Brazil’s pension reform bill, in detail

. Feb 23, 2019
pension reform

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Hello! In this week’s issue: the most important facts of the week. Brazil’s pension reform bill, in detail. The Venezuelan crisis, explained.

The week in review

  • Electoral fraud. The Federal Police has decided to wade into the investigation into Minister of Tourism Marcelo Antônio. He is suspected of using dummy candidates to siphon money from the publicly-financed electoral fund while serving as chairman of the Minas Gerais Committee of Jair Bolsonaro’s Social Liberal Party. The president’s former Secretary-General was fired after a similar scandal. 
  • Flávio Bolsonaro. More ties between Senator Flávio Bolsonaro and urban armed militias were discovered. Besides having employed the mother and wife of a leader of a death squad known as “The Office of Crime,” the senator employed the sister of another two militia members (who have been arrested) as the treasurer of his campaign. This woman signed two checks in the name of Flávio Bolsonaro’s campaign committee for a total of BRL 8,500.
    </li> <li><strong>Free trade.</strong><strong> </strong>The Brazilian government will propose &#8220;exploratory talks&#8221; around a free-trade deal with the U.S., as President Jair Bolsonaro visits Washington DC on March 17. This marks a radical shift in Brazilian trade policy. Since 1994, when the Free Trade Area of the Americas (FTAA) was initially thought up, Brasília has refused to discuss free trade initiatives with the U.S. The first steps are quite simple: a series of trade-facilitating measures and regulatory convergence—which are already underway and are simpler to agree on.</li> <li><strong>Homophobia.</strong><strong> </strong>After four Supreme Court Justices voted in favor of making homophobia and transphobia a crime equivalent to racism (that is, with no right for bail to the offender), the court suspended the trial. Seven justices are still to vote. While the continuation hasn&#8217;t been scheduled, it is unlikely to take place before June. The court has been accused of overstepping its boundaries and placing itself above Congress—one of the justices said they should &#8220;give history a push, even if that means going against the majority.&#8221;</li> <li><strong>Jobs.</strong><strong> </strong>The Ford Motor Company will shut down its São Bernardo do Campo plant—killing 3,000 jobs and threatening 21,000 others when considering the production chain as a whole. The São Paulo state government is trying to find a suitor to buy the plant, while unions will go to Ford&#8217;s headquarters, in Dearborn (Michigan) to try to veer executives from the decision.</li> </ul> <hr /> <h2>Brazil&#8217;s pension reform bill, in detail</h2> <p>Every maneuver and negotiation of the last four months of Brazilian politics in the last four months has been centered around the much-promised reform of the country&#8217;s pension system. Finally presented to Congress, the reform bill will now be picked apart by pundits, politicians, and members of the public before starting its long journey throughout the Brazilian legislature.</p> <p>The reform proposal is sure to face opposition, but there has been a marked shift in public opinion regarding the pension system. There is now no doubt, on all sides of the political spectrum, about the need for an overhaul to the current rules, in the face of a mounting budget deficit and an aging population.</p> <p>Brazil&#8217;s fiscal deficit currently stands at 7% of its GDP, dragged down deeper every year by the pension system, which takes up over one-third of the federal government&#8217;s tax revenue. The pensions shortfall alone almost doubled between 2011 and 2017.</p> <hr /> <p>&nbsp;</p> <p><img class="alignnone size-large wp-image-14152" src="" alt="" width="1024" height="683" /></p> <hr /> <p>In a medium to long-term view, pension reform is also made imperative by the rapidly changing demographics of the country. The chart below shows Brazil&#8217;s age distribution in 2010 compared to projections for 2060. In just over 40 years&#8217; time, 47% of the country&#8217;s population will be over 50 years old, in comparison to just 19% in 2010.</p> <hr /> <h4 style="text-align: left;"><img class="alignnone size-large wp-image-14153" src="" alt="" width="1024" height="463" /></h4> <hr /> <p style="text-align: left;">Such rapid change would be an issue for any economy, nevermind one with a pension system as deficit-ridden as Brazil&#8217;s. Even now, with a relatively young population, the country is vastly overspending on pensions, as the chart below illustrates.</p> <hr /> <h4><img class="aligncenter size-full wp-image-16924" src="" alt="" width="1200" height="820" srcset=" 1200w, 300w, 768w, 1024w, 610w" sizes="(max-width: 1200px) 100vw, 1200px" /></h4> <hr /> <p><img class="aligncenter size-full wp-image-16923" src="" alt="" width="1200" height="1150" srcset=" 1200w, 300w, 768w, 1024w, 610w" sizes="(max-width: 1200px) 100vw, 1200px" /></p> <hr /> <p>The dependency ratio is calculated by comparing the size of the population aged 65 and over with the current productive age range (15-64). A low dependency ratio, such as that of Brazil, means there is a sufficient number of people of working age to contribute to the retirement of the elderly. However, despite Brazil&#8217;s favorable ratio, its percentage of GDP spent on pensions is very high indeed. Simply put, the country cannot afford its current pensions system. If the 2060 projections are correct, Brazil will be saddled with a dependency rate larger than that of Japan&#8217;s, which already spends significantly less on pensions.</p> <p>It would not be accurate, however, to say that Brazil is &#8220;spending too much on pensions&#8221; in a general sense. The primary deficits are in fact restricted to certain sectors of the country&#8217;s labor force, with civil servants and the military being the biggest drains on the system. Brazil loses over BRL 63,000 per capita on the pensions of government workers, and almost BRL 130,000 for each retired member of the military.