What is the best pension reform for Brazil?

. Jun 15, 2019
pension reform paulo guedes Economy Minister Paulo Guedes was frustrated by the pension reform report.

In about a month, the Brazilian Congress will enter its mid-year recess. From July 17 to August 1, members of both congressional houses are set to leave Brasilia and return to their constituencies. Over the course of this past week, I was asked an interesting question: whether there is any possibility lawmakers would forego their break to vote on important bills. Such a move would certainly be welcomed by financial markets—as it would speed up the approval process of the pension reform.

</span></p> <p><span style="font-weight: 400;">Legally, it is possible. The Constitution allows for Congress to be called into work in cases of urgency or relevant public interest, always with the support of the majority of each congressional chamber. Only the President, House Speaker, or Senate President can make this call. The last time it happened, however, was in 2006. </span></p> <p><span style="font-weight: 400;">I don&#8217;t believe lawmakers would cancel their vacation. Firstly, because getting a majority in both chambers has proven to be a difficult ordeal. Secondly, foregoing the recess is not in the political class&#8217; best interests. Members of Congress use this time to go back to their home states and reinforce their presence with voters.</span></p> <h2>Assessing the pension reform report</h2> <p><span style="font-weight: 400;">Last Thursday, the pension reform&#8217;s rapporteur in the House, Representative Samuel Moreira, presented his report. What came of it was, in my opinion, positive. While savings in the next ten years are smaller than originally proposed by the government—BRL 915 billion against BRL 1.2 trillion—they are sizeable enough to correct the current deficit trajectory of the pension system.</span></p> <p><span style="font-weight: 400;">True, many privileges were upheld. But the report also tried to create new sources of revenue, such as increasing taxes on net profits from banks. Besides, Mr. Moreira proposed a new arrangement so that we could reach the psychological threshold of BRL 1 trillion in savings: transferring resources from a labor fund (used to pay for unemployment insurance) from the National Development Bank to the pension system. </span></p> <p><span style="font-weight: 400;">That would bring an extra BRL 217 billion—totaling BRL 1.13 trillion in savings. And, at the end of the day, that&#8217;s what is important. But that didn&#8217;t stop Economy Minister Paulo Guedes from showing his disgruntlement and saying the bill had been &#8220;aborted.&#8221;</span></p> <h2>The changes to the original project</h2> <p><span style="font-weight: 400;">The main changes in the bill (</span><a href=""><span style="font-weight: 400;">you can read about them in detail here</span></a><span style="font-weight: 400;">) were made after a deal between party leaders in order to facilitate the bill&#8217;s approval. Some of these changes were expected—such as slashing the idea of changing the system to a capitalization model, or promoting cuts to benefits for the elderly poor and rural pensions. </span></p> <p><span style="font-weight: 400;">Others were a surprise. The list includes a new, more lenient transition route, a different retirement age for female teachers (from 60 to 57), and a lower minimum length of service (from 20 to 15 years).</span></p> <p><span style="font-weight: 400;">Discussions around the report at the Special House Committee start this week. A vote is yet to be scheduled, but it is expected to happen in the last week of June—which would make a floor roll call vote possible before the recess.</span></p> <p><span style="font-weight: 400;">I believe there is an upside to the watering down of the reform. It signals a consensus among members of Congress, which makes it more likely that the bill will pass a floor vote (as it amends the Constitution, the pension reform requires two rounds of voting, with minimum support of 60 percent of seats—308). </span></p> <p><span style="font-weight: 400;">Moreover, BRL 915 billion in savings still give margin for negotiations in the Senate. I believe the limit will be BRL 800 billion—any less than that and the reform loses its purpose of correcting the pension system&#8217;s deficit.</span></p> <p><span style="font-weight: 400;">Between a bold strategy to approve the original project, or making sure that the reform passes as it is in Mr. Moreira&#8217;s report, I would take option number two in a heartbeat. Let&#8217;s remember that former President Michel Temer&#8217;s reform bill proposed savings of BRL 800 billion, which were eventually slashed to BRL 500 billion, before being tossed aside altogether. </span></p> <p><span style="font-weight: 400;">While I understand Paulo Guedes&#8217; frustrations, I don&#8217;t agree with them. Politics works by making deals and reaching compromise. Brazil&#8217;s Economy Minister is a competent man, but bashing the report only makes the government&#8217;s life more difficult. If he wanted to complain about anything, it would maybe be more appropriate to look to his boss, President Bolsonaro, who has yet to establish a majority in Congress.</span></p> <hr> <p><a href=""><img class="alignleft wp-image-18346 size-medium" src="" alt="" width="300" height="37" srcset=" 300w, 768w, 1024w, 610w" sizes="(max-width: 300px) 100vw, 300px" /></a></p> <h6 style="text-align: right;">Written by<br /> <a href=""><strong>Levante Ideias de Investimentos</strong></a></h6> <p>

Felipe Berenguer

Felipe Berenguer is a political analyst at Levante Ideias de Investimentos

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