Proposal for social security envisions structural changes

Amid rising public debt and the fiscal effort the next government will need to make, social security is a top priority, since it is the federal government’s largest mandatory expenditure. Against this backdrop, a group of Brazilian experts on the subject, backed by former Central Bank President Arminio Fraga, has put together a broad structural reform proposal with two main components.

The first part covers adjustments to parameters such as the minimum retirement age, equal treatment for men and women and for urban and rural populations, an automatic link between the minimum age and life expectancy, and a review of special retirement benefits.

The second part goes further, proposing changes to benefit design, the financing model, and system administration—including a role for the private sector in some cases. In the last social security reform, approved in 2019, the government’s initial proposal also included a funded pension model, but it was dropped from the final bill.

“What’s being proposed makes it possible to come close to eliminating the deficit. Certainly, individual cases will feel a penalty. But everyone will pay a little; our plan spreads that cost across generations,” said Paulo Tafner.

The economist is the technical coordinator of the group behind the proposal, which also includes Bernardo Schettini, Leonardo Rolim, Rogerio Nagamine, and Sergio Guimarães.

The document will be delivered to the winner of October’s presidential election, according to Fraga. Until then, it is available to presidential candidates and other interested parties at reforma.previdencia.2027@gmail.com.

All the professionals involved say they are not part of any presidential candidate’s campaign team. The proposal even includes a draft Constitutional Amendment Bill (PEC).

The experts hope the proposal will serve as the basis for building what they describe as a sustainable social security system capable of ensuring lasting protection for future generations. “Absent a reform along these lines, [future generations] would be called on to finance a system from which they’d be unlikely to benefit,” they said.

Raising the minimum retirement age to 67, for both men and women and for urban and rural populations alike, is the starting point of the first, parametric part of the proposal. Today the age is 62 for women and 65 for men. The increase would be gradual, rising by six months for each calendar year that passes.

To equalize retirement ages between men and women, women would receive a contribution-time credit of a year and a half for each child born alive or adopted. The current age gap is described as a compensatory policy with low effectiveness and poor targeting. The gap between urban and rural retirement ages is considered unjustifiable and would be eliminated under the proposal.

Linking retirement ages to life expectancy is considered essential, the experts say, because it would let the requirement adjust to demographic change while avoiding the political strain of renegotiating the age repeatedly over the years.

The mechanism—used in social security reforms in various countries—would raise the minimum retirement age by four months for every additional six months of life expectancy.

The plan also calls for a minimum retirement age of 55 for military personnel, who currently face no minimum age and move to the reserve after 35 years of service. Reviews of special retirement programs are planned as well.

The proposal calls for keeping the minimum social security benefit at one minimum wage, adjusted by the National Consumer Price Index (INPC) for 20 years, with no real increase. According to Bernardo Schettini, a legislative consultant to the Senate, the group chose not to discuss decoupling retirement benefits from the minimum wage, in order to avoid legal uncertainty at this stage.

For social assistance benefits, however, the document proposes an amount below that floor: 60% of the minimum wage, plus 2 percentage points for each year of contributions.

“The idea is to guarantee a minimum income for the elderly while also encouraging people to contribute to social security, even if they don’t reach the 20-year qualifying period. And anyone who does contribute for 20 years is guaranteed the minimum wage,” explained Leonardo Rolim, who served as Social Security secretary in 2019, when the last reform was approved.

The second component of the proposal contains the most far-reaching changes, recommending an overhaul of benefit design, the financing model and system administration.

The idea is to shift from the current defined-benefit (DB) format to defined-contribution (DC), while changing the financing model from pay-as-you-go—in which the working generation funds retirees’ benefits—to a hybrid combining pay-as-you-go financing with a funded component.

Making the system more sustainable, Rolim said, requires more than parametric tweaks; its structure must be prepared for demographic and macroeconomic change. “The model we’re proposing is inspired by Sweden’s and was later adopted by Italy. It’s a layered model.”

Rolim acknowledges that getting the proposal passed is a political challenge, but says it is necessary to safeguard the rights of future generations.

For Tafner, any reform hinges on winning over the president: “He needs to get behind it, carry the proposal under his arm and go negotiate. It has to be clear this is the president’s agenda. Then there’s a good chance it gets approved.”

Spending under the General Social Security Regime (RGPS) currently accounts for 8% of GDP but could reach 17.4% of GDP by 2100 if nothing changes, according to the study’s estimates. Under the proposed reform, that spending is projected to reach 10% of GDP by 2070 and hold at that level through 2100.

*By Lucianne Carneiro — Rio de Janeiro

Source: Valor Internatiional

https://valorinternational.globo.com/