March 7, 2017    4 minute read

Brazil’s Pension Problem

Age Issues    March 7, 2017    4 minute read

Brazil’s Pension Problem

On average, Brazil spends 50% more than OECD members on pensions, as a share of GDP, despite having half as many over-65s as a share of the population.

Ever since the mid-20th century, Brazil has experienced a decline in fertility rates leading to a reduction in the population growth. It is estimated that Brazil’s elderly group will continue to form a growing portion of the country’s population where over-65s currently account for 8.06% of its inhabitants, subsequently causing an elderly dependency ratio of 11.3% putting pressure on the ever-diminishing labour force to support these dependents.

Troublingly, it is projected that, by 2050, the over-65s will make up 25% of the population which could lead to problems meeting pension obligations, which will place a strain on health services. Currently, government spending on pensions equals 12% of GDP.

In Rio, there are more pensioners supported by the state than there are civil servants – they say “for every police colonel on active duty five are retired” – putting Rio in great danger of bankruptcy.

How the Problem Started

The introduction of a basic pension in 1988 for men over the age of 65 and women over the age of 60, regardless of whether they made contributions to the system, has created an incentive to retire early and formed the foundation for a population with increasing numbers of wealthy retirees. If contributions are made to the pension scheme, benefits can be claimed sooner. On average, pensions are collected at 58 years of age in Brazil. In Mexico, for example, they are collected at 70.

Furthermore, pensions in Brazil can be worth around 80% of the salary earned before retirement, a substantial amount when compared to other countries, with widows/widowers eligible to receive 100% of their late spouse’s pension in addition to their own. This, combined with the fact that the recession slashed available revenues to pay for these pensions, has led to the possibility of government spending on pensions to hit 20% of GDP by 2060 and public debt reaching an astounding 98% of GDP by 2019.

Planning Ahead

Moreover, Brazil is in the midst of the longest decline on record with generous pensions being the main factor behind this, making it evident that changes need to be made to the pension system.

President Michel Temer has drawn up a plan that is up for debate to transform the pension system, in a bid to improve Brazil’s financial stability. It would look to set a minimum age of 65 for both men and women to be allowed to claim their pension as well as the potential for this to increase with changes in life expectancy. Widows/widowers would also not receive the full pension of their late spouse under the new reforms.

Furthermore, to be eligible for the basic pension, contributions would have to be made for at least 25 years as opposed to 15, although the poorest are exempt from this condition.

These changes under the new reforms, if put in place, would help stimulate the economy and hopefully allow the central bank to cut interest rates, yet are unlikely to be popular amongst those close to retirement as they would now have to work longer than initially expected.

What the Future Holds

Overall, in the face of opposition from labour and civil servant unions, it is clear that changes desperately need to be made to Brazil’s unsustainable pension system and spending patterns if the country stands any chance in lowering its current deficit.

The reforms proposed by Michel Temer are a positive start towards putting Brazil back on track and retaining investor confidence, yet whether or not they aid in fixing Brazil’s short-term problems remains to be seen.

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