Temer’s pension reform drive rises from the dead in Brazil

Temer’s pension reform drive rises from the dead in Brazil

President capitalises on a nascent recovery by relaunching retirement benefit proposals

Outside Brasília’s modernist congress building, protesters wielding a dummy of President Michel Temer dressed as a vampire rail against a renewed government attempt to pass pension reform. 

“We are running the risk of having to work longer and longer before we can receive a pension,” complains Rosangela Barreto, a 40-year-old university employee who travelled two days by bus from the northeastern city of Fortaleza to join the protest.

With elections due next year, Mr Temer has begun rallying congress to make a last stand this month on the issue economists see as most crucial to Brazil’s long-term prosperity — pension reform.

In spite of opinion polls that show him to be one of the most unpopular presidents in Brazil’s recent history, Mr Temer has presided over a recovery in Latin America’s largest economy this year. After suffering its worst recession in history in 2015 and 2016, gross domestic product rose 1.4 per cent in the third quarter against a year earlier.

He has also implemented reforms that have won over markets, such as limiting increases in real budget spending to zero for up to 20 years to try to reduce a 9 per cent budget deficit that is threatening to implode the nation’s public finances.

But the prize that would really secure his legacy with markets as a reformer remains the most elusive — how to rein in a voracious pension system that by 2030 is expected to consume the entire federal budget, leaving no room for any other type of expenditure, according to estimates by the World Bank. Brazil already spends 4 per cent of GDP on public service pensions alone, higher even than Greece.

“This reform is fundamental to any fiscal adjustment strategy,” the World Bank said.  Under Brazil’s current system, workers can retire as early as their mid-50s on full salary. The system is also unjust. The federal government, for instance, spends nearly 2 per cent of GDP on pension benefits for 1m retired public servants — about eight times more per person on average than it spends on private sector retirees.

Earlier this year, Mr Temer, riding high after coming to power on the impeachment of his predecessor, former president Dilma Rousseff, in August 2016, looked close to passing a comprehensive pension reform.

But he was accused of corruption in May after a businessman, Joesley Batista of meatpacker JBS, recorded him allegedly secretly discussing bribes. The pension reform, which requires three-fifths of Brazil’s 513-seat congress to pass, was delayed while the president fought two congressional votes on whether he should be tried for corruption. 

Mr Temer defeated the second vote in October. But analysts say he spent too much political capital on his survival at the cost of the pension bill.  With general elections in October next year, legislators want to avoid such a deeply unpopular reform. A study by Arko Advice, a consultancy, estimated the government had 262 votes in favour of pension reform — well short of the 308 needed to pass the measure.

Party insiders claim even among the 60 lawmakers from Mr Temer’s Brazilian Democratic Movement Party, 10 still need convincing. The pension reform “won't pass, it just won't pass”, said one PMDB lawmaker in Brasília.

The other problem is that the PMDB’s main coalition partner, the Brazilian Social Democracy Party, or PSDB, is suffering a leadership crisis and is heavily divided over its allegiances with Mr Temer.  But Ricardo Trípoli, the lower house leader of the PSDB, said the party still supported pension reform. “We need to have [the pension reform] because we cannot run the risk of having a financial crisis,” Mr Tripoli said. 

Economists argue the government might still pass a reform this year but predict it will be watered down. The government has floated an amended bill that maintains the new minimum retirement age of 62 for women and 65 for men but dilutes other provisions, such as an attempt to raise the minimum contribution period for the private sector to 25 years from the current 15 years.

The dilutions would reduce the savings from the reform from 2.2 per cent of GDP over the next decade to 1.3 per cent, Santander Bank calculated.

Others put the estimate of savings even lower. “Our working assumption is that to the extent something is passed, it will probably procure savings of half the advertised rate, or about 0.5 per cent of GDP,” said Neil Shearing, chief emerging markets economist at Capital Economics. He said that was “a drop in the ocean” compared with the total funding deficit in the system of about 4 per cent.

Even so, with the economy strengthening, markets could rally if the government succeeded in passing even a token reform, economists said. 

“There is a large number of people like myself who are very doubtful it will happen but if we are wrong, then it will be a significant surprise and it will be good for the market,” said Tony Volpon, economist with UBS in São Paulo. 

Joe Leahy & Andres Schipani

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