Can Brazil’s Pension Reform Kick-Start the Economy?

Trade union members and social activists demonstrate against Brazilian President Jair Bolsonaro's proposal to reform the social security system.

Source NELSON ALMEIDA/AFP/Getty Images)

Why you should care

Because Latin America’s largest economy is teetering.

After decades of delay and political deadlock, Brazil has finally passed its long-awaited pension reform. It’s a big victory for the country’s far-right president, Jair Bolsonaro, and his economic czar, University of Chicago–educated Paulo Guedes, who spearheaded its passage. 

The costs of failure would have been high. Brazil’s ballooning pensions spending risked sparking “a social collapse” in Latin America’s largest economy, according to Rodrigo Maia, speaker of the lower house, who shepherded the constitutional amendment required to reform the pensions system through a fractious Congress. 

Why does it matter?

The pension reform is seen as key to shoring up public finances and restoring confidence in Brazil’s sluggish economy, which emerged from a recession in the last quarter. Investors have been following the reform saga closely because the country’s spending on social security is among the highest in the world. Last year, it accounted for 44 percent of the federal government’s budget and 8.6 percent of gross domestic product. 

Without the reform, the country’s pension outlays would balloon to 17 percent of GDP in the next four decades, according to official data. The pension reform has already been priced in by Brazil’s financial markets. 

What’s in the reform?

Rogério Marinho, the government’s social security secretary, says the reform — which will increase retirement age to 65 for men and 62 for women, from 56 and 53, respectively — represents an 800 billion real ($194 billion) in savings over the next decade, plus 270 billion real of ancillary savings over the same period. 

“This is a big number. It is a good result,” says David Beker, chief economist at Bank of America Merrill Lynch in São Paulo. The pension reform should prevent the government’s debt ratio from rising over the coming years — a concern in a country where gross public debt could have topped 120 percent of GDP “if reforms are not implemented,” the International Monetary Fund warned in July. 

Will the public accept it?

Twenty years ago, former President Fernando Henrique Cardoso came within one vote in the Senate of passing the reform. Since then, political efforts have waned. The current pension reform proposal was initiated under Michel Temer, Bolsonaro’s predecessor, but stalled after the former president was charged with graft. 

Since Bolsonaro’s election last year, however, most legislators have come round to the idea that reining in Brazil’s vast system of social welfare payments is necessary. Senior politicians even managed to get the message across that losing certain benefits would be beneficial for future generations, with some people rallying in favor of the reform. Opinion polls show that the overhaul has gained supporters. “We cannot focus just on the present; things are getting worse, so the reform is necessary,” says Elica Goulart, a languages teacher who will retire soon. 

What’s next?

Many international businesses have held back from investing in Brazil until the reform passed, viewing it as a litmus test for whether Guedes and his team would be able to pass a broader economic agenda, including a comprehensive overhaul of the country’s byzantine tax system. Many hope the passage of the pension reform will restore confidence in the Brazilian economy. 

However, Vladimir Caramaschi do Vale, chief economist for Latin America at Indosuez Wealth Management, warns that Brazil “needs to keep pushing through other reforms” if it really wants to unlock investments.

Analysts warn that the positive reform momentum may dwindle if the economy does not pick up steam next year, and if Bolsonaro’s approval ratings continue to drop. With the pension overhaul finished, the urgency that underpinned it may vanish. A risk, according to Monica de Bolle, a senior fellow at the Peterson Institute for International Economics, is that the firebrand president could turn “his big mouth” on his economic team, hampering further reforms.

“I am somewhat concerned about the political obstacles facing the next stage of reforms. There seems to be more opposition than there was against pension reform, and not the same urgency,” says William Jackson, chief emerging markets economist at Capital Economics.

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By Andres Schipani and Bryan Harris

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