Conditioned support

It was unexpected at the time, but investors (both domestic and foreign) put their faith in Jair Bolsonaro during the election campaign because of the soon-to-be Minister of the Economy Paulo Guedes and his plan to launch profound structural reforms. While the fledgling government has been rocked by political scandal, its support from the markets has not been affected.

This goodwill, however, comes with its own terms and conditions. If the government is unable to reform the pension system by the end of the year, or if the savings of the proposal are neutered during its journey through Congress, the markets will jump ship.

Weathering a political crisis is one thing, trying to do so amid a tumbling currency and market distrust is another. A poorly executed pension reform could be the death knell for the Bolsonaro government.

What’s more, the administration is all-in on approving the reform, meaning that very little will get done until the process is completed. Privatizations of state-owned companies, another pillar of Paulo Guedes’ economic plan, will not be touched while the pension reform is still pending, according to Privatization and Divestment Secretary Salim Matter.

Reforming the pension system reform

It is seen as a given that political parties in Congress will demand changes to certain provisions in the pension system reform proposal, tweaking some and scrapping others. The first to go is likely to be the so-called Continuous Payment Benefit (BPC). By Paulo Guedes’ proposal, this particular pension—intended for elderly people living in poverty—would undergo significant cuts. At 60 years old, the poorest in Brazil will have the right to receive only BRL 400 per month—less than half of the legal minimum wage. Only when these pensioners reach 70 years of age will they begin receiving a full minimum salary.

Likewise, the harsh rules for rural workers are likely to undergo some sort of alteration over the coming months. Mr. Guedes’ pension program would impose a minimum yearly contribution of BRL 600 for this segment of the population. Previously, rural workers paid social security tax as a percentage of their production. It is expected the minimum contribution will be made significantly lower, with opposition groups petitioning for a figure in the realm of BRL 200 per year.

The view from Congress is that the government could have avoided this scenario of having its reform bill picked apart. Leaders of political parties complain that Paulo Guedes’ economic team did not consult members of Congress before submitting its proposal, which may have saved the headaches and delays of having the bill pored over and questioned by the lower house.

An added obstacle

As if the congressional tug of war was not enough for the government, Jair Bolsonaro’s administration may face another opponent to its pension reform proposal in the shape of the Supreme Court. With the responsibility of safeguarding the constitution, there is a chance that the country’s highest court will have a significant role to play in a bill which promotes significant changes to Brazil’s magna carta.

As a way of delaying or potentially blocking parts of the reform, opposition parties have the option to file Direct Actions for the Declaration of Unconstitutionality (ADIs) to the Supreme Court. An estimated 10 measures may be subject to the justices’ perusal, such as the establishment of minimum retirement ages and transition rules for public servants.

While the Supreme Court has established that it is in favor of the pension reform and will not stand in its way, one of the bill’s proposed changes could sway the justices’ opinion.

The government’s plan includes a measure which would make it easier to adjust the retirement ages of Supreme Court justices. Once members of the court retire, the sitting president has the power to appoint the replacement.

Currently, Jair Bolsonaro is set to have two Supreme Court appointments before the end of his term. The retirement age stands at 75 years of age, and Justices Celso de Mello and Marco Aurélio will leave their posts before 2022. However, if the government were to reduce this cut-off to 70, two more ministers (Ricardo Lewandowski and Rosa Weber) would step down, leaving Jair Bolsonaro with almost 40 percent of the full Supreme Court.

The appointment of members to Brazil’s Supreme Court is completely at the discretion of the sitting president. Nominations must pass confirmation hearings in Congress, but they are little more than a rubber stamp.

In the past, Supreme Court Justices have been thoroughly personal appointments. Fernando Henrique Cardoso put close friend Gilmar Mendes into a seat on the board, while Fernando Collor selected his own cousin, Marco Aurélio.