Bloomberg News

Rousseff’s Pension Push Could Bring Brazil a Ratings Upgrade

October 27, 2011

Oct. 27 (Bloomberg) -- Brazilian President Dilma Rousseff is pushing allies in Congress to approve changes to the pension system for government employees, a move Banco Bradesco SA says may pave the way for an upgrade of the nation’s credit rating.

Rousseff on Oct. 3 set a 90-day deadline for Congress to vote on a bill that has remained in limbo for eight years and would limit the government’s share of public servant pensions to 3,691.74 reais ($2,107) a month. The measure would gradually eliminate a shortfall responsible for a third of Brazil’s 94 billion reais public deficit last year, according to the Social Security Ministry.

Rousseff, since taking office Jan. 1, has given mixed signals about her commitment to containing spending that economists say is needed to reduce the highest real interest rates in the Group of 20. Reducing the payout to retiring civil servants signal can produce savings over time and pave the way for an upgrade in Brazil’s credit rating, said Fernando Honorato, deputy chief economist at Banco Bradesco, Brazil’s second-largest bank by market value.

“I can’t remember a bill that had such an impact,” Honorato said, adding that the proposed legislation compares only to Brazil’s 2000 passage of the fiscal responsibility law that limits spending by federal, state and city governments. “I think it may bring forward the chances of an upgrade because some of the ratings agencies still see the fiscal accounts as a restriction.”

Private Fund

Under the bill being debated in Congress, a private pension fund would be created to manage contributions by all newly hired federal government employees, Jaime Mariz, who oversees pension funds at the Social Security Ministry, said in a telephone interview from Brasilia. The fund would eventually become the largest in Latin America, he said.

Mariz said passing the bill is the government’s top priority this year because the pension deficit is rising at an “explosive” 10 percent annual pace and the gap could widen even further when an estimated 40 percent of the federal government’s 771,570 workers retire within the next five years. The new limit of 3,691.74 reais for retiring government workers compares with average pension payments of 6,181 reais for the executive branch and 19,546 reais for the legislative.

The government’s pension benefits have long been a magnet attracting workers to public payrolls, and a major contributor to the deficit that stood at 2.6 percent of gross domestic product at the end of last year.

Pension Deficit

Currently, retired government workers receive 80 percent of their average salary during their last decade of employment. Brazil racked up a 31 billion reais deficit last year to cover the pensions of the 664,253 retired civil servants, compared with a 43 billion reais deficit for 28 million people receiving social security. With passage of the bill, the pension deficit would be eliminated gradually after 30 years, Mariz said.

In 2003, then-president Luiz Inacio Lula da Silva pushed through Congress a constitutional amendment authorizing the government to cut pension payments for public servants. He didn’t send a bill enumerating the specific changes until 2007, and it has not yet reached the floor of either chamber.

Rousseff’s move “contradicts our impression that public servants would be spared,” Jankiel Santos, chief economist at Espirito Santo Investment Bank, said in a phone interview from Sao Paulo. “It’s definitely welcome.”

Analysts covering the Brazilian economy expect Rousseff’s administration to miss its fiscal target next year as the government raises the minimum wage by about 14 percent and increases spending on preparations for the 2014 World Cup and 2016 Olympic Games, according to an Oct. 21 central bank survey.

‘Significant’ Effort

The new rules will signal the government is making a “significant” effort to control public spending over the medium and long term, a move that will improve risk perception and may lead to a drop in yields on long-term interest rate futures, Solange Srour, who helps manage 11 billion reais at BNY Mellon ARX, said in a phone interview.

Brazil’s debt rating was raised on June 20 by Moody’s Investors Service to Baa2, the second-lowest investment grade, from Baa3. The rating company cited Rousseff’s efforts to cut spending as a reason for the upgrade and gave Brazil a positive outlook. Standard & Poor’s was the first to raise Brazil to investment grade in April, 2008.

Political Leverage

Government leaders in Congress say Rousseff has enough political leverage to overcome concerns by members of her coalition who are responsible for having delayed a vote.

“We will approve the bill in the lower house this year,” Candido Vaccarezza, the government’s leader in the chamber, said in an interview in Brasilia. “I can’t say it will be easy, but we will approve it.”

Opponents of the changes are bracing for a defeat.

“Dilma won’t have the support of the unions, but I think the bill will pass because the government has the necessary majority,” Paulo Pereira da Silva, a pro-government congressman and president of Forca Sindical, Brazil’s second-biggest trade union. “I understand that the public sector situation is a hard one, and that something has to be done to avoid bankrupting the system.”

The new fund, to be named Funpresp, will have 500,000 members in 20 years. It will overtake the pension fund for state-controlled Banco do Brasil employees known as Previ, which manages about 150 billion reais and is currently Latin America’s largest, Mariz said.

--Editors: Harry Maurer, Joshua Goodman

To contact the reporters responsible for this story: Maria Luiza Rabello in Brasilia at; Andre Soliani in Brasilia at

To contact the editor responsible for this story: Joshua Goodman at

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