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Brazil’s Pension Overhaul Is Just a Start

Brazil’s Pension Overhaul Is Just a Start

(Bloomberg Businessweek) -- It took three presidents, four finance ministers, and countless setbacks, but Brazil finally completed an overhaul of its pension system—one of the world’s most generous and a perennial drain on government finances. The bill, which is at the core of President Jair Bolsonaro’s economic agenda, was approved by the Senate on Oct. 23 after months of debates.

Getting the legislation passed is an undeniable achievement for Bolsonaro, a firebrand best known for controversial statements on everything from climate change to gender equality who was elected in a landslide last year. The pension revamp—which sets a minimum retirement age and trims benefits—is widely regarded by economists as a must-do to keep Brazil’s fiscal accounts from deteriorating further.

The country spends the equivalent of 13% of gross domestic product on social security outlays, well above the 8% average for Group of 20 nations. Some projections had that climbing to almost a quarter of GDP by 2060, as the proportion of the population over 65 rises to 25%, from 9.5% now.

Brazil’s Pension Overhaul Is Just a Start

The legislation hasn’t supplied the confidence boost that many analysts had anticipated, however. Growth remains stalled, foreign investors are mostly on the sidelines, and the implementation of the rest of the government’s economic agenda is unclear. “The pension reform was a change to avoid Brazil going bankrupt,” says Mario Mesquita, chief economist at Itaú Unibanco Holding SA, the country’s largest bank. “Reforms to get Brazil to grow, like the tax overhaul, are more complicated.”

Pension reform has been debated, promised, and protested for years. Former President Luiz Inácio Lula da Silva in 2003 succeeded in cutting the pension deficit, but the legislation didn’t go far enough in attacking the root causes of the shortfall. Dilma Rousseff didn’t get around to tackling the issue before she was impeached in 2016. Her replacement, Michel Temer, had gathered just about enough support for his own bill when Joesley Batista, the owner of meat-processing giant JBS SA, taped the president allegedly endorsing the payment of a bribe to a lawmaker. The reform was all but buried as Temer spent the rest of his time in office fighting attempts to remove him.

Brazil’s Pension Overhaul Is Just a Start

Despite pushback and delays, Bolsonaro’s bill had resounding support in both houses of Congress. The legislation has been somewhat watered down, so it won’t deliver the 1 trillion reais ($247 billion) in savings over a decade that Economy Minister Paulo Guedes had initially targeted. But with projected savings of almost 800 billion reais, it’s still a big improvement on Temer’s proposal.

Investors, who’d already priced in approval of the measure, have turned their attention to the rest of the government’s agenda. While there’s plenty to be done, from privatizing dozens of state-run companies to revamping a complicated tax system and cutting red tape, some fear momentum has dissipated. “We’re a little anxious about the pace of things in Congress,” says Mariana Guarino, a money manager at Truxt Investimentos in Rio de Janeiro. “Things are moving much more slowly than we expected.”

That’s a concern, because Brazil’s economy desperately needs a jump-start. The country has been slow to rebound from a deep recession in 2015-16. This year, even with record-low interest rates and no major internal or external shocks, growth will be only 0.9%, according to a Bloomberg survey of economists.

If growth stays that weak, pension reform won’t be enough to arrest the deterioration in the fiscal accounts, meaning the country will have little chance of recouping the investment-grade rating it lost in 2015. “The sensation of fiscal emergency has dwindled, despite the emergency itself continuing,” Mesquita says. “Today the main concern is the pace of the economic recovery.”

To contact the editor responsible for this story: Cristina Lindblad at mlindblad1@bloomberg.net

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