Pension reform: Brazil's uphill battle to save 1 trillion reais
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.
What 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 more than 1 trillion reais ($260 billion) 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 period of up to 14 years.
Economy Minister Paulo Guedes, an orthodox economist and former fund manager who is leading the charge on reform, insists that failure to overhaul social security will bankrupt Brazil. He has drafted an ambitious plan to streamline the system, whose scale is greater than any prior governments has proposed.
Guedes argues that the changes are progressive, with the wealthiest in society contributing more and the poorest gaining the most from the changes.
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.
Brazil`s spending on social security is by two 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 forecasts, while reform will boost growth, generate millions of jobs and keep inflation and interest rates under control.
Successful reform will 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.
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.
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.
Net savings from changes to military compensation will be 10.4 billion reais over the next decade, significantly down from the original target of 93 billion reais, after military personnel, police and firefighters secured pay increases of some 86 billion reais in negotiations.($1 = 3.86 reais)
(This article has not been edited by Zeebiz editorial team and is auto-generated from an agency feed.)
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