Brazil Puts its Accounts in Order

When Brazilian president Luiz Inacio “Lula” da Silva acquired power in January 2003, he made pension reform one of his main priorities. In December 2003, after seven months of tough negotiations, the Brazilian National Congress approved the Constitutional Reform Proposal for reforming the public pension system, otherwise known as the System of Social Security. The proposal alters the rules regarding the retirement benefits of public workers, but it also establishes a change in the maximum benefits provided for retirees and pensioners in the private sector. According to the government, the reform will help reduce the deficit in the accounts of the Social Security system, both public as well as private, which in the federal realm amounted to about 58.5 billion reais in 2003, the equivalent of about $20.525 billion.

 

Reasons for Reform

The Brazilian government considers the Social Security reforms necessary because of two fundamental factors: First, a large deficit is created by the current system of pensions; second, in order to democratize the system it is necessary to close the gap between the value of benefits paid in the public sector and those paid by the private system, known as the INSS.

 

The Ministry of Social Security estimates that the private-sector deficit in 2003 amounted to 27.1 billion reais, and the deficit in the public sector reached 31.4 billion reais.

 

With this change in the rules of the system, the government hopes to economize its financial resources and cut the deficit. “In reality, there will be some savings, but the problem is that this won’t take place in the short term,” says José Matias Pereira, an attorney who is also a professor of public finances and coordinator of graduate business studies at the University of Brasilia. “They are eliminating a series of rights; and they are leveling salaries in the private sector to levels in the public sector. All this, in the medium and long term will have an impact on public-sector accounts.”

 

Luis Carlos Gonçalves Lucas, president of Brazil’s National Union of Teachers of Institutions of Higher Education, believes that these changes will generate more deficits rather than lead to the cleaning up of accounts. “From the point of view of public-sector accounts, there are no arguments than can justify this reform,” he says. “The arguments that are used are of a fiscal nature, and people know that the fiscal impact on liquidity will be negative. Every privatization project that has imposed in Latin America demonstrates this fact. That’s because, for a long period of time, the State has ceased to collect those contributions from workers that exceed the limit, yet the State maintains its expenditures for Social Security. This usually generates a very large deficit. That’s what happened in Chile and Argentina, where the deficit for pensions multiplied by six or seven times since privatization was enacted.”

 

Bad Management?

One of the arguments against the current reform of the System of Social Security refers to the supposedly poor management of resources carried out by various governments over the course of years. “A (social security) fund has never been recreated in which the government deposits its corresponding share of funding (as happens in the case of private-sector companies). Therefore, the (deficit) data that lately has been compiled does not reflect the reality,” says José Pereira. “If, along the course of the career of the public-sector worker, the government had contributed its corresponding share, and if the government had administered that fund well, there would probably not be a deficit.”

 

In contrast, João Batista Inocentini, president of Brazil’s national union of retired union workers, supports the reform because it democratizes the system. “We defend the reform, and a large part of the proposals that have been approved are ours. We do not defend privileges; we are radically opposed to them. We defend an equal cap on salaries for everyone, equivalent to ten minimum salaries, or 2,400 reais (a bit more than $840),” says the unionist.

 

Senator Aloizio Mercadante, a government leader from the Workers’ Party (in São Paulo), also defended the initiative in a speech before the Senate. “[The reform] wound up almost saying the following: The nation in which we live has 44 million Brazilians who are outside the Social Security System … Eighteen million have an income that qualifies them to be within the system, and we are introducing a mechanism for trying to bring this portion into it, so that they too can benefit from the change in the System … The fiscal and financial crisis requires this reform … Therefore, we are laying the groundwork for a solid road of growth, with stability and social inclusion.”

 

New Rules for Public-sector Workers

Pension benefits for workers in the private sector are going to change little because reform had already occurred under the government of Fernando Henrique Cardoso (1995-2002). The maximum paid for retirement rose from 1,869 reais ($656) to 2,400 reais ($842).

 

For public-sector workers, however, the pension system now will have two bases: One for current workers and another for future workers. The old pension system foresaw that public officials, when they retired, had the right to receive their entire last salary, without discounts or caps, as well as same kinds of readjustments to their pensions that active personnel were provided.

 

The changes establish two ways for calculating benefits for working officials: Either by using a base of the worker’s contributions over his professional career; or by paying the equivalent of his or her final salary – observing a minimum age of 55 years for women and 60 years for men. Those people who choose the whole package will have a partial adjustment in the annual value of their benefits. Now, when someone chooses a benefit calculated from when he began to pay taxes in his professional career, he receives future readjustments based on inflation rates. The calculation for new workers will be based on their contributions throughout the course of their careers.

