Social Development and Public Governance > Social Development > Health and HIV/AIDS
The Political Economy of Reform in Brazil's Civil Servant Pension Scheme
By André Medici (09/04, En, Es)
Over the past two decades both developed and developing countries have implemented pension reforms. Reasons for reform include demographic transitions (with increasing life expectancies and growing elderly populations in many countries), labor market changes (with expanding informal sectors cutting into the payroll taxes needed to finance pension systems), and actuarial and financial imbalances of pension systems becoming more widespread due to the first two developments. Pension reforms must be handled carefully, because they may affect the income distribution between generations and among groups in the same generation.
Reform has been more successful in countries that have more homogeneous societies and that do not have a history of providing privileges to certain groups. By contrast, reform has been slow and painful in countries with political and representative systems unable to produce stable majorities in their congresses and where traditions related with heterogeneous and segmented pension systems have created political lobbies against reforms and impeded a clean political transition. In Italy, for example, these obstacles have stalled pension reforms started in the first half of the 1990s.
In Brazil most pensions are under the umbrella of a pay as you go (PAYG) system. Unlike many developed countries and even more than most other developing countries, Brazil also has a large, socially inclusive, noncontributory system that requires huge fiscal resources to finance expected benefits. In addition, there is a generous scheme for civil servants, as well as schemes that complement the coverage provided by the others. There is, however, considerable inequity among the benefits provided by these four main pension schemes. Thus pension reform in Brazil must both increase the coverage of the contributory schemes and reduce the inequity between the general pay as you go scheme and the privileged civil servant scheme.
In 1998 the Brazilian government implemented reforms to increase the financial sustainability of its pension schemes?seeking to contain pension deficits without hurting acquired rights. Changes to the pay as you go scheme included establishing a mechanism that defines benefits based on workers? ages and length of contributions, as well as raising the minimum retirement age for civil servants.
Despite these reforms, the country?s pension schemes continued to generate rising deficits. So, in the second half of 2003 the administration of President Luis Ignacio (Lula) Silva introduced new reforms aimed at equalizing the more generous civil servant benefits with those offered by the general pay as you go system. These reforms were driven by the fact that the government was incurring R$50 billion a year in deficits to sustain high pensions for fewer than 3 million retired civil servants when it lacked resources to extend health and education coverage to poor citizens.
Reforms to the civil servant pension system are expected to cut the public deficit by 0.3?0.5 percent of GDP a year over the next five years and by more than 1.0 percent of GDP a year beyond that. These savings imply that while the civil servant system will continue to carry a sizable deficit over the medium term, it should decline over the long term. This chapter analyzes Brazil?s pension systems, focusing on the scheme for civil servants?including the need for and implications of the recent reforms.
This working paper is being published with the sole objective of contributing to the debate on a topic of importance to the region, and to elicit comments and suggestions from interested parties. This paper has not gone through the Department?s peer review process or undergone consideration by the SDS Management Team. As such, it does not reflect the official position of the Inter-American Development Bank.
Last updated: 06/01/07
