Huge Boost for Brazil Pension Reform as Bill Clears Major Hurdle (Bloomberg)
Last Modified: 04:02 PM, Wed Jul 10, 2019

Mario Sergio Lima, Samy Adghirni and Simone Iglesias

Bloomberg. 11 July 2019

Word Count: 992

This is for Research purpose only

(Bloomberg) -- Amid the gloom surrounding Brazil’s economy -- shrinking growth forecasts, double-digit unemployment and rising public debt -- Wednesday’s lower house vote to reform the pension system marks a significant step forward.

In a 379 to 131 vote, lawmakers approved the base text of a reform that will result in significant savings for the government and finally establish a minimum retirement age for Brazilians. While the bill still faces a number of legislative hurdles before becoming law, including amendments that could sap its strength, the draft legislation has now overcome its most challenging obstacle.

In an emotional speech, House Speaker Rodrigo Maia said lawmakers’ leading role in the reform strengthens Brazil’s democracy and will eventually bring investors back to the country. “I’m increasingly convinced of the necessity of reform,” he said. “This is a historic moment for all of us.”

Brazil spends much more on its pensions than most peer countries, and offers more generous terms, particularly to its well-paid civil servants, many of whom retire in their 50s. The vast, multi-billion dollar deficits in its pension funds are driving up Brazil’s public debt to unsustainable levels and risk consuming the entirety of the federal budget.

Already Brazil spends ten times more on payments to retirees than on education. With a rapidly aging population, and a constitutional limit on public spending, the current system is a ticking time bomb that threatens to devastate the country’s fragile economy and condemn Brazil to many more years of sub-par growth.

Wednesday’s vote was no mean achievement, given four previous administrations had tried -- and failed -- to enact a major reform. The margin of victory was also significantly above the minimum threshold of 308 votes, and bodes well for its future passage.

President Jair Bolsonaro celebrated the decision on Twitter and congratulated Maia for his role in its approval.

Opposition lawmakers, however, lambasted the proposed legislation, claiming that it served only to entrench Brazil’s current system of privileges and burden yet further the poor.

“A lamentable decision of a majority who voted just looking at numbers, and not at people,” Alessandro Molon, the leader of the opposition, said. “We are going to fight now to reduce the negative impact of this reform via amendments.”

Retiring Later

As it currently stands, the bill would set a minimum retirement age of 65 for men and 62 for women, with a transition period of 12 to 14 years. If enacted as approved by the lower house, the legislation would save the state over 900 billion reais ($236 billion) over a decade.

Yet lawmakers still have to debate a handful of proposed amendments that could reduce those projected savings. A second vote in the lower house is likely by the end of the week; as with the first, it will require a three-fifths’ majority to pass. After that it heads to the Senate where it needs to pass twice with the same margin.

Rogerio Marinho, the special secretary for pensions and jobs at the economy ministry, said that the government would work to minimize the impact of any amendments, adding that the first-round vote tally had been a “positive surprise.”

Investor Optimism

Over the past six months Brazilian asset prices have largely followed the ebbs and flows of the pension reform negotiations. Ahead of the vote on Wednesday, Brazilian stocks rose sharply while the real strengthened as investors began to see the public finances of Latin America’s largest economy move onto a more sustainable footing.

Progress on the pensions issue is also likely to increase bets on an interest rate cut, possibly as early as this month. Brazil’s central bank has long made clear that it sees headway on economic reforms as an essential precondition to any monetary easing.

Still, the reform alone is unlikely to result in an investor stampede to Brazilian assets. Overhauling the heavily-indebted social security system arguable represents only the bare minimum needed to keep the economy afloat. Without further reforms, notably privatizations and a shake-up of Brazil’s notoriously onerous tax system, the country is unlikely to attract a huge surge in foreign investment.

“Investors will now be looking for a potential improvement in sentiment and a stronger growth profile,” said Alberto Ramos, the chief Latin America economist at Goldman Sachs Group Inc. “If the economy fails to strengthen, no matter how gradually, the market may become disappointed and come to the view that social security was oversold in terms of its importance to turning around a long struggling economy.”

Congress’ Lead

The reform’s approval is due less to President Jair Bolsonaro, a lukewarm advocate of the bill, than to Maia who has negotiated relentlessly for the overhaul since he first took over the role during the government of President Michel Temer. “Without Rodrigo Maia we would not have got to this moment,” Waldir Soares de Oliveira, a lawmaker from Bolsonaro’s own PSL party, said as he declared his vote in favor of the reform.

Even as the lower house was preparing to vote, Bolsonaro was still calling for lawmakers to carve out more favorable terms in the bill for police officers.

While much of the work on the bill was overseen by economy minister Paulo Guedes, he has recently distanced himself from the latest version of the text, frustrated that lawmakers ditched his proposal for an individual savings plan and excluded state and municipal governments’ pension obligations from the text.

(Adds quote from lower house speaker in paragraph 3, other details lower down.)

--With assistance from Rachel Gamarski and Murilo Fagundes.

To contact the reporters on this story: Mario Sergio Lima in Brasilia Newsroom at mlima11@bloomberg.net;Samy Adghirni in Brasilia Newsroom at sadghirni@bloomberg.net;Simone Iglesias in Brasília at spiglesias@bloomberg.net

To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, ;Walter Brandimarte at wbrandimarte@bloomberg.net, Bruce Douglas

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