State-level retirement rules pose the next big obstacle to Brazil’s pension reform

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.

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...