Pension deficit reduces public investment – 01/28/2024 – Market

The actuarial deficit of retired public sector employees reached around R$6 trillion and is today considered one of the main reasons for the drop in the investment rate in Brazil — whose increase would be essential for the economy to grow sustainably.

Federal, state and municipal governments have been spending increasing amounts of their net revenue to pay retired civil servants, in addition to those on active duty, leaving less and less left over to fund the administrative machinery and invest.

According to calculations by public accounts specialist Raul Velloso, in just over 30 years the Union’s social security expenditure alone jumped from 19.2% of total spending to 51.8%. On the contrary, what the federal government had to use freely (discretionary spending) fell from 33.7% of the total it spent to 3.1%.

Investments suffered the most, which fell from 16% to 2.2%. During the period, there was also an increase in expenses with health, education and social assistance — further compressing investments.

In addition to the direct relationship between the increase in expenditure on inactive employees and the decrease in investment, over the last few decades, there has also been a drop in GDP (Gross Domestic Product) growth. When the public sector invests little (and operates with large deficits), the private sector also shrinks, investing less.

Between 1980 and 2022, the rate of public investment in infrastructure plummeted from 5.1% to 0.6% of GDP.

As a comparison, the almost R$6 trillion actuarial deficit in public pensions is equivalent to 93% of the public sector’s total net debt (R$6.4 trillion) — the country’s main source of macroeconomic concern.

But, unlike public debt, which is “rolled over” with the issuance of Treasury bonds, the deficit of states and municipalities has to be covered with cuts “in the flesh”; in other expenses (such as investments), as these are pensions that must be paid to millions of former civil servants.

In 2017, for example, during the government of Luiz Fernando Pezão, in the state of Rio, hundreds of former civil servants held protests, clashing with the police, due to delays in the payment of more than 300 thousand pensions. The risk, in the future, is that several states and municipalities will go through the same thing.

Since 2006, social security spending on civil servants has shown an average real growth rate (above inflation) of 12.5% ​​per year in municipalities, 5.9% in states and 3.1% in the Union, according to Velloso’s calculations.

When the Social Security reform was approved in 2019, after political pressure, states and municipalities were left out of the new rules that made retirements more difficult. But they were allowed to approve separately later, in local chambers and assemblies, the adoption of the new mechanisms.

Data from the federal government show that, of the 2,146 municipalities and states that have their own Social Security systems for their employees, only 732, or 34.1%, have adopted at least 80% of the rules for benefits established in the Social Security reform.

Among the two thirds that did not do so, there are administrations such as those in the Federal District, Pernambuco, Amazonas, Maranhão, the capital of Rio de Janeiro, Belo Horizonte and Florianópolis. In the interior cities, of the 2,093 with their own regimes, only 701 carried out broad reforms.

Some entities also increased the monthly contributions that inactive people must contribute to their own scheme, alleviating the deficit.

Velloso states that it is essential that administrations reform their regimes. But that alone won’t solve it, as there are thousands of civil servants reaching retirement age, which should continue to put pressure on the deficit.

The economist has been advocating for years the creation of funds to capitalize some assets (such as real estate and oil and mineral royalties) to pay pensions.

With Velloso’s help, his home state, Piauí, adapted the pension system to the rules of the 2019 reform and created a capitalization fund, solving, in the long term, the actuarial problem of its own pension system.

According to Leonardo Rolim, former Secretary of Social Security and former president of the INSS (National Social Security Institute), the city of São Paulo also reformed the system and created a fund (with real estate and company shares) with the same objective. Cities like Goiânia and Campinas follow the same path.

Rolim states that, in some cases, the deficit could be resolved by charging additional contributions from retirees, but that this is often difficult politically. “There is a short-term vision in many administrations, and the deficits are not resolved. This problem has been talked about for many years, but it only gets more serious as time passes,” he says.

Some administrations currently have more retired employees than active employees, and the amount collected on their salaries is insufficient to pay benefits to active employees. In Rio Grande do Sul, according to Rolim, there are 10 retirees for every 7 active people — and the payroll for inactive people is 50% higher than that of those who still work.

In the short term, many states have also been suffering from a drop in revenue, especially the more populous ones, where there is a decrease in net current revenue compared to the previous 12 months.

For Claudio Hamilton dos Santos, public finance coordinator at Ipea (Institute for Applied Economic Research), some states currently have debts with the Union and, even so, are reluctant to make adjustments — although some have been trying to improve their accounts.

“Many have already ‘broken’ other times and know that, if they do badly, the Union ends up helping in the end.” Santos says, however, that there is a lack of more effective instruments to monitor and clean up the states.

“In many cases, the adjustment that can be made is to reduce the number of active employees, not making new hires. But this does not solve the problem in the short term, nor the issue of inactive employees”, he says.

According to him, between the states, it is necessary to make distinctions. Former territories such as Amapá and Roraima and “young” states such as Tocantins have few inactive people and have carried out or are carrying out reforms and savings to pay retirees.

Others would be the “mature” ones (always with many inactive) who have done their homework over the last 20 years with sensible salary policies and/or savings. Cases from São Paulo and Espírito Santo. There are other “mature” countries that have not made adjustments, such as Minas Gerais and Rio de Janeiro.

Finally, there would be the “very mature” states, which already had to “cut their meat horribly in the 2010s”, such as Rio Grande do Sul. But, as the state has hired few employees since 2010, it will have relatively few new retirements in the future .