Overhauling a country’s pension system is a big deal anywhere in the world. In Brazil, though, the debate seems to be less focused on what the changes would mean for people’s future, and more about the immediate impacts it would have on a country which is already flirting with recession.
It seems to be a consensus that the ultra-expensive Brazilian social security framework is one of the main obstacles to balancing the federal budget. However, nobody seems to agree on how to solve the issue. It certainly doesn’t help that this conversation is taking place during one of the most polarized political climates in Brazilian history. Meanwhile, politicians seem to be more concerned about their political careers than actually debating a good reform for the country.
It is easy to get lost in the war of narratives between the reform’s backers and its detractors. That’s why The Brazilian Report invited economist Pedro Fernando Nery to explain some of the most controversial topics about the “New Social Security System,” as President Jair Bolsonaro christened the government’s reform bill.
Mr. Nery holds a Master’s degree and a Ph.D. in Economics from the University of Brasília. He also works as a legislative consultant for economic affairs regarding income, pensions, and labor at the Brazilian Congress. He has literally written the book on Brazilian pensions, “Reforma da Previdência—Por que o Brasil Não Pode Esperar,” loosely translated as “Pension Reform—Why Brazil Cannot Wait.”
Watching the debates in Congress, it is evident that some lawmakers still have doubts about the deficit in the pension system. Why is this the case? How is it possible to prove there is a deficit?
The deficit exists and every government has been vocal about it in recent years. It was also confirmed by the Federal Accounting Court (TCU). The pension reform does not reduce this deficit, nor does it fill it, but it allows it to grow at a slower pace. There is a mix of misunderstanding and bad-faith that generally comes from groups connected to civil service who deny the deficit exists, claiming that social security funds could finance pension spendings—and, for that, you should not be looking for the end of the deficit.
The most concerning thing is that the deficit is a measure of how much we need to sacrifice in terms of other expenses, or raising taxes. Denying it by saying that you could use social security or health funds just confirms this idea. It is noteworthy that these funds come from contributions on consumption, which take a heavier toll on the lower-income population. It is malicious to say there is no deficit because you could be taking money away from chemotherapy treatments paid by the [public health system] SUS or Bolsa Família.
There is also the argument that the pension system deficit was created by defaulting companies. How much do these defaults actually contribute to the overall deficit? Is it possible to collect this money, considering that many of these companies are now bankrupt?
It represents a very small amount of money. The share of the active debt which is likely to be recovered is irrelevant even in comparison to the deficit of a single year. But, by all means, the government has proposed measures to recover this in the reform bill and another proposal.
The proposal to change the minimum retirement age is a controversial point, as it has been argued that it is too close to the life expectancy in some areas of Brazil, thus forcing people to work for their entire lives. Is this true, considering the Brazilian reality?
This is another paradox. The minimum retirement age has been a reality in Brazil for a long time and mostly affects the poor. Urban male workers must be 65 years old to retire if they have contributed for only 15 years, not 35 years, as wealthier people do. And both men and women who contributed for less than 15 years and may be eligible for the Continuous Payment Benefit [a social security stipend for low-income individuals], must be 65 years old. That’s why the poor retire long after the rich. The reform aims to reduce this inequality, but critics turn the situation upside down and use the poor to protect the rich.
Also, it is important to remember that the life expectancy for babies cannot be confused with the survival expectancy rate of the elderly—in this respect, Brazil’s figures are already comparable to developed countries. Life expectancy at birth is reduced by child mortality, urban violence, and drug trafficking. Survival expectancy at the age of 65 is 83.5 years old in Brazil. So, this is another malicious argument: they use the premature death of young people, which affects life expectancy as a whole, to justify giving more resources to senior citizens.
So, currently, what is the profile of people who retire based on their length of service?
Retirement through length of service is “white male” retirement, to use the current parlance. It is the model for more educated people, who have the most productive jobs and live in the most industrialized areas in Brazil. It is the opposite for those who retire after reaching the necessary age [60 years for women and 65 for men]. Basically, a lawyer retires after completing his minimum length of service; his maid retires after turning 60, 10 or 12 years later.
What is the biggest expense of the pension system? What drains the most money?
In absolute terms, pensions paid over contribution period. In per capita terms, civil service pensions.
The government is presenting the “New Social Security System” bill as a way to reduce that inequality, especially considering the pension’s value. Is the bill really efficient to fight these distortions?
It is, but it could be even better. It could be softer on rural retirement, the Continuous Payment Benefit, and the minimal contribution period. It could be harder on civil servants and the military, but I cannot say whether this would be politically viable.
The retirement system of civil servants is considered one of the most unequal in Brazil. How does the bill help to reduce the gap between wealthier civil servants, such as judges, and poorer professions such as school teachers?
It creates a progressive contribution rate for civil servants, according to their income, as has been the case in the private pension system for decades. The motto is “who earns more, pays more.” It makes sense because people who earn higher salaries get more subsidies from the unbalanced civil servants pension system and it has been destroying states and municipalities’ ability to provide basic services.
Which points of the bill are set to be blocked by lawmakers and why? How much of an impact do they have on overall savings?
According to the press, the Continuous Payment Benefit and rural pensions may be modified. The fiscal impact is small, especially considering MP 871 [a provisional decree that fights frauds on the social security system and has been approved by the Congress; it will now be signed into law]. There’s also criticism about more impactful points, such as transition rules or salary bonuses, which is not even a pension benefit, actually.
The government eyes BRL 1.2 trillion in savings for the next decade, but markets foresee a smaller amount, of up to BRL 800 billion. Is there such a thing as an ideal amount of savings to balance public accounts? What would be an “overly diluted” version of the bill?
There’s an excessive focus on the savings for the first ten years. It could be a little bit smaller, as long as the reform is broad and puts spending on a more sustainable path. I don’t see much trouble in reducing the savings to BRL 800 billion if the problem is well directed for following decades.
If savings reach BRL 1 trillion, the government aims to create a capitalization system. How does this differ from the current Brazilian system? How much would that cost? Is there a chance of it being approved?
It is totally different from the current system, in which the public and mandatory pensions are exclusively financed by the distribution system. That means that active workers are paying for the pensions of other retirees, not for themselves.
In a capitalization system, people contribute to their own future, and the funds are invested. That means the current system loses revenue. The government speaks of BRL 1 trillion in losses in 20 years, but there are no details about the model. I believe that with more information and a smaller fiscal impact, society may agree with the change. Currently, it is quite concerning to speak about losing revenue in such a deficient system. We may be jumping the gun.
The government also says that the capitalization system makes it possible to reduce the burden on companies’ payrolls and, consequently, create more jobs. Is that really viable?
That’d be interesting. We have serious and chronic youth unemployment in Brazil and it is good that this issue is finally one of the main concerns for the government. But capitalization is not a necessary condition to reduce the payroll burden.