BRAZIL’S SOCIAL SECURITY SYSTEM: PROSPECTIVE TRAJECTORYAND REFORM ALTERNATIVES

MONICA PINHANEZ* AND KAIZO B Q1ELTRAOBrazilian School of Public and Business Administration, Brazil

SUMMARY

This article assesses the current status of Brazil’s Social Security System in terms of the social and economic development of theBrazilian population it is intended to serve. It starts with a historical overview of the system. Data from a household survey(Pesquisa Nacional por Amostra de Domicílio) is used to describe the workforce and its relationship with the social securitysystem. The years 1992, 1997, 2002, 2007, and 2012 were chosen to give a series of pictures of the Brazilian population at equalintervals but under different legal circumstances with respect to the implementation of social security legislation. Data withregard to beneficiaries and the corresponding expenditures and revenues of the system are also shown. The situation presentedis rather bleak considering that, since 1997, expenditure on benefits has consistently surpassed revenues based on payrolls.Some alternative reform options (parametric in nature) are evaluated using simulations. These simulations show that thealternative of postponing the eligibility age would have the greatest positive effect on balancing the books, especially whenusing 65 years as the minimum pensionable age. This would be the equivalent of eliminating “seniority retirement.” Age testingis also effective for the recipients of survivor’s benefit. Eliminating multiple benefits, though not impressive in terms ofnumbers, is progressive in nature and, therefore, an alternative to be considered. Dissociating the minimum wage from theminimum benefit would have a much larger impact in the long run, but the measure is highly unpopular and would mostprobably not be approved if proposed by the Government. Copyright © 2014 John Wiley & Sons, Ltd.

key words—T; B; A; A

INTRODUCTION

Social security can be understood as a set of policies and programs established by statute with the aim of sustainingthe individual and/or familial group faced with events resulting from death, illness, disability, unemployment, andeconomic incapacity in general. These situations usually lead to a loss of working capacity or simply earningpower. This all-encompassing definition covers a number of variants, depending on the political, economic, social,historical, and cultural factors that have influenced the evolution of each and every system around the world. Notwo countries have exactly the same social security system (SSA, 2011a, 2011b, 2012a, 2012b Q2). Working capacityvaries not only with respect to the aforementioned variables but also with social class, occupation and is alsoaffected by individual choices and circumstances. Thus, the impact of advanced age on work capacity, aside frombeing a biological status and part of the lifecycle, may be considered to some extent a social construct. Alternativeforms of support for the later years have always existed, such as family and social charity, but such support wasoften quite limited. It could be combined with some government assistance for some elderly people and allowthe participation of the elderly people in different domestic and/or community occupations. More extensive socialsecurity, however, generally requires a reasonable level of wealth in society so that individuals, productive or not,may enjoy a regular income.

A situation that can theoretically lead to loss of working capacity and, consequently, to eligibility to obtain asocial security benefit is that of arduous work or work under harsh conditions over a long period. An example

*Correspondence to: M. Pinhanez, Brazilian School of Public and Business Administration, Praia de Botafogo, 190-4 and 5th floors, CEP22250-900 Rio de Janeiro, Brazil. E-mail: monica.pinhanez@fgv.br

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of this is that of miners at the turn of the previous century. Brazilian legislation took this concept further anddefined retirement by seniority, that is, retirement after a legally established length of service (in number of years),later defined as length of contribution, regardless of the type of work involved and the person’s age. Currently, thisis the benefit that absorbs the largest portion of Brazil’s social security budget. In addition, we have a uniqueperspective in Brazil. Even semantically, the terms commonly used in other languages/nations, such as retraite,retiro, retirement, and taishoku, as translations for the word “aposentadoria,” all imply a departure from the laborforce. Brazilians, however, do not understand retirement as a cessation of working activity but as a bonus forprevious activities. In many other countries, receiving the benefit is legally conditional on an effective withdrawalfrom the labor market: if the beneficiary returns (or continues) to work, the retirement benefit is not payable or isreduced. In Brazil, only invalidity pensioners are not allowed to re-engage in the labor force.

