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Brazil: Selected Issues and Statistical Appendix

Author(s):
International Monetary Fund
Published Date:
September 1999
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V. Reform of Brazil’s Public Pension System1

Basic characteristics of Brazil’s pension system prior to the recent reforms2

1. The basic tier of the Brazilian pension system—hereafter, the public pension system—is made up of a very large number of plans. No one plan, like OASDI in the United States covers the whole population. There is one plan for private sector workers, the RGPS (Regime Geral de Prevêdencia Social, or General Social Security Regime), which is run by the National Social Security Institute (for which the Portuguese acronym is INSS), and over a thousand plans for civil servants at the federal, state and municipal levels of governments. Actual contributors to the RGPS number approximately 22 million, and contributors to the federal plan number about 1 million, compared with a labor force of about 75 million.

2. The public sector plans are governed by the terms of the Regime Jurídico Unico (RJU). The federal government’s plan is the largest of these, but is rivaled in size by the plans of the large states. There are substantial differences between the RGPS and the public sector plans as regards generosity of benefits, and conditions of eligibility. Even within the private sector, there is, or has been, a considerable lack of uniformity in the treatment of contributors in different occupations.

3. Until recently, the public sector plans were noncontributory, and current contributions by civil servants still cover only a small part of the cost of current benefits.3 Given the size of general government in Brazil, and the generosity of benefits, it is not surprising that the public sector plans taken together are already running large cash flow deficits (see Table 5.1). The private sector plan moved from a small cash flow surplus to a deficit in the early 1990s. The combined cash flow deficit of public and private sector plans exceeded 4.4 percent of GDP in 1998. Despite the much smaller coverage of the public sector plans, their total expenditure is about % that of the RGPS, and they account for more than ¾ of the total deficit of the public pension system.

Table 5.1.Brazil: Summary Financial Indicators for the Brazilian Public Pension System, 1998(In billions of reais)
FederalState and MunicipalGeneral GovernmentINSS (Private Sector)Total (Private and Public)
Contributions2.54.36.846.653.4
Expenditure19.419.63953.892.8
Balance (-deficit)-16.9-15.3-32.2-7.2-39.4
Balance (as percent of GDP)-1.9-1.7-3.6-0.8-4.4

4. The private sector plan has high statutory contribution rates (20 percent for employers and, until the recent reform, progressive rates with a top rate of 11 percent on a maximum salary of 10 minimum wages for employees).4 However, evasion is high, and effective rates (actual collections as a share of the contributory base) are much less than statutory ones, in large part because benefits have not been tied to actual contributions, due to the lack of individual accounting of the history of contributions by plan participants’ contributors.

5. Both public and private sector plans bestow remarkably generous benefits (see Tables 5.2 and 5.3, which summarize the basic terms of the plans for the private sector and federal public sector). Plan participants become eligible for a pension at an early age, and enjoy a very high replacement ratio (the ratio of the pension to income during the contributor’s working life). Until the recent reforms, there was no minimum age requirement for a retirement pension in either the public or the private sector. Instead, a full pension could be had with 35 years of plan participation (which did not necessarily imply 35 years of contributions) for men and 30 years for women in both public and private sectors. A full pension was 100 percent of pensionable income. In the private sector pensionable income was the average of the last three years of income (indexed in current reais).5 In the public sector, it was the last paycheck, which meant that civil servants could retire with a pension greater than their take-home pay. In common with other countries in Latin America and elsewhere, life expectancies in Brazil have increased dramatically in the last 30 years. As a result, the period over which a pension would be drawn could easily exceed the period of plan participation and contribution, particularly in the case of women. Among recent retirees from the federal government, almost 40 percent were aged 50 or less.6

