Brazilian President Jair Bolsonaro delivered his proposed pension overhaul to Congress on Wednesday, aiming to save over 1 trillion reais (US$270 billion) in a decade by changing tax rates, delaying retirement and creating individual savings accounts.
The proposal for social security is the cornerstone of the new president’s plan to close what credit rating agencies call an unsustainable public deficit and bolster a sluggish economic recovery. The government pledged to present changes for military pensions that would save even more.
Bolsonaro’s savings target is far more ambitious than the roughly 600 billion reais of savings in a decade proposed by his predecessor, Michel Temer, who eventually gave up on the unpopular austerity initiative.
The new proposal was in the middle of a range that Economy Minister Paulo Guedes suggested in an interview last month: between 700 billion reais to 1.3 trillion reais of savings over 10 years.
Brazil’s stocks and currency seesawed on the news, with the benchmark Bovespa stock index nearing an all-time high before turning negative. By midday trading in Sao Paulo, the Bovespa and Brazil’s currency had settled roughly in line with Tuesday’s close.
“What worries me more is they don’t have the votes in Congress they need,” said Julio Hegedus Netto, chief economist at consultancy Lopes Filho & Associados.
On Tuesday evening, the lower chamber handed Bolsonaro his first legislative defeat, overturning an executive order on state secrets and underscoring the resistance he faces in a fragmented Congress.
“One thing is a solid, well thought out and crafted reform proposal, the other is what will ultimately emanate from Congress. The risk is that the initial proposal will be significantly watered down by Congress,” wrote Alberto Ramos, head of Latin American economic research at Goldman Sachs.
The pension reform is unlikely to get final approval until the fourth quarter, Ramos told clients in a note.
“Changes in demographics mean we have to change the rules. The current system is unsustainable,” Pension Secretary Leonardo Rolim told journalists in Brasilia.
The constitutional amendment Bolsonaro proposed to Congress would save 1.072 trillion reais in a decade, according to an Economy Ministry presentation.
Wealthier taxpayers would contribute more, minimum retirement ages would be raised and a new system of individual savings accounts would give workers “an alternative to the current system,” according to the ministry’s presentation.
The transition to the new rules would take 12 to 14 years, depending on which transition rules individuals choose.
Hegedus called the proposal “good” but flagged the lack of detail for how to handle police and military pensions.
Proposed changes to military pensions, which the government pledged to deliver within 30 days, would bring savings of 1.165 trillion reais in 10 years. Pensions for military police and firefighters would follow the same rules as the armed forces.