The Brazilian pension system: recent reforms and challenges ahead

Brazil’s public pension expenditure is about 9 per cent of GDP, above the OECD average. Given that OECD countries are generally not only wealthier, but also significantly older, Brazil’s pension expenditures are clearly excessive, draining resources away from other areas, such as much needed social investment in health and education. Beyond its fiscal impact, the Brazilian pension system is also unjust. About half of total pension expenditure is paid to former civil servants, which account for only 5 per cent of total retirees.

Given the demographic challenges Brazil is likely to face in the next decades, authorities have started to implement a series of reforms. The general regime available to private sector workers underwent major changes in 1999, which will help ensure its long-term actuarial and financial balance. However, problems remain concerning the growth of the informal economy, the weight of non-pension benefits financially imputed to the regime and the mechanisms for the indexation of pension benefits.

Paper argues that the main challenge is to reform the special pension regimes for civil servants. While estimates about future spending trends are sensitive to assumptions, it is likely that, in the absence of further reforms, pension expenditure under these schemes will not decline as percentage of GDP over the next 10-15 years. This would reinforce inequity and create difficulties for fiscal policy. Initiatives to date, such as changing the employment conditions for civil servants joining since 1998 will only bring benefits in the very long-term.

Benefits remain generous, and not sufficiently linked to the amount and length of contributions. Hence more forceful measures are required to address existing distortions. Benefits should at once be capped at less than 100 per cent of last salary. A more ambitious reform would introduce, as in the general system, an adjustable formula for all civil servants. This latter measure would ease portability between the public and private sectors, reduce incentives for early retirement and facilitate introduction of a fully-funded complementary pension scheme. {adapted from author]