Table 5.2.Brazil: Outline of Main Features of the Basic RGPS Program
Former RegimePresent Regime 1/Future Regime
Contributions
Employee: progressive rates of 8,9,11 percent of up to R$1,200 monthly wage (adjusted for inflation).Employee: unchanged.Employee: uniform 11 percent of up to R$1,200 monthly wage (adjusted for inflation); contribution earmarked for notional pension account
Employer: proportional rate of 20 percent of wage payments.Employer: unchanged.Employer: unchanged rate earmarked for notional pension account; contribution above R$1,200 used for general expenses and reduced as permitted by declining deficit of program
Old-age benefits
Eligibility: 65/60 years of age (male/female), with minimun contribution period; 2/ rural workers may retire 5 years earlier.Eligibility: 65/60 years of age (male/female X with minimum contribution period;2/ rural workers may retire 5 years earlier.Eligibility: at retirement age selected by contributor, subject to a minimum age.
Benefit: 70 percent (plus 1 percent yearly increment above minimum contribution period, up to 100 percent) of inflation-adjusted average wage of last 3 years.Benefit: unchanged, but based on average of lifetime wage earnings to be phased in with yearly additions to average wage calculation—and linked to R$1,200 monthly, adjusted for inflation.Benefit: determined by inflation-adjusted accumulated lifetime contributions in notional pension account and by life expectancy at retirement; alternatively, a social minimun pension at 70 years of age or above.
Length-of-service/contribution benefits
Eligibility: minimum service period 30/25 years (male/female).Eligibility: for a proportional pension transition for current contributors, at 53/48 years of age, with 30/25 years of contribution (male/female) plus a charge of 40 percent of period remaining until retirement at time of the reform for a full pension-unchanged.Eligibility: after 30/35 years of contribution and subject to minimun retirement age.
Benefit: 70 percent (plus 6 percent yearly increment above minimum service period, up to 100 percent) of inflation-adjusted average wage of last 3 years of employmentBenefit: 100 percent of inflation-adjusted average lifetime wage earnings—to be phased in with yearly additions to reference period-and limited to R$1,200 monthly, adjusted for inflation.Benefit: determined by inflation-adjusted accumulated lifetime contributions in notional pension account and by life expectancy at retirement
Occupation-specific benefits
Eligibility: for aircraft crews, journalists, veterans, teachers after 30/25 years of service (male/female); for hazardous occupations 5,10, or 15 years earlier, depending on occupation.Eligibility: primary and secondary teachers after 30/25 years of service (male/female); for specific hazardous activities 5,10, or 15 years, limited to actual performance of hazardous activity.Eligibility: primary and secondary teachers after 30/25 years of service (male/female); others determined by actual performance of hazardous activity.
Benefit: 100 percent of inflation-adjusted average wage over last 3 years of employmentBenefit: 100 percent of inflation-adjusted average lifetime wage earnings-to be phased with yearly additons to average wage calculation-and limited to R$1,200 monthly, adjusted for inflation.Benefit: determined by inflation-adjusted accumulated contributions in notional pension account, enhanced by additional risk-related employer contributions, and by life expectancy at retirement.
Disability benefits
Eligibility: certified temporary or permanent, and full or partial disability.Eligibility: certified temporary or permanent, and full or partial disability.Eligibility: revised criteria for determining temporary and permanent disability.
Benefit: up to 100 percent of inflation-adjusted average wage of last 3 years.Benefit: up to 100 percent of inflation-adjusted average lifetime wage earnings—to be phased in with yearly additions to the average wage calculation.Benefit: determined by inflation-adjusted accumulated lifetime contributions in notional pension account and by life expectancy.
Survivors’ benefits
Eligibility: death of beneficiary.

Benefit: 100 percent of inflation-adjusted average wage of last 3 years if deceased still working; continuation of pension benefit otherwise.
Eligibility: unchanged.

Benefit: unchanged.
Eligibility: unchanged.

Benefit: unchanged, but subject to age limit and means test for survivor.

After December 16, 1998.

Minimum contribution period for eligibility is 9 years at present-phased in from 5 years in 1991 to 15 years effective 2011.

After December 16, 1998.

Minimum contribution period for eligibility is 9 years at present-phased in from 5 years in 1991 to 15 years effective 2011.

