ECONOMY-BRAZIL: Pension Debate Puts Lula at Another Crossroads

By Mario Osava Reprint | | Print |

Analysis by Mario Osava

RIO DE JANEIRO, Jul 14 2003 (IPS) - The government of Brazil lost control of negotiations on social security reforms, leaving it at a decisive moment for the nation’s economic future and reviving fears of new financial turbulence for this South American giant.

All of the financial market confidence that was achieved during the first semester of the Luiz Inácio Lula da Silva government could evaporate, warns former treasury ministry Mailson da Nóbrega.

That could mean a return of capital flight, devaluation of the real and an increase in "country risk" (indicator of the perception in financial markets of the government’s ability to keep up with bond payments), says Nóbrega.

Parliamentary leaders and some ministers agreed last week to renounce one of the basic principles of the government-sponsored bill on pension reform, the elimination of inequalities that benefited public employees over other workers.

That change, seen by many as capitulation, was agreed in consultation with the chief justice of the Supreme Court, Mauricio Correa, who heads a movement in favour of maintaining the existing public employee rights for all members of the judiciary.

In Brazil, government employees cannot be fired, they retire with a stipend equivalent to their last paycheque, and that monthly payment is kept at par with the salaries of their active colleagues.

Such a system does not exist anywhere else in the world, even in countries with strong welfare states, Social Security Minister Ricardo Berzoini, a former union leader, has repeatedly pointed out.

For private sector workers there is a different regimen, with pensions limited to a monthly maximum of 1,869 reais (approximately 640 dollars).

And workers in the private sector must make contributions to the social security system for a longer period in order to collect retirement benefits. The minimum retirement age is 60 for men, 55 for women – in both cases seven years older than for public employees.

The reform bill sent by the Lula administration to the National Congress on Apr. 30, also seeking a modification of the Constitution, would eliminate these long-standing differences.

Previous governments tried to implement similar changes, but all were unsuccessful. The vote on the current attempt is slated for October.

A partial strike by public employees began last Tuesday in protest against the bill and the talks underway involving one sector of the public employees’ union and CUT, the country’s largest labour union.

But the most effective pressure against the government proposal comes from the judges, who threaten to go on strike if they are not given full-salary pensions kept at parity with their working colleagues.

Without those benefits, the judiciary will not be able to attract competent judges and the entire legal system would be weakened, says chief justice Correa.

The alternative he is negotiating involves maintaining pension levels for men who retire at age 65 and women who retire at 60, in other words five years older than set out by the bill being debated in Congress.

To have the right to such an arrangement would require salary contributions over a period of 35 years for men and 30 years for women, as well as a minimum of 25 years in public service.

In fiscal terms, the reduction of the social security deficit would be the same under the alternative formula, according to the calculations of experts at the Social Security Ministry.

But the political and economic impacts could be disastrous.

The lawmakers who support the government are divided on the issue, and the state governors – key actors in the drafting of the original project – are up in arms that the bill is being modified without their input.

José Dirceu, Lula’s chief of staff and government policy coordinator, has assured them that nothing would be finalised without the governors having their say.

In the economic arena, the market has reacted negatively to the situation. The real has fallen and sources from the banking and investment sectors are criticising the government’s back-pedalling and failure to stand up to the pressure of the judges and other public employees.

Lawmakers and economists charge that maintaining full pensions for public employee retirees would bury any chance at social security reform, and the constitutional amendment under discussion would be reduced to a mere fiscal adjustment.

Lula, who began a European visit to Portugal, Britain and Spain last Thursday, won himself a week to negotiate and reflect on the matter before issuing the final word.

The fear amongst economists and business leaders is that the crisis will once again put off any substantial decrease in the Central Bank’s basic interest rate, which stands at a high 26 percent.

The interest rate reduction is needed to stimulate spending and investment by making deposits less attractive and loans less costly, agree economists.

Experts predict a one- or two-point cut in the interest rate on Jul. 23, but the fears generated by the barriers to social security reform could frustrate those expectations.

Without an interest rate cut, the economy would continue in its stagnation, undermining the growth forecast for Lula’s second semester in office.

In the first quarter of this year, Brazil’s gross domestic product (GDP) fell 0.1 percent in relation to the previous quarter, and economists say it is likely the trend extended into the April-June period.

The Central Bank predicted that over the course of 2003 the GDP would grow 1.5 percent, implying there would be no increase in per capita income.

And even this scant economic expansion – less than the average recorded over the past two "lost decades" – depends on a recovery in the year’s second half, vulnerable to the direction the political winds are blowing.