Brazil’s Long-Awaited Pension Reform: Why it was Crucial and its Impact on the Economy

Ryan Gauthier
Nov 1 · 5 min read
Photo taken by Tamis Souza

Brazil’s President, Jair Bolsonaro, inherited a difficult economic environment when he was elected to office on January 1st, 2019. A recession in 2015 and 2016, driven by low commodity prices, decreased exports and unchecked government spending, sunk the real and contracted the country’s economy by 7%. Since then, the country has struggled to pay down its fiscal deficit and maintain anything higher than 1% annual GDP growth.

Bolsonaro campaigned on the promise of promoting a business-friendly atmosphere and implementing a variety of structural reforms to revamp the economy. There are many ways in which this is feasible, including lower tariffs and writing new trade agreements. The key area on which he has first focused his aggressive agenda, though, is the country’s pension system.

Creating both a fair and sustainable social assistance program is not a new initiative; presidents in office have tried and failed for decades to amend the current system in place. After the country transitioned from a military regime to a democracy in 1988, the right to retirement was embedded in the constitution and thus requires approval from at least 2/3 of congress to change. As pension reform is often unpalatable for unions, interest groups, and other constituencies throughout the country, lawmakers have been unable to form a unified decision on how to best move forward with proposed legislation.

Currently, there are two ways in which a citizen can qualify for a pension:

  1. The individual can retire with 35 years (men) or 30 years (women) of contributions.
  2. The individual can retire with 15 years of contributions and has reached the age of 65 (men) or (60) women.

If one starts his career at the age of 20, it is possible for him to retire at age 55 — a number substantially lower than the Organization for Economic Cooperation and Development (OECD) average (44 years of contributions). Indeed, the average man retires at age 56 and the average woman at age 53. Once a citizen in Brazil stops working, he receives roughly 70% of his pre-retirement salary for the rest of his life and, when he dies, his widow can then inherit the pension and add it to her own.

Financing what is considered to be one of the most generous social assistance programs in the world has proven costly. The Brazilian government is already paying a considerably higher amount than its peers in retirement benefits; in 2016 Brazil’s social assistance system accounted for over 10% of its GDP while the G-20 averaged at roughly 8%. 8.2% of Brazil’s social spending was dedicated entirely to pensions — almost double the 4.6% it was just two years prior in 2014. According to the research firm Capital Economics, pensions account for over 40% of Brazil’s federal spending.

Unsurprising, the federal government is having difficulty supporting the system. The pension fund for the private sector will run a deficit of 218 billion reais ($54.3 billion) this year, amounting to over a 20 billion reais ($4.8 billion) increase from 2018. The fund for public employees is also negative.

Brazil’s relatively young population has made the expensive program a ticking financial time bomb. Nearly 40% of Brazil’s population is under the age of 25 years old and only 8% are over 65. By 2060, 25.5% of the population is expected to be over the age of 65 and life expectancy is predicted to pass 80 years of age. Consequently, pension costs are doomed to skyrocket. forecasts estimate that under the system in place outlays could increase to 17% of GDP by 2060.

Inaction on this matter has made investors worried and given rating agencies more reason to downgrade Brazil’s bond ratings. That said, Bolsonaro and his Economy Minister Pablo Guedes have finally crafted a reform bill that the Brazilian Senate approved with a vote 60–19 in October, 2019. The massive overhaul plans to set minimum retirement ages at 65 for men and 63 for women as well as new brackets for contribution amounts and a transition period into the new system. Nothing will change for current retirees. Although unions have spoken out against reform, a survey from Datafolha shows that a record 47% of Brazilians actually support it.

The impact the amendment will have is impressive. The administration expects that over 70 million workers will be affected and that the government will save 800 billion reais ($195 billion) over the next ten years. Markets have reacted positively and the Ibovespa B3 Index closed at a record high of 106,022 points after the vote. The move also set the stage for the Brazilian central bank to further cut interest rates in an attempt to tackle low inflation and growth.

Whether or not Brazil’s success with pension reform will act as a springboard for renewed economic growth has yet to be seen. Many lawmakers view it as a stepping stone for further change and expect to continue working with the administration to develop an even more comprehensive plan. Likewise, the government will now need to maintain momentum on objectives such as tax reform, private infrastructure investment and slimming the fiscal deficit.

Although there is still much work to be done, the Brazilian government should be proud of this historic achievement and positive step towards fiscal responsibility.

Sources and Additional Resources

Ryan Gauthier

Written by

Emerging Markets Enthusiast with a Concentration on Business, Finance, and Economics in Brazil

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