Table 5.3.Brazil: Outline of Main Features of the Basic Federal RJU Program
Former RegimePresent Regime 1/Future Regime
Contributions
Employee: uniform rate of 11 percent of wages.Employee: progressive rate of 11, 20, 25 percent of wages.Employee; rate determined by retirement age selected by contributor, applied on monthly wage up to R$1,200 (adjusted for inflation); contribution earmarked for notional pension account and calibrated to yield a benefit equivalent to last monthly wage to a maximum of R$1,200. (For supplementary pension, voluntary defined contribution on monthly wage above R$1,200.)
Employer government finances deficit of the program.Employer unchanged.Employer equivalent to twice the employee contribution, earmarked for notional account. (For supplementary pension, contribution is at most equivalent to employee contribution.)
Pensioner progressive rate of 0,11,20,25 percent of pension; disabled or above 70 years of age, with monthly pension less than R$3,000 are exempt
Old-age benefits
Eligibility: voluntary retirement at 65/60 years of age (male/female); mandatory at 70 years of age.Eligibility: voluntary retirement at 65/60 years of age (male/female), subject to minimum tenure of 10 years in government and 5 years in the position in which retirement occurs.Eligibility: at retirement age selected by contributor, subject to minimum tenure of 10 years in government and 5 years in position in which retirement occurs.
Benefit: 100 percent of last monthly wage, adjusted for subsequent wage increases in same position.Benefit: unchanged, but limited by salary of supreme court judges.Benefit: Unchanged.
Length-of-service/contribution benefits
Eligibility: after 30/25 years of service (male/female).Eligibility: transition for current contributors, at 53/48 of age, with 30/25 years of contribution (male/female), plus a charge of 40 percent of period remaining until retirement at time of the reform, or alternatively, with 35/30 years, charge is reduced to 20 percent of remaining period.
Benefit: 70 percent (plus 6 percent yearly increment above minimum service period, up to 100 percent) last monthly wage, adjusted for subsequent wage increases in same position.Benefit unchanged, but limited by salary of supreme court judges.Benefit maximum R$ 1,200. (For supplementary pension, defined contribution.)
Occupation-specific benefits
Eligibility: for teachers 5 years earlier than for other government employees.Eligibility: unchanged.Eligibility: unchanged.
Benefit 100 percent of last monthly wage, adjusted for subsequent wage increases in same position.Benefit unchanged, but limited by salary of supreme court judges.Benefit maximum R$ 1,200. (For supplementary pension, defined contribution.)
Disability benefits
Eligibility: certified temporary or permanent, and full or partial disability.Eligibility: unchanged.Eligibility: revised criteria for determining temporary and permanent disability.
Benefit 100 percent of last monthly wage, adjusted for subsequent wage increases in same position.Benefit unchanged, but limited by salary of supreme court judges.Benefit maximum R$ 1,200. (For supplementary pension, defined contribution.)
Survivors’ benefits
Eligibility: death of beneficiaryEligibility: unchanged.Eligibility: unchanged.
Benefit 100 percent of last monthly wage, adjusted for subsequent wage increases in same position.Benefit: unchanged.Benefit maximum R$ 1,200, but subject to age limit and means test for survivor. (For supplementary pension, defined contribution.)

After December 16, 1998.

Minimum contribution period for eligibility is 9 years at present—phased in from 5 years in 1991 to 15 years effective 2011.

After December 16, 1998.

Minimum contribution period for eligibility is 9 years at present—phased in from 5 years in 1991 to 15 years effective 2011.

6. Pensions are also subject to indexation. In periods of very high inflation, lags in indexation could effectively reduce their real value, but this cannot occur to any significant extent when inflation is low. A “proportional” or early retirement pension, with a replacement ratio of 70 percent—a generous rate for a foil pension by international standards—was available after 30 years for men, and just 25 for women. These eligibility conditions created strong incentives to retire very early.

