Brazil: "The Bums" By Peter Fritsch [Wall Street Journal, July 8, 1998] BRASILIA - They say life begins at 40. Perhaps that's why some 15,000 Brazilians still in their 30s retired last year under the nation's troubled social-security system. If you think social security in the U.S. is a mess, consider the pension system of the land of soccer and samba. Though Brazilians retire based on their length of service, legal loopholes are legion. With no minimum retirement age in effect, the majority of those retiring with benefits last year were in their 40s. Civil servants retire at full pay, and many even receive a 20% raise when they walk out the door. All retirees are guaranteed any subsequent raises awarded to those still toiling away. The not-uncommon case of Rio de Janeiro state sums up neatly the devastating potential of this time bomb. As the system is currently set up, the majority of the state's wage bill - which now eats up an astounding 90% of revenues - will actually go to retired workers within 15 years. The public accounts "are being systematically undermined by the poor performance of the pension system," says Amaury Bier, secretary for economic policy at the Finance Ministry. Indeed, the red ink is flowing furiously, to the great chagrin of investors already concerned about the deterioration of Brazil's fiscal accounts as spending on pork ramps up ahead of October national elections. A social-security deficit of some $3 billion last year is likely to triple this year to more than 1% of gross domestic product, officials say. Throw in payouts to retired government bureaucrats and last year's deficit explodes to more like $40 billion. Getting control of this system "is the most important challenge facing Brazil in the next four years," says John H. Welch, chief economist for Latin America at Paribas SA in New York. Of course, the easiest way for the government to finance the social-security shortfall is to borrow money by issuing more debt. But if the financial community decides that debt isn't worth buying for whatever reason - more trouble in an emerging market like Russia, for instance - the government will have to either cut spending on badly needed social programs or print money. That would spell political disaster and threaten to undo Brazil's hard-won victories over price and exchange-rate instability. Without massive overhaul of social security, "it will be difficult or impossible to consolidate the process of sustained economic development with stable prices and greater social justice," says Finance Minister Pedro Malan. In the near term, receipts from items like Brazil's massive privatization program and the sale of new cellular concessions are helping to keep the system from spiraling out of control. But family jewels like Telecomunicacoes Brasileiros SA, or Telebras, will be sold off in the coming weeks and months, shortening the fuse on the social-security time bomb. The situation is particularly frustrating to President Fernando Henrique Cardoso, who has been trying to convince Congress to pass a social-security reform bill for the past three years. An exasperated Mr. Cardoso recently blew his top, calling those who retired while still in their 40s "bums." Wags in the local press immediately sprung into action, pointing out correctly that Mr. Cardoso's own former social security minister has been drawing a pension - now worth $2,600 a month - since he was 46 years old. Indeed, it comes as little surprise that the vast majority of the "bums" come from Brazil's massive federal, state and municipal bureaucracy. Public-sector workers qualify for full pensions after 25 years of service, compared with 35 years for those in the private sector. Half of the $85 billion paid in pensions to workers in Brazil last year went to 2.7 million workers retired from government service, an annual average of nearly $ 6,000 a worker. The other half of the pot went to 17.7 million private-sector workers, an average $2,500 a year for each worker. And since public servants didn't begin paying into the social-security system until 1992, their benefits are largely subsidized by relatively poorer workers from the private sector. Predictably, getting the public servants who benefit most from this system to change it in an election year has been no easy task. Brazil came close to plugging the dike in May, failing by one vote to pass a congressional bill that would have introduced minimum retirement ages of 60 for men and 55 for women and linked pension payouts directly to contributions. A watered-down bill capping civil-servant pensions at $12,600 a year and setting transition minimum-age requirements then cleared some initial hurdles in Congress. The bill promised to save some $4 billion this year in payments to private-sector pensioners and $100 billion over the next decade. But congressional leaders weren't able to get a quorum to vote on the legislation because of World Cup soccer action, summer recess and the beckoning campaign trail. Translation: No meaningful pension reform is likely until next year, at the earliest, and then only if Mr. Cardoso is re-elected. (His leftist opponent hasn't supported pension reform.) Meanwhile, Brazilian workers are rushing to retire before Congress does adopt a minimum retirement age, putting further pressure on the system, and unemployment is soaring, cutting into social-security contributions. Public-sector debt, in turn, is growing quickly and being financed at a higher rate than a year ago. Says Paribas's Mr. Welch: "It's hard to exaggerate how critical this situation is."