country needs reform, but government wants to relax rules

While the government’s economic team is working hard to approve ways to increase revenue to eliminate the deficit in public accounts, Minister Carlos Lupi, of Social Security, raises the possibility of sending to Congress a proposal to review the rules of the social security reform that could increase spending on benefits by 9%, according to experts interviewed by People’s Gazette.

Lupi, who immediately upon taking office criticized the reform for what he called “absurdities”, returned to the charge asking for “sensitivity” to Congress to discuss a possible review of the reform in early 2024. One of the points he intends to change is the pension for death, set by the 2019 Social Security reform at 50% of the retirement value plus 10% per dependent.

The minister defended the return of 100% of retirement to beneficiaries in an interview with Uol. When he criticized the reform, in January, Lupi created so much noise that he had to be denied by the Minister of the Civil House, Rui Costa. This time, no one disallowed him.

For Paulo Tafner, president of the Institute of Mobility and Social Development (IMDS) and associate researcher at Fipe, the measure is “nonsense for those who are out of touch with reality” – especially considering the future of Social Security accounts, which the economist defines as ” relatively dark.”

In 2022, INSS expenses totaled R$809.5 billion, equivalent to 44% of all primary expenses of the federal government. Compared to the previous year, there was a real increase of 2.1% in social security spending. Except for the payment of interest on public debt, Social Security is the Union’s main expense.

Last year, the INSS deficit was R$261 billion. For next year, the estimate is R$277 billion, or 2.6% of the Brazilian Gross Domestic Product (GDP), according to the Budget Guidelines Law Project (PLDO) prepared by the economic team.

The government projects that in 2060 the deficit will reach R$3.3 trillion, or 5.9% of GDP. In 2100, the hole will be R$25.22 trillion, or 10.4% of GDP, according to official estimates.

For Tafner, government data is underestimated. The economist’s calculations are even more worrying. “If nothing is done, in 2060 the gap will reach 10% of GDP, which is already a scandal. By the end of the century, we could reach 15%, a percentage never seen in a country, developed or not”, he predicts, warning of the need for a new pension reform.

Social Security revenue and expenses are out of step, even after reform

The 2019 Social Security reform, under Jair Bolsonaro’s government, promoted important changes, such as setting a minimum retirement age of 65 for men and 62 for women; changing the criteria for calculating the value of the benefit to prevent early retirement; and, in particular, the unification of rules for granting benefits to the public and private sectors.

The new legislation was never intended to bring the accounts to zero, but rather to reduce the rate of growth of the deficit, which threatened to cause the system to collapse. The slower rate of increase in the gap, however, will not avoid the need for new reform.

The scenario has worsened with the mismatch between the volume of expenses, driven by the aging of the population, and revenue, which has been eroded by informality. “Sooner or later, a new adjustment will have to be made,” says Tafner.

According to research published in the Ibre/FGV Fiscal Policy Observatory, between 1980 and 2022 social security benefits increased by 3.9% per year, while the population grew by just 1.3%. At the beginning of the period, the system counted 15.3 active workers – the system’s contributors – for each beneficiary. In the end, it was 5.4 to one.

“At this rate, the prediction is that, in 2050, there will be one worker for each benefit”, assesses Rogerio Naganime Costanzi, PhD in Economics from the Autonomous University of Madrid and one of the authors of the research.

If we consider the assistance salaries for the elderly, people with disabilities and low-income people who did not contribute to Social Security, included under the heading of Continuous Payment Benefit (BPC), the data is more alarming. During the 42-year period studied, the increase in the number of benefits was 383.4%, compared to a 70.6% increase in the population.

For Costanzi, any reversal of points from the 2019 reform is not only counterproductive, but also contradictory, given the government’s need to increase revenues to meet the goals of the fiscal framework. “If you’re going to change something, it needs to be to fix errors and solve urgent problems,” he says.

Advancement of the MEI boosts Social Security expenses with no counterpart in revenue

Despite believing that the deadline for a new reform is 2027, Costanzi believes that some points should be reviewed beforehand.

The priority in the general regime, according to the economist, is the reevaluation of the Individual Microentrepreneur (MEI) program, which has been rapidly diluting the form of social security financing. The regime provides for an easier social security rate of 5% of the minimum wage and has attracted workers without a formal contract.