7. Studies of pension systems around the world typically a country’s pension system in approximate cash flow equilibrium, but facing deficits that will only grow in the future unless action is taken. This usually results from the increase in a country’s dependency ratio—basically, the ratio of pensioners to working age population, and to the phenomenon of pension plan maturation—whereby benefits tend to grow in relation to wages because the proportion of retirees with a full pension grows as the plan matures. In Brazil’s case, the cash flow deficit is already very large, and demography, if not plan maturation, is working against it.

The reforms of late 1998–early 1999

8. To understand how the reform package consisting of the Constitutional Amendment of December 16, 1998 and the Ordinary Law of January 1999 will affect Brazil’s public pension system, it is useful to bear three distinctions in mind. First, the Constitutional Amendment makes a fundamental distinction between changes to the permanent rules of the system—which affect only those who begin to contribute to the public and private system after December 16, 1998—and so-called transitional rules, which apply to those already contributing to one of the plans. Second, the reform includes measures whose effect, although modest to begin with, grows over time, and others whose effect is immediate, but without a strong cumulative element. Third, some changes apply to both the RJU and the RGPS; others apply to one but not the other.

The Ordinary Law of January 1999

9. This law imposes contributions at progressive rates varying from 11 to 25 percent on civil service retirees. This measure, unlike those that make up the constitutional amendment, is not phased in, and affects the current generation of retirees, not just future retirees. It complements the more gradualist approach embodied in the Constitutional Amendment. From both a distributional point of view, and the need to address the urgent problem of the public sector system’s finances, it is easy to justify.7

The Constitutional Amendment of December 16, 1999

10. From the point of view of their impact on the finances of the public pension system over the next 30 years, the two most important elements of the reform were these:

  • The introduction of minimum retirement ages of 53 years for men, and 48 years for women, as a transitional rule. This rule applies to civil servants seeking to retire on either a proportional or a full pension, and to private sector plan participants intending to retire on a proportional pension. For civil servants, minimum retirement ages of 60 and 55 are introduced as a part of the permanent regime. No minimum age requirement applies to private sector plan participants retiring on a full pension, however.

  • A lengthening of the required contribution period for either a proportional or full pension for civil servants who had not yet qualified for a pension when the Constitutional Amendment was ratified. The required contribution period for a full pension is not lengthened for private sector plan participants, however; it remains 35 years for men and 30 for women.

11. The way in which contribution periods have been lengthened is a little complex. Specifically, the increase in the required period of contribution is determined by the shortfall in the number of years of contributions as of the date of introduction of the new law from the minimum contribution period required for a pension. (The former minimum contribution periods for a full pension were 35 years from men and 30 years for women, and for a “proportional” pension were 30 years for men and 25 years for women). In the case of a full pension, an additional period of time (a “toll”) of 2.4 months for each year of shortfall is added to the required contribution period (for civil servants only). For the proportional pension, the toll is 4.8 months per year of shortfall. Consequently, someone who had contributed for 30 years, five short of the minimum required for a full pension when the reform was introduced would have to work for 5 years plus 1.0 years to qualify for a full pension.

12. These provisions are transitional, inasmuch as they apply only to persons now in the labor force and contributing to one system or another, and they must both be satisfied to qualify a contributor for retirement. Their combined effect is to increase both the average retirement age of new pensioners and the average period over which they must contribute to the system. Persons joining the labor force after December 16, 1998, when the reform was passed, and working in the private sector are not subject to a minimum age requirement.

13. A number of other important changes affected only the RGPS, and affect both current and future contributors:

  • The three-year pre-retirement period used in the calculation of the pensionable base is to be phased out, and a lifetime income base gradually phased in.

  • The special regimes applying to certain occupations were eliminated.

  • A cap of R$1,200 (now R$1,255) was imposed on RGPS pensions.

