Generous pension benefits have long been a magnet attracting workers to Brazil’s public payrolls, and a major contributor to a government deficit that stood at 2.6% of gross domestic product at the end of last year. The benefits go to a small but privileged group, retired civil servants; the costs cripple the government’s efforts to invest in economic growth.

It’s a problem because it affects GDP growth…

The government’s huge expenditures on items such as pensions and payrolls and its lack of savings are often blamed for the economy’s stop-start growth pattern – illustrated by the rapid overheating and slowing down of the economy over the past two years.

Good news… or is it?

Brazil’s lower house of Congress approved a few days ago the main guidelines of a bill that caps government pension payments. In a 318 to 134 vote, lawmakers approved changes that limit at 3,916 reais ($2,300) the amount the federal government can pay each month in pensions for retired public servants. Good news, but… before celebrations start, something similar was done in 2003: on August of that year, Lula secured the approval in the lower house of Congress of the crucial reform of public-sector pensions… the bill passed by 358 votes to 126, but not much progress was made since then. It just shows how difficult such reforms are in Brazil – it has been in the making since 1998.

Via FT:

Brazil’s pension system is characterized by imbalances. In 2010, the general social security system for private sector workers, providing pensions for 24m people, cost the equivalent of 6.8% of GDP. Meanwhile, the system for public sector workers cost 2.1% of GDP but only covered fewer than 3m people, according to research by Itaú-Unibanco, a Brazilian bank. That meant civil servants’ pensions were costing the government far more than those of private sector workers per person.

Overall, social security payments dominated by pensions were a major contributor to the country’s 2.6 per cent fiscal deficit last year. This burden will only get worse. As living conditions improve in Brazil, its relatively youthful population will start to age.

The point…

Still according to FT, the huge outlay on pensions restricts the money that the government has available for investment in infrastructure, education and other areas, contributing to inflation by restricting the capacity of the economy to supply goods and skilled labor. Higher inflation leads to higher interest rates. The high recurring pension bill also creates a need for lofty taxes, raising the cost of doing business in Brazil and putting more upward pressure on prices.

In view of the still high public debt the government should implement more public sector austerity measures to reduce the fiscal deficit and to prevent the public sector debt from rising further. Measures to do so could be a reform of the complicated tax and the generous pensions systems, but … progress in those fields is rather unlikely.

Sources: Financial Times, Bloomberg, The Economist

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