Between 2011 and 2021, the number of contributors to the program grew, on average, 20% per year, with no equivalent contribution in revenue. In 2021, MEIs represented 10% of the number of INSS taxpayers and just 1% of the regime’s revenue. “There was an increase of one million contributors to the program in a period in which formal employment did not grow”, he notes.

The point is that, in the future, when they retire, MEIs will have access to the same benefit floor (a minimum wage) as salaried employees, who contributed more to the system both directly and indirectly, as companies also collect contributions. Today, an employee who earns a minimum wage, for example, contributes 7.5% and the employer contributes 20%.

The government, however, is willing to boost the MEI, increasing the annual revenue limit to qualify for the program from R$81 thousand to R$144.9 thousand, as a form of incentive for entrepreneurs. This means that more people will be able to access Social Security through a reduced contribution.

“If we don’t correct the distortions, we will be incurring a debt for the future and sacrificing the next generations”, warns Costanzi.

Another aspect to be reviewed even before the next reform is the inclusion of state and municipal employees in the new Social Security rules. The uniformity of the systems was included in the government’s initial proposal, but withdrawn by Congress.

It is not reasonable, according to the economist, to have thousands of different rules. Some states promoted reviews and adaptation to general changes. But only a third of municipalities have reformed their pension systems since then.

Real readjustment of the minimum wage increases the Social Security gap

Costanzi does not believe that the review proposed by Minister Lupi will go ahead, especially considering the impacts of the new policy of real adjustment of the minimum wage, approved by Congress. If the account erosion factors were not enough, the change in the correction rule promises to worsen the pension deficit.

In addition to inflation, the minimum value will be increased each year by the real variation in GDP from two years before. In other words, whenever GDP grows, there is a real increase in the minimum wage, which is also the social security floor.

For Tafner, the minimum wage has always been the major factor in the system’s imbalance, linked to 45% of pensions and the Continuous Payment Benefit (BPC). This year, INSS expenses are expected to grow by R$49.2 billion, in part due to the readjustment of the salary floor. “The current government is doing something crazy by establishing the GDP readjustment policy without de-indexing the Social Security calculation”, she assesses.

Unlike Costanzi, Tafner sees real risks of the Executive sending a proposal to review the reform to Congress. “[O ministro da Fazenda, Fernando] Haddad could try to stop it, but, depending on the moment, the government’s populist spirit could speak louder, since Lula never supported the reform”, he believes.

If this happens, the tendency is for Congress to approve the expansion of benefits, so as not to bear the electoral burden of refusal. “If the Executive itself, which is the one who wants to give rationality to the debate, decides to open the gate, it is not Congress that will stop it”, says Tafner.

It is worth remembering that there are other initiatives in the Legislature that go against the spirit of the reform, such as a project that provides for special retirements for categories of security forces and health agents.

Furthermore, the Judiciary can also contribute to the deficit. Recently, the Federal Supreme Court (STF) decided that those who entered the system before 1999 can use their contributions prior to 1994 when calculating retirement, if it is more advantageous.

Estimates of the impact are in the hundreds of billions, adding the retroactive effect and the next 15 years. “The Supreme Court has also shown itself to be populist. Eleven members decide without evaluating the impact on people’s lives and the country. It’s a conspiracy of suicides”, says Tafner.

New pension reform needs to stir up “hornet’s nests”, experts say

With no expected date, the next pension reform will need to advance on priority points for the sustainability of the system. Among them, Paulo Tafner defends an element of automatic adjustment of retirement age according to changes in life expectancy.

“It is a smooth readjustment of retirement parameters that avoids distortions over time”, he explains. The social security factor, extinguished by the Social Security reform, was an adjustment mechanism of this type.

Tafner also defends that assistance benefits be reevaluated, with fairness to taxpayers, as well as special retirement regimes for some segments, such as the Armed Forces, teachers and rural workers: “We need to stir these hornet’s nests and face the distortions.”

Another point that is almost consensual among experts is that the benefits sharing model, in which active workers pay the benefits of inactive workers, is insufficient for the country’s demographic profile.

For Tafner, Social Security does not do without an individual capitalization system, where each worker has an account with retirement contributions, in a type of savings account.

The proposal for a capitalization system was part of the reform project sent to Congress in 2019. The mechanism was defended with emphasis by the then Minister of Economy, Paulo Guedes, who considered the Brazilian system – of simple distribution – “a factory of privileges”, in which the richest are favored to the detriment of the poorest. Negotiations, however, did not progress and the capitalization system was discarded.