</p> <hr /> <p><img class="alignnone size-large wp-image-14156" src="" alt="" width="1024" height="367" /></p> <hr /> <p>All of this evidence points to one conclusion: some form of pensions overhaul is necessary to help Brazil&#8217;s economy get back on track. Whether it is the one submitted by Jair Bolsonaro&#8217;s economic team remains to be seen.</p> <h4><strong>The positives of the pension reform</strong></h4> <p>The bill submitted to Congress establishes an important change in rules for civil servants. Currently, government workers may retire after 35 years of service for men and 30 for women, providing they surpass the minimum retirement age of 60 and 55, respectively. Alternatively, they can receive their full pensions at 65 and 60 years old.</p> <p>The proposed change would impose a blanket minimum retirement age for both public and private workers, at 65 for men and 60 for women, with a mandatory 25 years of contribution for civil servants, creating savings of BRL 200 billion for this sector within 10 years. These changes would not come into force right away, involving a gradual transition period of 12 years.</p> <p>Changes were also made to the pension benefits themselves. If a worker in the private sector was to retire after 20 years of service, they would have the right to 60% of their pension, a rate which increases 2% per extra year in work. A similar system would be in place for the public sector, though it begins at 25 years, when workers would receive 70% of their full pension benefit.</p> <p>Contribution rates would also change, varying in accordance with income: those who earn more will have to contribute more—an important change to help get public opinion onside. All in all, the proposal is projected to save BRL 1.2 trillion over the next 10 years.</p> <p>Another important aspect of the reform is changing the legal status of articles establishing the framework for the pension system. They will no longer require changes to the Constitution, meaning that it would be easier for a sitting government to promote new changes—requiring only ordinary laws, rather than constitutional amendments.</p> <h4>Problems with the reform</h4> <p>The military was not included in this week&#8217;s reform proposal. As we showed above, pensions for the Armed Forces are responsible for the highest deficit per capita in the entire system. Military pensions come under a different legal framework and must be reformed through a different bill—but nothing prevented the government from presenting both proposals together. Though pensions secretary Rogério Marinho has promised a separate bill to overhaul the military system will be submitted in due course, the fact that it will proceed separately to the main reform increases the chance of the proposal being rejected or significantly altered.</p> <p>Another gripe about the new reform concerns its provisions for the country&#8217;s poorest populations. The so-called Continued Installment Benefit (BPC), destined for the elderly and those living in poverty, will undergo an increase to its minimum age. Under the new proposal, the poorest portion of Brazilian society will need to turn 70 years old just to receive the equivalent of the minimum wage. At 60 years old, they would have the right to receive a paltry pension of BRL 400 a month—less than half the minimum salary.</p> <h4>The Trojan horse</h4> <p>Economy Minister Paulo Guedes has tried to slip changes to the labor legislation into the pension reform, by ending companies&#8217; need to pay severance compensations to laid-off workers. That measure has next to no effect on the pension deficit—and makes the reform impalatable.</p> <hr /> <h2>The Venezuelan crisis, explained</h2> <p>At least two people were killed and 15 others were hurt at the Brazil-Venezuela border by security forces linked to Venezuelan anti-democratic leader Nicolás Maduro. He has closed the country&#8217;s borders, in order to block U.S.-sponsored humanitarian aid—which Mr. Maduro sees as a plot to undermine his administration and oust him from power.</p> <p>Tensions are expected to raise this weekend, when the aid products are expected to be delivered—well, sort of. The Brazilian government will take food and medicine to border town Pacaraima, but Venezuelan drivers will have to cross the border and drive back to Venezuela themselves—when they will certainly be met with violence by Mr. Maduro&#8217;s loyalists.</p> <p>Brazilian authorities have discarded the possibility of intervening in Venezuela—which is forbidden by our Constitution. &#8220;We will never begin an armed situation with Venezuela, unless we are attacked. That would be different. But I think Mr. Maduro is not that crazy,&#8221; said Vice President Hamilton Mourão.</p> <p>But the decision to maintain the operation to send humanitarian aid to Venezuela was not consensual. President Jair Bolsonaro met with political and military leaders yesterday to discuss the matter. House Speaker Rodrigo Maia and military officers were against the operation, while the others were for it. Mr. Bolsonaro sided with the latter group.</p> <h4>How a country that should be so rich became so poor</h4> <p>Blessed with the world’s largest oil reserves, Venezuela’s economy is based on the production of crude, propped up by elevated oil barrel prices in the 2000s. Years of mismanagement and cronyism has taken the country to rock bottom, however. Falls in production and barrel prices have destroyed an economy which was never diversified and caused millions of Venezuelans to flee.</p> <p>Inflation rates coming from the country are pornographic in proportions, ranging from 132,000 percent this year to over 10,000,000 percent, according to the International Monetary Fund. Accurate data is difficult to come by, as the deepening crisis caused the central bank to disclose less and less information.</p> <p>Recent U.S. sanctions on the national oil company Petróleos de Venezuela (<a href="">PDVSA</a>) have made things even worse, with Donald Trump’s administration banning any dollar payments for Venezuelan oil. Production is plummeting, and Nicolás Maduro’s anti-democratic government is holding on by a thread, sustained only by the dwindling support of the Venezuelan military. Saturday’s operations could be the tipping point.

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