Can Brazilians Afford to Retire?
An exploding pension crisis here in Brazil, Latin America’s largest economy, is wreaking havoc on its public finances and intensifying a struggle over the economy’s future.
Brazilians retire at an average age of 54, and some public servants, military officials, and politicians manage to collect multiple pensions totaling over U$100,000 year. After they die, some find ways for their spouses or daughters to continue collecting the pensions for the rest of their lives, too.
The pension crisis, along with “stagflation” and double-digit unemployment, is feeding Brazil’s economic turmoil. The country’s interim president, Michel Temer, is desperately searching for a solution, but the huge problem will not be solved easily.
“The entire country should be frightened to its core. The pensions Brazilians obtain and the ages at which they start receiving them are nothing less than scandalous,” said Paulo Tafner, an economist and a leading authority on Brazil’s pension system.
The nation’s economists and Temer’s economic advisors have made it clear that the country’s future economic health depends on a radical re-organization of the federal pension system, and Temer has promised to make it happen. It is unclear exactly what measures Temer will be able to pass into law, but the first solution on the table is to increase the retirement age to 65 or 70.
Interestingly, before Dilma Rousseff’s impeachment, she vetoed legislation proposed by Temer’s party that would have expanded pension benefits. Government officials had predicted a major pension shortfall in 2030, but now they say that could happen as soon as next year.
At this time, Michel Temer lacks a clear mandate from the populace. People are awaiting anxiously the results of the Senate vote as well as the results of Temer’s efforts to jumpstart the lagging economy.
Temer has yet to assemble a solid voting coalition inside Congress among the 28 political parties represented in Brasília, the country’s capital, more viable political parties than any other country in the world. Without a solid mandate from the legislature at a time of dire economic straits, Michel Temer faces a tough agenda.
In addition to the weakened economy providing less revenue to the government, there is another serious problem affecting the pension system – Brazil’s plummeting fertility rate. The most recent statistics place the birth rate at 1.77 children per woman, which is the same level as the US and northern Europe and below the rate needed for the population to replace itself. As recently as 1980, Brazil’s fertility rate was 4.3 children per woman, according to the United Nations.
Thanks to the influx of immigrants to the US, its overall population continues to increase, but Brazil lacks a significant number of recent immigrants. A shrinking total population puts even more pressure on a pension system already under strain because of more retirees and less workers to pay for their pension benefits.
Instead of building a surplus now to prepare for an onslaught of new pension obligations in the years ahead, economists say Brazil is squandering a demographic bonus that will soon fade. Brazil already spends more than 10 percent of its gross domestic product on public pensions. Brazilian men now retire at an average age of 55, while men in Greece or Italy retire on average at 63.
Along with fewer young people, the average life expectancy in Brazil has climbed to 74.9 years in 2013, climbing miraculously from only 62.5 years in 1980. Unless changes are made, an even bigger shock is expected here, given that the population of people 60 or older is expected to reach about 14 percent of the overall population in just two decades, up from about 7 percent now.
The biggest challenge that political leaders across the ideological spectrum face is one they helped create: the generosity of Brazilian pensions. The pension system can ease extreme poverty. For instance, rural workers can retire five years before others even if they have never contributed to the public pension system, receiving a monthly payment equal to the minimum wage, about U$210 a month.
However, the system also perpetuates inequality by providing special benefits to hundreds of thousands of government employees and their families. In 2000, for instance, officials did away with rules allowing the daughters of military officials to receive the pensions of their fathers after they died. But the shift applied only to new entrants into the armed forces, so more than 185,000 women still draw military survivors’ pensions, often amounting to the full salary of their fathers upon retirement. Spending on such pensions is forecast to last through the end of this century, economists say. Pension benefits, known as INSS in Brazil, throughout the public bureaucracy are so high that it’s estimated the country is spending about 3 percent of G.D.P. on survivors’ pensions, about three times the level of most rich countries.
Politicians have been especially skilled at securing big pensions at the state level. For example, in the less industrialized state of Pará, former governors and first ladies were recently receiving lifelong pensions as high as 25 thousand reais a month, even if they only served a few years in office. The Supreme Court suspended such pensions this year.
Other states are struggling with similar payouts. In the state of Rio de Janeiro, authorities had relied on royalties from offshore oil production to keep pensions high but that was before oil prices fell sharply. Officials in Rio are now preparing a bailout to transfer about 1800 million reais from the state treasury to cover this year’s shortfall in the pension system. With pension obligations soaring, fewer resources are available for basic services like schools, hospitals, police, and sewage systems. Rio is planning to spend about U$4.5 billion this year on pension benefits, compared with about $3.6 billion on the state’s public education and health systems.
So where does that leave Brazil’s current government? “Brazil has only three financial options to prevent large increases in pension spending – increase contributions, increase the retirement age, or decrease pensions,” said Mariano Bosch, a labor markets specialist at the Inter-American Development Bank. “As you can imagine, all of those options are very unpopular.”
“Public pensions in Brazil have long been a slow-motion disaster,” said Raul Velloso, a Brazilian specialist on public finances. “The difference now is that the debacle is accelerating, revealing to our children the political cowardice and irresponsibility our leaders are bestowing on the country.”
[Research for this article comes from The New York Times.]