1. Why is pension reform so important?
Brazil’s pension expenditures are already high compared to those of 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. On pensions specifically, 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 ($53.2 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, would 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. Those changes, along with a tax increase on banks, were initially supposed to generate 1 trillion reais in savings over 10 years, though modifications to the bill have since reduced that amount to some 800 billion reais.
3. What’s been the response?
Bolsonaro’s government made headway in winning lawmaker support by ceding on several points. State and municipal pensions were exempted from the reforms, for instance, and a plan to implement individual pension savings accounts was shelved. Such compromises helped 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 bill. In the Senate, in the first of two floor votes, it was backed by 56 senators, more than the 49 needed to pass the legislation as a constitutional amendment. In subsequent votes on bill amendments, lawmakers backed a proposal to keep an annual bonus to low-income workers -- a blow to Bolsonaro that reduced the bill’s estimated savings by some 70 billion reais. The second and final floor vote most likely won’t happen before Oct. 22. When senators next convene, they would be allowed to present only new amendments that deal with relatively minor changes in language, rather than significant alterations that could again impact the proposal’s savings.
5. What are investors hoping to see?
Investors reacted positively when the proposal was first made public in February and remained optimistic as many of its main points remained intact even after weeks of debate. A central belief in financial markets has always been that the closer the projected savings are to 1 trillion reais, the better. Many had even expected a final number closer to 700 billion reais, which is lower than the 800 billion reais that the bill would guarantee in its current form. Still, fresh concerns arose after the Senate’s last-minute change reducing the reform’s savings. Some investors see chances that the final vote may be pushed back even more.
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 email@example.com;Simone Iglesias in Brasília at firstname.lastname@example.org;Mario Sergio Lima in Brasilia Newsroom at email@example.com
To contact the editors responsible for this story: Juan Pablo Spinetto at firstname.lastname@example.org, ;Walter Brandimarte at email@example.com, Matthew Malinowski, Laurence Arnold