14. Apart from the impact of the minimum age requirement (discussed below), the reform has an effect on the number of retirees in a given year and the average age of retirement as a result of the increase in the minimum contribution period. The way the increase in the contribution period works is to increase the effective retirement age of contributors in an inverse relation to the number of years they had contributed when the Amendment was ratified. For example, a male civil servant who is exactly 51 years old and has contributed for 33.0 years as of December 16, 1998 when the reform was implemented would have to work an additional 4.8 months (20 percent of 2 years) to qualify for a full pension. If he has worked for 31 years, he must work for an additional 9.6 months. (His private sector counterpart with the same age and work experience does not have to work this additional period to qualify for a full pension, and can retire at age 53). The toll thus works to lengthen gradually the minimum contribution period for each successive generation, and it is a means of achieving de facto a substantial increase in the effective retirement age, albeit a very gradual increase that leaves retirement ages below those of most countries.

15. The toll’s effect on the age of retirement is more pronounced in the case of proportional retirement. Someone who has just entered the labor force and so would have 30 years to go before being eligible to retire with a pension of 70 percent of the maximum without the toll would have to work an additional 12 years with the toll before qualifying, or for 42 years in all. This effect makes the proportional retirement option irrelevant in practical terms for the cohorts who just entered the labor force and have not accumulated any years of contributions yet. As can be seen from Table 5.4 with the 42 years of work necessary to receive a proportional pension at 70 percent, the same person also qualifies for the full retirement with a 100 percent replacement rate.

Table 5.4.The Relationship Between Years of Contribution and the Addition to the Required Period of Contribution (for men)
Years of Contributions

When Reform Passes
Additional Years for Full

Retirement (100 Percent

Replacement Rate

After 35 Years)
Additional Years for

“Proportional” Retirement

(70 Percent Replacement Rate

After 30 Years)
341+0.2
332+0.4
305 + 1
2510 + 25 + 2
2015 + 310 + 4
1520 + 415 + 6
1025 + 520 + 8
530 + 625 + 10
035 + 730 + 12

16. The minimum age requirement also has an effect on the age of retirement, but only in the case of participants who entered the labor force and began contributing at a relatively early age, and has no effect in the case of private sector workers retiring on a full pension. A man beginning work at age 20 will not have satisfied the contribution period of a full pension by the time he reaches age 53. In his case, the minimum age requirement is not binding. On the other hand, someone beginning work at age 16 will have satisfied the contribution period for a full pension by the time he has reached age 51, but will have to work an additional two years if he is a civil servant. The minimum age retirement can thus increase the average retirement age of new retirees. It will, however, also increase the value of the pension that a contributor may draw, if the contributor satisfies the minimum contributory period for a proportional or reduced pension before he reaches age 53 (age 48 in the case of a woman). Since the value of the pension increases by 6 percent of its maximum value with each additional year of work, this effect may actually work to worsen the finances of the pension system.8

17. The mechanism of the toll works to obviate the minimum age requirement for pensions in the middle of their working life. For example, a person who entered the labor force at age 20 and was 40 when the reform became effective would have to work 14 more years—until he was 54—to qualify for a pension of 70 percent of the maximum. Previously, he would have had to work only 10 additional years. If he were seeking a full pension, however, he would have to work 18 years, instead of 15, and would not be able to retire before 58. Put another way, as time passes, the minimum age requirement is less and less relevant; i.e., it has less and less of an effect on the retirement decision. Before too many years have passed, it will be completely irrelevant, and the system will have (for the current generation of contributors) only a minimum contribution period.

Impact on the system’s finances

18. Simulations by the recent FAD technical assistance mission shed light on the orders of magnitude of the impact of the measures just introduced, as well as some that have not yet been adopted. FAD staff simulated the impact of three sets of measures on the finances of the RGPS and the federal RJU:

  • introduction of a contribution by retired civil servants of 11 percent; and a similar increase for contributors to the RGPS system

  • the gradual phasing-in of a life-time income base for pensions

  • a gradual increase in the retirement age (as would tend to occur with the toll mechanism)

19. The following tables show the results of the simulations, which are presented cumulatively—i.e., the first line below the baseline shows the impact of the contribution increase, the second line shows the combined impact of the contribution increase and the that of the phasing-in of a lifetime average wage, while the third adds the impact of an increase in the average retirement age.

