Social Security Reform in Brazil

Since I was a little kid Social Security reform has been discussed in Brazil. It is fair to say that in the early 1980s a huge actuarial deficit was already in place. Since the financial side was still fine, i.e. Social Security contribution revenues were larger than the paid benefits. Additionally, the hyperinflation of this period facilitated financial adjustments. All that was needed to balance the Social Security budget was to adjust benefits by less than the actual inflation rate.

To make matters worse, several significant changes affected the Brazilian economy since the late 1980s. First, the Brazilian Constitution of 1988 changed several Social Security rules for both private sector and public sector workers. These changes, among other nefarious effects, increased substantially the benefits paid without an increase in the contributions. Moreover, the Brazilian Social Security system is a pay-as-you-go system, which makes it very vulnerable to demographic changes. In fact, the fertility rate started to decline rapidly and at the same time life expectancy in Brazil increased considerably since the 1980s. Finally, the end of hyperinflation after the implementation of the Real Plan in July 1994 prevented the use of inflation by government to curb Social Security deficits. As a result, by the end of the 1990s, Social Security had both actuarial and financial deficits.

Several mild reforms have taken place since the mid-1990s, though none of them were able to restrain the ever increasing financial deficit. A new reform is currently being discussed in the Brazilian Congress. It is not clear, at least to me, whether it will be modified (and how) or even if it will be approved by Congress. In this link you can find some of the fiscal forecasts that were used to support the current proposal to reform Social Security.