Explained: Why Brazil’s pension reform bill to help save $312 billion mattershttps://indianexpress.com/article/explained/explained-why-brazils-pension-reform-bill-matters-5695613/

Explained: Why Brazil’s pension reform bill to help save $312 billion matters

What exactly is the Brazil government proposing? Why does it matter? And why are markets so sensitive to its every twist and turn?

Explained: Why Brazil's pension reform bill to help save 2 billion matters
Brazilian Federal Deputy Marcelo Ramos speaks during a session of the commission of the pension reform bill at the National Congress in Brasilia, Brazil 25 April, 2019. (Reuters Photo: Adriano Machado)

Brazilian President Jair Bolsonaro is staking much of his political capital on a plan to shore up the country’s costly social security system, which he hopes will kick-start the country’s economy and boost investor sentiment. The government is, however, struggling to sell its proposal to the public and lawmakers. Legislation will almost certainly be watered down, and passage through both houses of Congress could be a long, drawn-out process.

On Thursday, the Economy Ministry raised its projected savings target by 15 per cent to 1.237 trillion reais ($312 billion at current exchange rates) over the next decade. But what exactly is the government proposing? Why does it matter? And why are markets so sensitive to its every twist and turn?

Government’s proposal 

The draft bill aims to save 1.237 trillion reais over the next 10 years by changing workers’ pension contributions, raising the minimum retirement age and closing loopholes.

Broadly speaking, workers will have to pay more into the system over a longer period of time, and the minimum retirement age will be raised to 65 for men and 62 for women. These changes would be phased in over a period of up to 14 years.

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Economy Minister Paulo Guedes, an orthodox economist and former fund manager who is leading the charge on the reform, insists that failure to overhaul social security will bankrupt Brazil. His ambitious plan to streamline the system is at a scale greater than any prior government has proposed.

Guedes has argued that the changes are progressive, with the wealthiest in society contributing more and the poorest gaining the most.

The bill needs to be approved by a 60 percent majority in both houses – 308 votes in the Chamber of Deputies and 49 in the Senate – to be passed into law. THE BREAKDOWN

The Economy Ministry is now targeting total savings of 1.237 trillion reais, up from 1.072 trillion in February’s original draft.

Of that, 808 billion reais will come from the private sector social security system, up from 687 billion. Some 433 billion reais of that will come from urban workers’ increased contributions, and 128 billion from the increase in their retirement age.

Savings from rural workers will total 92 billion reais, while savings from public sector civil servants will be 225 billion reais, up from 203 billion.

Total savings per year are expected to start low at 16 billion reais in 2020, gradually rising to 231 billion by 2029.

Financial weight 

Brazil’s spending on social security is by some measures among the highest in the world. Last year it accounted for 44 percent of the federal government’s budget and 8.5 percent of gross domestic product. Without reform, the government says, outlays will climb to 17 percent of GDP by 2060.

According to Treasury projections, the pension deficit will swell to more than 314 billion reais this year. Economists widely agree that deficits of this scale are unsustainable.

Indebted states and municipalities can also trace much of their financial problems directly to swollen social security bills. Brazilian states’ combined deficit with the federal government stands at some 200 billion reais.

Economic, market impact 

Failure to fix the system will wreck the Brazilian economy, the government warns. The language seems apocalyptic and the forecasts severe, but economists, analysts and financial market participants tend to agree the options are reform or bust.

Leaving the system as it is will tip the economy into a deep, prolonged recession next year, cause interest rates to soar and push up unemployment, the Economy Ministry forecast in February, while it says reform would boost growth, generate millions of jobs and keep inflation and interest rates under control.

Successful reform would also boost investor confidence in the country and lift Brazilian assets, analysts say.

The real and Brazil’s stock market were among investors’ most favored emerging market assets at the start of the year, but that optimism has faded as negotiations in Congress have run into political quicksand.

History

Pension reform has been the bane of every Brazilian government for the past quarter century.

President Fernando Henrique Cardoso came within one Senate vote of passing reform in 1999, which would have stopped, or at least slowed, the recent surge in spending. With that narrow failure, the political will to push for ambitious reform wilted.

The last attempt at fixing the problem was made by President Michel Temer, who left office on Jan. 1 and whose most recent proposal would have generated savings of around 400 billion reais. That push ended in 2017 when a corruption scandal snared Temer, decimating his popularity and derailing his agenda.

Controversy

The most obvious challenge for Bolsonaro is convincing Brazilians, many already struggling, to give up retirement benefits, and convincing lawmakers to support policies that may cause financial hardship to large swathes of their constituents.

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Proposed changes to rural, disabled and elderly workers’ pensions are a particularly sensitive issue. Opposition to cutting their benefits is bound to be reinforced by the fact that military personnel, police and firefighters have already been largely compensated for any pension cuts with higher pay.