RGPS Primary Balance(As percent of GDP)
19992000200120022003200420052010201520202030
Baseline-1.2-1.4-1.41-1.42-1.45-1.5-1.56-2.2-3.3-4.75-7.95
Contribution Increase-0.63-0.52-0.5-0.5-0.51-0.54-0.58-1.1-2.07-3.38-6.3
Phase-in of
Lifetime average wage-0.63-0.52-0.5-0,49-0.5-0.51-0.53-0.83-1.33-1.91-2.84
Increase average Retirement age-0.63-0.46-0.38-0.32-0.27-0.23-0.2-0.24-0.48-0.77-1.57
Federal RJU Primary Balance(As percent of GDP)
19992000200120022003200420052010201520202030
Baseline-1.83-1.89-1.94-2-2.05-2.11-2.16-2.45-2.73-2.94-3.15
Contribution Increase-1.57-1.44-1.48-1.53-1.58-1.63-1.68-1.93-2.18-2.36-2.55
Phase-in of
Lifetime average age-1.57-1.44-1.48-1.53-1.57-1.61-1.65-1.83-1.92-1.91-1.68
Increase average Retirement age-1.57-1.44-1.48-1.53-1.57-1.61-1.59-1.46-1.3-1.12-0.84

20. Notwithstanding the significant positive impact of the reforms, it can be seen that even the cumulative effect of all three measures brings neither the RGPS nor the RJU into financial balance. Two basic features of the reform may explain why it is not enough to arrest the tendency to growing deficits:

  • the reform affects only the flow of new pensioners, not the stock of earlier retirees, and because the increase in retirement age is a gradual one, the number of pensioners retiring in a given year is not greatly reduced;

  • there is no measure to affect the value of the pensions the RJU federal is now paying, apart from contribution increases for retirees under the RJU, and these increases are not enough to reduce the RJU’s deficit substantially;

21. It should also be noted that its largest effects take place in the initial post-reform years, when the minimum age requirement is a binding constraint on the retirement decision of many plan participants, obliging them to postpone retirement; and although retirement is postponed, there is a substantial rise in the pensions earned by persons whose retirement is postponed by the minimum age requirement.

22. The toll mechanism reduces the flow of new retirees, although this effect is not a drastic one. Everyone who was intending to retire in 1999 would have reached the minimum contribution period at some point during the year—on average, mid-way through the year. This means that on average they were seven months from qualifying when the reform was made law. Persons seven months shy of qualifying for a full pension would have to work an additional 1½ months; persons seven months shy of a proportional pension would have had to work an additional three months. The toll’s thus has the effect of reducing the flow of new retirees by about 20 percent. If the toll simply added a constant number of months onto everyone’s working life and age retirement, it would have basically a one-time impact on the flow of retirees, and a permanent but small impact on the stock. Since the toll’s effect grows over time, however, it should continue to have an impact on the stock, although not a particularly large one.

23. In any case, the reforms of 1998–99 are in fact somewhat less ambitious than the ones embodied in the simulations. RGPS pensioners are not subject to a contribution, and the pensionable base for government employees remains their last month’s wage. Similarly, although the toll will achieve an increase in average retirement age, its effect on private sector plan participants is muted by the fact that it does not affect those who choose a full, rather than a proportional pension.

The need for additional reform

24. The gradualist philosophy that underlies the recent reforms is appropriate for a government trying to cushion the impact of reform on current beneficiaries of the public pension system. The way the toll mechanism works requires a gradual adjustment from current contributors; persons already nearing retirement are not suddenly required to put it off for many years. By its nature, however, gradualism by itself will not address the financial problems of Brazil’s pension system adequately. Consequently, the reforms that will be presented to congress later this year are of great importance.

