Brazil is currently discussing a project to reform its pension system. The subject is controversial, but the majority of the population agrees that a reform is needed, although they are not in agreement with the current government proposal.

Brazil’s pension system is an outlier compared to pension systems in developed and other developing countries. Most public pension schemes in other countries include a minimum retirement age. The Brazilian system pays high replacement rates – pensions relative to working age incomes – and it does so at a much lower age. While life expectancy in Brazil is a little below average compared to other developing and developed nations, this gap does not justify a much lower retirement age. As it stands, the pension system is financially unsustainable.

Pension spending rose from 4.6% of GDP in 1995 to 8.2% in 2016, despite the fact that the population is still relatively young. It is estimated that under the current rules, pension spending could reach almost 17% of GDP by 2060 (20% of GDP including the public sector regime). The combined annual shortfall of the pension schemes is close to 4.5% of GDP, contributing substantially to the general government budget deficit.

Brazil will be ageing fast. In 2015, the old-age dependency ratio was half the average compared to developed and other developing nations; by 2050, however, Brazil will be rapidly closing in on the average and by 2075 it will be older than the average. The population aged 65 and above will more than triple within the next four decades, increasing from about 7.6% of the population in 2010 to 38% by 2050.

The proposal being discussed would, among many other changes, include:

• Sets a minimum age of 65 to apply for retirement (irrespective of the length of the contribution period) and raises the minimum contribution time from 15 years to 25 years.

• For those receiving more than the minimum pension, the calculation of pension benefits is changed. With the new formula, about 10 more years of additional contributions would be required to get the same benefit. The minimum pension level will remain at the minimum wage.

The main criticism coming from the population is that the new rules would require workers to contribute for 49 years before they may retire with a full pension.

Source: OECD Policy Memo