President Bolsonaro Seeks Early Victory

Reform Agenda

Americas March 1, 2019

In Brazil, spending on pensions absorbs fully one third of federal tax revenue. For close to forty years, successive presidents have promised, and failed, to reform the country’s complex pension system which, it is often noted, combines welfare state generosity with pioneer market funding and represents a resilient leftover from the corporatist development model pursued from the late 1960s to the mid-1990s.

Anchored in the country’s constitution and touching the interests of powerful lobby groups, pension law is not easily amended. Previous governments have only succeeded in pushing through a few, mostly cosmetic, changes to the system. The build-in largesse which allows most public sector workers to retire in their early 50s after paying into the system for just thirty years, was described as a ‘ticking time bomb’ by the administration of former president Michel Temer which last year organised a media campaign to explain to the population at large the inequities of a pension regime that enables people to ‘work a little and then retire early’. President Temer also failed to rally the two-thirds majority in both houses of congress needed to overhaul the pension system.

The ‘time bomb’-bit relates to Brazil’s quickly aging population. The age pyramid, an almost perfect shape in 2010, is set to inverse by 2060 as people live longer and the fertility rate declines. In about forty years, fully one third of Brazil’s population will be older than 65 years of age – a demographic that already now grows by 3.5% annually. The number of actively employed people increases by only 0.7% per year. According to a study by the OECD (Organisation for Economic Cooperation and Development), pension pay-outs as a percentage of contributors’ salaries are on par with those in France (77%) and just a fraction behind Denmark’s (81%).

Numbers from the National Development Bank (BNDES) show that between 1988 and 2017, expenditure on pensions rose from 2.5% of GDP to 8.5%. A slowdown of the average economic growth rate and a gradual but significant rise of the minimum wage, to which pay-outs are linked, contributed to the steep increase.

Greater Equality Derailed

Originally created in the early 1950s to promote greater equality, Brazil’s pension system is today seen to add to already disconcerting levels of inequality. Statistics clearly show that the benefits awarded to public sector workers represent the core of the problem: The deficit of the federal state pension scheme, which takes care of about one million retired public servants, is significantly larger than the one faced by the general pension system that serves some 33 million retired private sector workers.

Former finance minister Antônio Delfim Netto, who first tabled pension reform in 1982, warns that reform may be slow in coming but will eventually arrive by force of logic – and numbers: “Reform either takes place in perfect order or perfect disorder. That is the only choice available.”

The current administration of President Jair Bolsonaro has rather bravely placed pension reform at the core of its policy platform. New legislation was prepared in secret to avoid a crescendo of public indignation before the plans were ready for primetime. That moment came towards the end of February when it was announced that the retirement age is to be raised to 65 for men and 62 for women with a twelve-year transition period to ease the introduction of the new regime.

Economy minister Paulo Guedes said the aim is to save up to $345 billion in expenditure on pensions over the next decade. Minister Guedes did admit that the military will be exempted from the new rules with their pension entitlements left untouched.

The next order of business for President Bolsonaro is to push the reform package through congress where his administration faces an uphill battle, but one that may yet turn out to be not as tough as the ones his predecessors faced. Though lacking a majority in the chamber of deputies, home to a bewildering array of some thirty political parties, the informal but so far surprisingly stable bloc that supports the Bolsonaro Administration commands 302 seats, just six shy of the number needed to approve changes to the constitution.

There is a certain urgency, Mr Guedes stressed, because the reform of the pension system is central to a much wider push towards fiscal consolidation which aims to bridge the widening gap between revenues and expenditures.

Other Big Tickets

As federal tax receipts dwindled to 29% of GDP, government spending ballooned to 39% of national income. Mr Guedes explained that ‘big ticket items’ are first on his to-do list; pension reform will be followed by a thorough updating and simplification of the federal tax code and the privatisation of state enterprises. Mr Guedes aims high: “If I propose to sell a hundred companies, congress may eventually approve the sale of perhaps twenty-five.”

Mr Guedes’ aim is to re-establish the fiscal stability that is needed to restore investor confidence, return to a path of sustained growth, and create jobs. On pension reform, President Jair Bolsonaro is not in a mood to compromise, warning Brazilians late February that they must work longer before receiving a pension. A member of congress for 27 years before being swept into the highest office, Mr Bolsonaro repeatedly and consistently voted against pension reform. He now deplores his voting record on the topic: “After things were properly explained, I can now see that I was wrong.”

Although his administration was off to a slow start, in part caused by the president’s hospitalisation for an almost fatal stabbing wound sustained whilst on the campaign trail, the core of his cabinet has been working behind the scenes to lay the groundwork for several free-market liberalisations that together must pull Brazil out of the economic doldrums.

The cabinet that President Bolsonaro presides over comprises three distinct tribes: technocrats, ideologues, and military brass. Though the ideologues have been central to getting Bolsonaro elected, the group has suffered from infighting and lost most of its lustre as a result.

Meanwhile, the presence of generals at the top table turned out to be a lot less awkward than anticipated. Most of Bolsonaro’s military appointees have exercised a moderating influence on the cabinet, steering well clear of political controversy and appealing to reason rather than emotion. The technocrats, led by Mr Guedes, are thus left free to apply their magic whilst President Bolsonaro trusts the political inertia resulting from his landslide triumph at the polls will see his reform package sail through congress before long and unscathed.

Cover photo: President Jair Bolsonaro of Brazil is determined to push through his reform package.