Brazil Pensions a `Bomb Ready to Explode' for Lula Government
By Romina Nicaretta
Brasilia, Nov. 7 (Bloomberg) -- Nobor Saito paid into Brazil's state pension plan for only six of the 33 years he worked for the government. The system still let him retire at the age of 53 on a pension he says almost equals his former salary.
Saito's monthly benefit of 10,000 reais ($2,860) is 26 times the average for retirees from private companies -- who must contribute to the state pension system all their working lives. Saito and other government employees didn't even start contributing until 1991.
``These were the rules when I joined the government,'' Saito said. ``The constitution guarantees they cannot touch my pension.'' Now 58, the former systems analyst also gets increases to match pay rises awarded to public employees.
Saito's retirement package is one of the obstacles President- elect Luiz Inacio Lula da Silva will face when he takes office Jan. 1. The former union leader must either curb expenditures, including payments to the nation's 2.5 million former civil servants, or go back on campaign promises to spend more on education, aid to the poor and job creation while honoring Brazil's $300 billion debt, economists said.
``The pension system is a bomb ready to explode,'' said Raul Velloso, a self-employed economist in Brasilia who specializes in public finances. ``The government is forced to implement giant spending cuts just to cover the pension deficit.''
This year, Brazil's retirement program for civil servants will generate three quarters of the social security system's 70.1 billion reais shortfall. The deficit created by government retirees, which is equivalent to 3.9 percent of gross domestic product, rises by 0.3 percent of GDP each year, economists said.
`Heart of Crisis'
``This is the heart of the Brazilian crisis,'' said Mailson da Nobrega, a former finance minister. ``With such a deficit, the government cannot reduce the tax burden and make the economy grow.''
Pensions for former private and state employees together account for 41 percent of government expenditure and salaries a further 39 percent. That leaves 20 percent to fund services such as education, health and aid to the poor -- Lula's priorities.
Investor concerns that Lula, a former union leader, won't cut spending enough to avert a debt default have caused Brazil's currency to drop 37 percent this year, to about 3.7 reais per dollar. The benchmark 8 percent bond that matures in 2014 fell 27 percent to about 56 cents on the dollar.
During his eight years in power, President Fernando Henrique Cardoso reduced spending on pensions for private workers by limiting what they receive to 1,561 reais a month and by raising the retirement age to 65 years. Before, they qualified for retirement after 35 years of service, whatever their age.
Constitutional Amendments
Cardoso's efforts to reduce benefits to former civil servants failed because he couldn't persuade Congress to back constitutional amendments that would have enabled him to reduce state workers' pensions and end automatic increases linked to pay rises for active employees.
Lula has said that, while he would respect the rights of those already drawing a pension, he would introduce legislation to reduce benefits to retiring civil servants and end automatic increases.
Federal government retirees, who started to pay 11 percent of their salaries in pension contributions 11 years ago, receive an average pension of 4,700 reais a month while workers who used to work for private companies receive an average 384 reais, official figures show.
Rute Mossmann receives 370 reais a month, less than half what she earned when she qualified for retirement from her job as a hairdresser. Mossmann and her employer together contributed the equivalent of 33 percent of her salary to the pensions system over 30 years. Her payment isn't adjusted to offset the effects of inflation or to reflect pay rises for workers.
Changes Possible
``I still have to work seven or eight hours a day to pay my bills,'' Mossmann said, who continues to work at the same salon.
Central Bank President Arminio Fraga this week told a conference on risk in Rio de Janeiro that some changes to the pension system may be approved before the January handover of power.
Cardoso has proposed that retired civil servants pay 25 percent of their pensions back to the government to make up for contributions from which they had been exempt in the past. He also has proposed that public employees contribute to their pension plan for at least 30 years before they can retire on full pay.
Consensus between Lula and Cardoso on the need for changes meant they might be able to push them through Congress before the end of the year, said Fraga.
``That would be an extraordinary sign, worth perhaps a few hundred basis points on our risk premium,'' said Fraga.
Investors currently demand that Brazilian bonds yield about 1,800 basis points over comparable U.S. Treasury bonds to compensate for the risk of default, according to J.P. Morgan Chase & Co. A basis point is equal to 0.01 percentage point. |
