C&B Notes

Progress in Brazil

In our most recent partner letter, we identified the importance of pension and tax reforms to unlock economic growth in Brazil.  Lawmakers successfully passed some long-awaited long-term fixes to the country’s social security equivalent earlier this month.  Tax reform is next on the legislative docket.

Brazilian senators overwhelmingly approved on Tuesday a revamp of the country’s insolvent social-security system, which will sharply lower spending and serve as a pillar for President Jair Bolsonaro’s overhaul of a sluggish economy hamstrung by bureaucracy and protectionism.  The legislation, which is projected to save taxpayers as much as $200 billion over 10 years, is a political victory for the president, who has been distracted by clashes with foreign leaders and lawmakers in the capital, even from his own party.

The bill, approved by 60 of 80 senators, raises the minimum retirement age to 65 from 60 for men and to 62 from 55 for women.  It also plugs loopholes that allowed many workers, mostly in public service, to retire as early as in their late 40s, often with a full salary.  Retired police chiefs, judges, politicians and other state employees currently receive monthly payments as high as $9,000, nearly 20 times what most private-sector retirees get.  That has led to a shortfall, which is expected to reach $60 billion this year.  It is the main reason why Brazil has been living on borrowed money since 2014 and its sovereign debt rated as junk…

Nearly all of Mr. Bolsonaro’s predecessors tried unsuccessfully to make meaningful changes to Brazil’s pension system — one of the world’s most generous — but stopped in the face of strong popular opposition.  Mr. Bolsonaro’s supporters, however, bought into the administration’s argument that retirement perks bestowed mainly on well-paid public servants should be erased for Brazil to prosper.  Many took to the streets in rallies to demand pension overhaul, rare in a country trying to rollback coveted benefits.

Brazil’s pension costs eat up to 45% of the federal budget. With much of the remaining funds going to pay salaries, only about 3% is left to build and maintain much-needed hospitals, schools and other infrastructure. The pension overhaul will keep the country’s debt under control, the administration says, allowing policy makers to focus on growth-spurring measures.

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