Latin America’s largest economy, Brazil, is at a crossroads. Fixing its public finances could open the door to a virtuous cycle of expansion; failing that, it risks slipping deeper into junk-level credit ratings and sub-par growth. Much depends on the nation’s costly pension system, the target of the first sustained legislative drive by President Jair Bolsonaro, his economic team and allies. After efforts to muster support for a major pension reform failed under previous administrations, the push under Bolsonaro has scored a breakthrough.

1. Why is pension reform so important?

Brazil’s pension expenditures are already high compared to other countries, and a rapidly aging population makes the current system a ticking time bomb. Brazil spends the equivalent of 13% of gross domestic product on social security, well above the average of 8% for G-20 nations, according to a government report published in December. When it comes to just pensions, Brazil spends the equivalent of 8.6% of GDP. The pension fund for private sector workers is expected to run a deficit of 218 billion reais ($57.4 billion) this year, up from 195.2 billion reais in 2018, while the fund for public servants will also be in the red. At present, Brazil’s economically active population pays for retirees’ pensions. The number of citizens over the age of 65 will jump to 25.5% of the population in 2060 from just 9.5% now, according to the national statistics agency.

2. What is Bolsonaro’s plan?

His government, under Economy Minister Paulo Guedes, wants to establish minimum retirement ages -- 65 for men and 62 for women. For workers in urban areas, the minimum contribution time would be 20 years for men and 15 years for women. Currently, retirement is determined by a formula that considers both age and contribution time, allowing some people to claim benefits as early as in their 50s. To generate more revenue as part of the same reform, Bolsonaro would also raise a tax on banks. The goal of those and other steps is to generate roughly one trillion reais in savings over 10 years.

3. What’s been the response?

Bolsonaro’s government made significant headway in winning lawmaker support after ceding on several points. For example, both states and municipalities were left out of the reform, and a plan to implement individual pension savings accounts was shelved. Those changes came on top of previous alterations in areas including maximum retirement ages for civil servants and severance payments for employees who previously retired under the state pension plan. Put together, the changes helped to speed up a cumbersome voting process that had hit snags earlier this year.

4. Where do things stand?

Brazil’s lower house has approved the pension proposal in the first of two floor votes, representing a watershed moment. The legislation was backed by 379 deputies, well above the 308 threshold needed for approval as a constitutional amendment. With a second, mandatory lower house floor vote set to follow, the bill can move to the Senate by early August. There, it will need to be approved first by a commission and then by 49 of 81 senators in two separate votes. According to Brazil Chief of Staff Onyx Lorenzoni, the bill can clear the Upper House by mid-September. Still, in the event that senators make any adjustments to the proposal, it would need to return to the lower house for fresh debate and votes.

5. What are investors hoping to see in the reform?

Investors reacted positively when the proposal was first made public in February and continue optimistic as many of its main points remain in tact even after weeks of debate. For financial markets, the closer the projected savings are to 1 trillion reais, the better, though many expect a final number closer to 700 billion reais. Also important is the timeline for approval. The fact that the measure is on track to pass the lower house in July followed by the Senate still while still in the third quarter dovetails with investor’s base case scenario.

6. What happens if it isn’t approved?

Failure to change the pension system would most likely prompt a massive selloff. Analysts would lower their forecasts on local assets ranging from the stock market to the currency. Ratings agencies could downgrade Brazil’s sovereign debt rating further into junk, thus raising the government’s borrowing costs as pensions swallow up an ever-increasing percentage of the budget. The central bank would likely be forced to raise the benchmark interest rate to fend off inflationary pressures from a weaker real and help prevent sharper declines in investor confidence. Put together, those factors would hamstring Brazil’s already slow recovery in investments and economic growth.

--With assistance from Josue Leonel, Vinícius Andrade and Patricia Lara.

To contact the reporters on this story: Rachel Gamarski in Brasilia at;Simone Iglesias in Brasília at;Mario Sergio Lima in Brasilia Newsroom at

To contact the editors responsible for this story: Juan Pablo Spinetto at, ;Walter Brandimarte at, Matthew Malinowski, Laurence Arnold

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