Many investment companies have expressed their optimism regarding the pension reform in Congress—with predictions saying it will pass in the lower house before lawmakers go on their July vacations. One particular aspect of the reform, however, is causing friction between parties and could jeopardize the total savings generated by the proposal over the next decade: pensions of state-level civil servants.
State-level spending on pensions jumped from BRL 45 billion in 2006 to BRL 153 billion ten years later, and most regional administrations are on the cusp of a complete financial collapse. News program Jornal Nacional polled governors on the issue—with 21 of 27 saying they want state servants to be submitted to stricter pensions.</span></p>
<p><span style="font-weight: 400;">Fifty-one percent of state-level servants are entitled to special retirement rules. To compound matters, 96 percent of police officers (police in Brazil are state-controlled) are set to retire before reaching 50 years old. And without money to replace them, North and Northeastern states could be engulfed by sprees of violence.</span></p>
<p><span style="font-weight: 400;">Including states in the nationwide pension reform seems like a no-brainer. And it is. </span></p>
<p><span style="font-weight: 400;">The controversy on the issue is by no means financial—but rather political, and opposes left-wing governors already in their second terms and south-eastern conservatives fresh from their October electoral win. The latter group is thinking about how to govern for the next three and a half years (or seven and a half, for those who win re-election in 2022) with no cash to promote investments. The former group, however, cannot run for a third term—and governors are looking to cement their way into a new public office when it’s time to leave the governor’s seat.</span></p>
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<h2>When politics risk the pension reform</h2>
<p><span style="font-weight: 400;">While 21 of 27 state governors told </span><i><span style="font-weight: 400;">Jornal Nacional</span></i><span style="font-weight: 400;"> they want states to be included in the reform, many have publicly bashed it—especially in the Northeast, where most states are run by left-wing parties. “We can’t create two countries: one in which people can enjoy retirement, and another where people work until they die,” said the Governor of Pernambuco, Paulo Câmara, in March. His counterpart in Paraíba, João Azevêdo, went further: “Lowering the minimum retirement age from 65 to 60 is non-negotiable.”</span></p>
<p><span style="font-weight: 400;">That stance has led parties of the so-called “<a href="https://brazilian.report/opinion/2018/07/31/brazil-big-center-2018-president/">Big Center</a>“—a group of faceless power-hungry parties with no clear ideology—to consider taking state servants out of the pension reform, leaving state-level legislatures to rule on the matter themselves. For congressmen, it makes no sense for them alone to take the political hit of approving an unpopular reform that will leave servants—who are one of the most organized lobbies in Brazil—disgruntled, only for governors to benefit from a less tight budget to pave the way for their own political groups to remain in power.</span></p>
<p><span style="font-weight: 400;">President Jair Bolsonaro, who could use his political capital (which remains considerable, despite falling approval ratings) to arbitrate the matter, was non-committal: he said the ideal scenario would be keeping the states as part of the reform—but that it was a matter for lawmakers to decide themselves.</span></p>
<p><span style="font-weight: 400;">The bill’s rapporteur has suggested a way to split the baby. He would create a rule automatically including states in financial calamity and those with a higher rate of elderly citizens—which would encompass 10 states, Rio and São Paulo among them. His report will be presented to the House only next Tuesday.</span></p>
<h2>The financial impact on states’ budgets</h2>
<p><span style="font-weight: 400;">Savings estimates hover between BRL 330 and 350 billion over ten years for state administrations. According to the Independent Fiscal Institution (IFI), a Senate-financed think tank on public policies and budgetary issues, the impacts would be dramatic. In the case of Tocantins, for instance, savings would be equivalent to 3.5 times the state’s current liquid revenue. </span></p>
<p><span style="font-weight: 400;">In absolute terms, the impact is clearer in most populated states, such as São Paulo—where savings within ten years could reach BRL 59 billion—or Minas Gerais, where it could hit BRL 36.8 billion.</span></p>
<p><span style="font-weight: 400;">Not including states in the reform would certainly doom most of them to financial ruin. In Rio de Janeiro, for instance, the social security deficit represents 30 percent of the state’s liquid revenue.</span></p>
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