A note on Brazil´s real pension problem

By José Piñera


The so-called pension reform approved by Brazilian lawmakers has been hailed as a major step toward resolving the crisis in their system. But it is like fighting cancer with an aspirin. The government run pension system has a deficit of around four per cent of Brazil's gross domestic product.

Former President Fernando Henrique Cardoso called "bums" those retiring before 50, but did not solve the problem. The huge majority of these "bums" come from Brazil's massive federal, state and local bureaucracies. 

For many years, public sector officials have retired after only 25 years of work while the rest of the private sector does so after at least 35 years. Half of the $85 billion that was paid in pensions in 1997 went to 2.7 million public sector retirees. The other half went to the 17.7 million private sector workers. Since public officials didn't begin to make contributions until 1992, their pensions, which in certain cases reach stratospheric levels, are being highly subsidized by private sector workers and contributors. 

To make matters worse, before the recent reform public officials retired with 100 per cent of their last wage and receive any subsequent pay raise given to their replacements.

Neither former President Cardoso nor current President Lula seem to understand that these Kafkian characteristics are a product of a structural flaw in the pay-as-you-go public pension system.

Once the relationship between contributions and benefits is broken, the pay-as-you-go system creates incentives for all members of society to try to minimize what they contribute to the system and maximize what they get from it. 

In a state-run system, that is achieved through political pressure; a process in which the stronger groups inevitably beat out the weaker ones. As is painfully clear in Brazil, the system is not only an injustice in and of itself; it is also destined to explode.

Unfortunately, it will probably take just such an explosion before Brazil follows the successful Chilean system of personal retirement accounts. 

Only then will such a promising country be able to cure its fiscal spending disease and move decisevely toward macroeconomic responsability. social fairness and economic growth.