25. The proposed system of notional accounts (a defined contributions system for the private sector, and a defined benefits system allowing a trade-off between retirement age and contribution rate for the public sector) can put the pension system on a sustainable path provided that its parameters are well-chosen. For the private system, the intention is that the contributions an employee now makes and the employer’s contribution, up to a salary equal to 10 minimum wages would be earmarked for a notional individual account. This account would earn a “notional” return set by the government and expressed in real terms, (which the government could change from time to time)—and the value upon retirement of an individual’s accumulated contributions and the return they have earned, together with the person’s age at retirement would determine the value of the pension. With the parameters now under discussion, it would no longer be possible to earn a pension equal to 100 percent of pensionable income. In fact, depending on the return, replacement rates for persons retiring relatively young could fall substantially, even if they have a substantial period of contributions. This would be an important step toward a system that is actuarially balanced. Unlike the present system, pensions would bear a reasonable relationship with life expectancy at retirement.

26. For the public sector, the system would remain a defined benefits system. Civil servants would be able to chose, with certain limits, the age at which they retire, but their contribution rate would be set (and presumably adjusted after the fact) to ensure actuarial fairness (the younger the age of retirement, the higher the rate of contribution).

27. The success of the private sector system would depend critically on two things: first the notional rate of return chosen for the individual accounts; second, the proper functioning of the individual accounts system, and its impact on the effective, as opposed to the statutory rate of contributions. The latter is especially important because of the high rate of evasion of contributions from which the system suffers.

28. The choice of the right notional rate of return is of great importance. Replacement rates are very sensitive to small changes in the rate. Perhaps even more important is insuring that, pensions be based on what is actually paid in, accumulated at the appropriate notional rate. They must not be based on an after the fact estimate of what ought to have been paid in.

29. Evasion is a major problem with the present private sector system. To the extent that the notional accounts system functions well, and makes benefits a function of actual contributions, it should be possible to reduce statutory contribution rates, which are very high for wage and salary earners earning ten times the minimum wage or less. The combination of lower rates and the adoption of a notional accounts system could substantially reduce the incentive for evasion. A reduction in statutory rates might then not be inconsistent with an increase in the effective rates, while at the same time allowing for a reduction in future benefits.

30. It is hard to over-emphasize the importance of proper administration for a well-functioning notional accounts system (or for a well-functioning PAYG system that bases pensions, as they should be based, on lifetime earnings). The test of efficient administration will be its ability to ensure that the full amount of contributions actually withheld or paid on behalf of a given contributor is credited to his or her account. Inter alia, this requires a well-functioning taxpayer ID, or INSS contributor ID. The government took an important step in the direction of improved administration of the INSS with the introduction of a system of individual accounts for the current system in January, 1999.

31. For the public sector, successful reform requires that the government will have to introduce the kinds of changes now being proposed for the RGPS. In particular, retirement ages will need to increase, without any increase in average pensions. Reforms along the lines discussed above may also need to be supplemented by measures that address the current cash-flow disequilibrium of the public pension system. The system’s finances will also be improved by measures that will rationalize its treatment of rural workers and the self-employed.

Prepared by G. A. Mackenzie and Christian Keller.

This section’s account of the existing public pension system and the proposed reforms draws on “O Novo Modelo Previdenciário Brasileiro: Uma Fase de Transição” (Brazil’s New Model of Social Security: a Transitional Phase) by Waldeck Ornélas, available on the website of the Ministerio de Previdência e Assistencia Social, (http://www, mpas. gov.br) and on the guide “Como Você fica com a Reforma da Previdência” (How do you fare under the Pension Reform), at the same site.

Public sector pensions were not initially even conceived of as a pay-as-you-go plan, much less a savings plan, but simply as a vehicle for deferred compensation.

These rates also finance disability, old-age and survivors pensions.

Certain occupations have enjoyed even more generous treatment (see Table 5.2), although this treatment has not always been justified by the nature of the work they were performing.

MARE, Boletim Estadístico de Pessoal No. 36, April 1999.

Each is currently the object of court actions.

It has been argued that this effect means that reform will actually worsen the system’s finances overall (i.e., relative to a no-reform baseline) Gazeta Mercantile 5/21/99 “Reforma da prêvidencia é criticada.”

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