Why Pension Reform is So Important for Brazil’s Economy
Wed, April 21, 2021

Why Pension Reform is So Important for Brazil’s Economy

The pension expenditures of Brazil are high compared to other countries. / Photo by luzitanija via 123rf

 

Brazil, the largest economy in South America, is closer to overhauling its costly pension system that has been holding back the country’s economy. While the efforts of major reform in the previous administrations failed, incumbent President Jair Bolsonaro and his economic team have recognized the importance of the overhaul and have been giving so much of their focus on such change. They believe that it will kick-start the country’s economy as well as improve investor sentiment.

 

Pension reform and Brazil’s economy

The pension expenditures of Brazil are high compared to other countries. Lawmakers estimate that the reform can save the government about $265 billion in 10 years. In a report published by Reuters, Brazil spending on social security is among the highest worldwide. In 2018, it accounted for about 44 percent of the government’s budget as well as 8.5 percent of the GDP. Without the pension reform, the spending of the federal government of Brazil will increase to 17 percent of gross domestic product by 2060.

Meanwhile, the pension fund allocated for the private sector employees will run a 218 billion reais (US$53.2 billion) deficit this year.

The pension reform bill rewrites the laws on when and how public employees can retire. Under normal circumstances, reforms on the pension system are not easy to pass because it entails a reduction of benefits, redistribution, and changes to the country’s retirement age, among other parameters.

 

 

This month, though, 66 out of 81 senators in Brazil have already approved the bill. Such a vote is considered enough to give the country’s investors the security they needed that it is indeed a “done deal.” Financial planner Dalton Investments’ co-portfolio manager Pedro Zevallos commented that if the government can finally pass the bill, “it will send a positive message to the market.” He added that although there may still be structural impediments in the country despite the passing of the pension reform, it is like a “light” at the end of the tunnel.

 

Debt-to-GDP ratio in Brazil

The debt-to-GDP ratio, as defined by financial platform Investopedia, is a metric of comparing the country’s public debt to its gross domestic product. It shows what a country owes to everything it produces and indicates the country’s ability to pay back its liability or debt. On the part of Brazil, its debt-to-GDP keeps increasing and it can be a hindrance to the emerging market that needs credit to grow. The country has been spending heavily on social programs, including education and public pensions. Brazil-based staffer of American business magazine Forbes Kenneth Rapoza shared that it is not an easy balancing act for a country like Brazil because there is a lot of cash going out but not so much that is coming in.

 

Challenge in the pension reform

The obvious challenges on the part of the Bolsonaro administration are to convince the Brazilians to give up some of their retirement benefits and to convince lawmakers to support the policies that may lead to financial hardships. It would be a sensitive issue to propose changes to the pensions of the elderly, disabled, and rural workers. 

 

The minimum contribution time of employees in the urban areas would be 15 years for women and 20 years for men / Photo by dolgachov via 123rf

 

The price of getting old

The cost of caring for the elderly continues to increase, and it is one of the awkward truths that the government has to face. President Bolsonaro’s plan, with the help of Economy Minister Paulo Guedes, is to establish the minimum retirement ages: 62 for women and 65 for men. According to the Washington Post, the minimum contribution time of employees in the urban areas would be 15 years for women and 20 years for men. Investors have reacted positively with the said proposal ever since it was first made public. 

 

Pension Economics 

Tatyana Bogomolova from the World Bank shared the concept of pension economics. Workers of today contribute to pay the pensioners and they get a promise that they will also receive pension tomorrow, which are paid for by the workers of tomorrow. To keep the system in balance, it is important to adjust the contribution rate, replacement rate, parameters affecting the dependency rate, and the combination of all. If the dependency rate grows, it is important that the contribution rate should also be increased so that there is a balance in the pension fund, Bogomolova added.

 

 

Gross pension replacement rate, 2016

Gross pension replacement rate is a measure of how effectively a pension system provides a retirement income to replace earnings. Intergovernmental economic organization The Organization for Economic Co-operation and Development highlights the gross pension replacement rates of the following countries in both men and women perspectives:

Brazil: 70 percent of pre-retirement earnings for men and 53 percent for women
Croatia: 105 percent for both men and women
Netherlands: 97 percent for both men and women
India: 87 percent for men, 83 percent for women
Denmark: 86 percent for both men and women
Italy: 83 percent for both men and women
Austria: 78 percent for both men and women