Can Bolsonaro defuse Brazil’s pensions timebomb?

8 Jan 19

Tough talk will not help the new president resolve an explosive fiscal predicament, writes Gavin O’Toole.

Brazil’s new leaders like to use incendiary language.

“Our pension funds are an aeroplane with five bombs on board that will explode at any moment,” Paulo Guedes said during last year’s electoral campaign.

The recently appointed economy minister’s metaphor is in keeping with the image of his boss, President Jair Bolsonaro – a far-right former artillery captain who took office last week.

Bolsonaro’s political programme is unquestionably explosive.

He makes much of his admiration for Brazil’s former military dictatorship – a third of his cabinet are former army officers – promises to ease gun laws and give security forces a free hand in tackling crime, supports torture, and flings verbal hand-grenades at minorities.

But tough talk will be of little use when it comes to solving the main challenge facing Brazil – pension reform.

Guedes is right: the accumulating pensions deficit – which in 2017 stood at a breathtaking US$61.3bn (£48bn) – is a fiscal timebomb.

Last week, the economy minister reiterated that curbing Brazilian retirement benefits is the most pressing issue facing the country and crucial to tackling a budget deficit of 8% of GDP.

Pensions have become a symbol of government paralysis as Brazil struggles to recover from a damaging two-year recession that Bolsonaro has pledged to end.

Whether he succeeds or fails will be determined not by his rhetoric, but by how good he is at old-fashioned congressional horse-trading. 

Yet there are already signs that Bolsonaro has underestimated the complex politics of reform and is adopting a haphazard approach.

He failed to convince outgoing president Michel Temer to push through a pensions bill prior to his inauguration in order to make reform easier for him once in office.

After repeatedly promising to fast track the issue, Bolsonaro then delivered a blow to investors who had snapped up Brazilian assets in the wake of his election victory by conceding that congress was unlikely to play ball in 2018.

That was followed by a clumsy face-saving exercise in which the treasury secretary said a pensions overhaul could be approved in the first half of 2019 if the new president chose to run with Temer’s original bill – but later if he drafts his own.

By the eve of Bolsonaro’s inauguration, the message had morphed discernibly – with the president-elect indicating he planned piecemeal changes to navigate congress gradually.

It is far from the decisive start favoured by Guedes, whose relationship with his boss has become the most scrutinised feature of Brazilian politics.

Why reform is necessary

Pension reform is the litmus test for investors and credit rating agencies of Bolsonaro’s resolve to restore confidence in Latin America’s largest economy and regain the investment-grade rating it lost in 2015.

Spending on pensions in Brazil is among the highest in the world and a major cause of its US$1.5 trillion gross public debt, 75% of GDP.

Without reform, the World Bank has estimated pensions could consume the entire federal budget by 2030.

Moreover, demographics make matters even more pressing.

The average Brazilian retires at 58 but, with improving healthcare, life expectancy has soared and by 2050 the ratio of elderly people to those of working age will double, meaning that fewer workers will have to support more pensioners.

In short, by 2021 the Brazilian state will be unable to meet its pension obligations and – by any standards – reform will have to be drastic.

At this stage, all Bolsonaro and Guedes have indicated is that they plan to raise the minimum retirement age by two years. 

Political minefield

Although restructuring its retirement system would merely bring Brazil in line with other Latin American countries, successive administrations have delayed or fudged to avoid strife.

The stakes are high: public sector workers angry at the prospect of cuts – including police officers – have already staged violent protests.

This helps to explain why Bolsonaro’s predecessor failed to make progress, even though pension reform was central to his agenda.

In February last year, Temer was forced to shelve a first vote on his plans ... and Bolsonaro was partly to blame.

The bill foundered for technical constitutional reasons after a decision to hand policing in Rio de Janeiro to the military to curb a wave of violent crime – wholeheartedly supported by Bolsonaro, then a federal deputy for Rio.

Temer’s failure illustrates why, ultimately, pension reform in Brazil is a political minefield.

Pension rights are enshrined in the constitution, which can only be amended by three-fifths of congress.

The unpopular Temer was singularly ill-equipped to build such support.

The question that arises, then, is whether Bolsonaro possesses the political skill to build a congressional super-majority behind an unpopular measure in a system where his own mandate reflects profound distrust in politicians.

Ominous portents

The early signs are not auspicious.

Bolsonaro’s own contempt for congress is now the stuff of legend.

During a 1999 interview when asked whether he would shut it down if he were president, he said: “I would perform a coup on the same day. [Congress] doesn’t work … Let’s go straight to the dictatorship.”

Moreover, his own congressional record offers little cheer.

Before winning the top job, Bolsonaro served seven terms as a deputy over 27 years – with nothing to show for it. Just two of his bills and motions have ever become law.

The new president has all but admitted he is economically illiterate – anointing the University of Chicago-trained Guedes as a “super minister” overseeing all aspects of the economy.

That is a problem, because reform will be politically costly for this millionaire investment banker when it hurts working people in one of the world’s most unequal societies.

Nor does it help that Guedes is himself under investigation over allegations that he mismanaged investments received from ... public pension funds.

The only card Bolsonaro has up his sleeve is the sheer unfairness of the pensions system, which is excessively generous to middle-class professionals in the public sector.

Public workers retire on average at 54 – and are paid up to eight times what private sector pensioners receive.

But the dramatic conundrum confronting Brazil’s new president is that among the groups that this system disproportionately benefits is the military, which is responsible for nearly half of the pensions deficit

  • Gavin O'Toole, expert on Latin America
    Gavin O'Toole

    A freelance journalist. He has written six books about Latin America and taught the politics of the region at Queen Mary, University of London.

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