 

Currently, the maximum value of benefits for a public-sector worker who retires and opts for the entire benefit is the equivalent of the final salary he earned during his active life, with a maximum limit of 17,800 reais – about $6,245. Newly hired workers will be able to retire with a maximum of 2,400 reais a month. Those retirees who want to increase the amount they take home [after retirement] will have to resort to a complementary private [pension] plan.

 

Pensions paid, for example, to widows of active personnel or retirees will amount to the equivalent of the salary or the benefits paid to the official, up to a [monthly] limit of 2,400 reais. Beyond that amount, there will be a discount of 30%. For pensioners or dependents of new workers, the rules are the same as for normal retirement pensions.

 

Moreover, the reform creates one standard amount of contribution for federal workers, at 11%. It also establishes contributions of inactive workers at 11% when they exceed 1,440 reais ($505) for the currently retired, as well as 2,400 reais for those workers who are active and are going to retire.

 

Because some parts of the reform are encountering resistance, the government has created another proposal known as the Parallel PEC, which loosens some of the rules of the original reform. Although the Parallel PEC is still being discussed, it gives some hope to current public-sector workers because it lowers the requirements of the original constitutional reform.

 

The Impact on Education

The changes in the Social Security System have a direct impact on federal higher education because professors are also public-sector workers and they will be covered by the new rules.  According to estimates, some 6,000 teachers at federal institutions have retired or are in the process of retiring because of the reform.

 

The reform of the Pension System “has caused many problems at universities.     Although it is clear that it was necessary, it has led many professors into retirement,” says Carlos Roberto Antunes dos Santos, secretary of higher education at the Ministry of Education.

 

This prospect has generated a high level of concern throughout the academic world because a shortage of teachers can harm the quality of teaching in federal public institutions. Part of this is due to the fact that the process of hiring [new public-sector] workers is generally very slow and depends on the freeing up of financial resources.

 

Unconstitutional Reform?

Among analysts, the changes created by the reform of the Pension System have caused a range of different reactions. Some analysts consider the changes legitimate and legally acceptable, while others don’t. “The change that involves receiving 11% from the non-working population will probably wind up in the courts because that is an acquired right, says Pereira. “There was a complete, finished contract when the individual took retirement, which said that he will not pay more.”

 

Wladimir Novaes Martinez, an attorney, believes that the basis of the reform is legal. As for the contribution of 11% from inactive workers, Martinez agrees with Pereira: “I am totally opposed (to the collection). It is a terrible mistake on the part of the government – a logical, political and legal error.”

 

Another issue raised by analysts involves the change in the system of public-sector pensions. “(The reform) introduces privatization of the public pension system in Brazil. Everything indicates that this will not be an isolated measure. Around the world, pension reforms have not been done in stages. They are processes, and this is a step in the direction of privatization,” says Lucas.

 

Helio Gustavo Alves, an attorney who is president of the Institute of Social Security Lawyers of São Paulo and a law professor at the Ibero-American University Center (Unibero), believes that this reform is unconstitutional. “The public official, when he opted for public service, trusted in the expectation of this right. Now, how can this legal expectation be eliminated? The rules of the game cannot change in the middle of the match, and that is what is happening. To have a just result that is legally perfect, they would have to change the rules of the Social Security System starting from today.”

 

When the changes in the Pension System are finished, and the Parallel PEC is approved, those who feel that their rights have not been respected will have to turn to the judicial authorities. Complaints will be analyzed by the Federal Supreme Court, the highest authority of Brazilian justice, which is considered by many to be a political forum. For this reason, the most probable outcome is that the changes will be largely maintained, thus consolidating the most important political conquest that has been achieved so far by the government of president Luiz Inacio “Lula” da Silva.

Citing Knowledge@Wharton

Close


For Personal use:

Please use the following citations to quote for personal use:

MLA

"Brazil Puts its Accounts in Order." Knowledge@Wharton. The Wharton School, University of Pennsylvania, [11 February, 2004]. Web. [01 October, 2014] <http://knowledge.wharton.upenn.edu/article/brazil-puts-its-accounts-in-order/>

APA

Brazil Puts its Accounts in Order. Knowledge@Wharton (2004, February 11). Retrieved from http://knowledge.wharton.upenn.edu/article/brazil-puts-its-accounts-in-order/

Chicago

"Brazil Puts its Accounts in Order" Knowledge@Wharton, [February 11, 2004].
Accessed [October 01, 2014]. [http://knowledge.wharton.upenn.edu/article/brazil-puts-its-accounts-in-order/]


For Educational/Business use:

Please contact us for repurposing articles, podcasts, or videos using our content licensing contact form.

 

Join The Discussion

No Comments So Far