Unlike most Latin American countries, where reforms toward a privatized social security system based oncapitalized individual accounts has increased the number of individuals no longer eligible for government benefitsat older ages, Brazil has gone through several parametric adjustments. Formally, it has retained quite broad cover-age through its government social security benefits, including most of the rural population. In fact, among theelderly people, most of the population has access to some level of government benefits (be it social insurance orsocial assistance [SA] benefits).

Many other Latin America social security systems went through reforms during the 1990s that changed themfrom a pay-as-you-go defined benefit (DB) system into an individual-account defined contribution (DC) system.The main factor for such path choice was the political and economic circumstances, which made transition to anew system easier, including the prospective cost of the former DB benefits. In Brazil, the gross cost (the total ac-cumulated liabilities) of the DB benefit entitlements was estimated to be twice that of gross domestic product(GDP), thus promising substantial retirement incomes to most of the population. The cost in Argentina had beenlimited because benefits were not pegged to inflation and were therefore falling in real terms. Chile was runninga surplus in its balance of payments, and the military government was able to change the DB system into indi-vidual-account DCs without strong political opposition. As for the other LA countries, most of them changed toindividual accounts DC ( Q3SSA, 2012c) or considered such accounts as a significant part of the system.

Despite following a distinct path in terms of reform, the Brazilian Social Security coverage has improved for thepopulation at large. Sustainability over the long run, though, is another matter. Since 1997, revenues on payrollshave fallen below expenditures on benefits. In Brazil, despite the relatively young population, the social securitysystem presents a very low contributors-to-beneficiaries ratio, approximately 1.8, because of the very generousbenefits. In addition, although the country has a large informal labor market that is at peak working activity age,they make no contributions but manage somehow to get eligibility for benefits later on in life. As Brazil has favoredsome parametric reforms (i.e., reforms within the existing general framework) in the past, a menu of such reformalternatives was provided. These alternatives are based on recurrent academic debates in Brazil (Giambiagi, 2007;Giambiagi et al., 2005), which aim at curbing the System’s mounting financing needs.

This article comprises five sections. Following this introduction, Historical Overview section gives a briefhistorical overview of the Brazilian Social Security System. Evolution of the Brazilian Population According toOccupational and Social Security Status section presents the evolution of the Brazilian labor force (with respectto occupational and social insurance status) further disaggregated by urban/rural conditions between 1992 and2012. Prospective Trajectory section presents a projection of future costs and revenues of the system under thepresent regulations. In the same section, a series of alternatives are listed and their costs appraised. Conclusionsand final comments can be found in the last section.

HISTORICAL OVERVIEW

The earliest initiatives pertaining to social security in Brazil date from colonial times (Oliveira et al., 1997). SAinstitutions, such as the Casa de Misericórdia de Santos (dating back to 1543), were created during this period.This period also saw the establishment of pension benefits for surviving spouses and children of military personnel(the Navy in 1793 and the War Navy in 1795). However, the inception of the current system came with the Eloy

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Chaves Law, approved in 1923, the legal landmark of the current Brazilian Social Security System. This lawgranted pensions and health benefits to private sector railroad workers. As such, coverage was restricted to asegment of urban employees from select companies but was gradually extended to include other groups: employeesfrom all formal companies, employers, self-employed workers, domestic servants, rural workers, and so on.

This first Social Security Law was the first of an era where social insurance was characterized by several smallfunds (Caixa de Aposentadorias e Pensões)—each covering employees of a single company and basically withoutdirect Government intervention. A collegiate with representatives of employers and employees was responsible forthe administration of the funds. The National Workers Council (Conselho Nacional do Trabalho—CNT), aGovernment agency created in 1923 for this specific task, supervised the funds. In 1924, there were already 26 suchfunds. During most of the following decade, the system evolved as a very fragmented, company-based, lowcoverage set of isolated programs, privately run and operating under a full capitalization regime. By 1937, therewere 183 such funds (Oliveira et al., 1997). Those in the schemes were covered for health services and pensionbenefits only. Unemployment and SA were not under the umbrella of the funds. Later on, unemployment benefitswere covered under separate programs, such as the Fundo de Garantia do Tempo de Serviço (FGTS) (Worker’sSeverance Indemnity Fund), which was implemented only in the 1960s, and unemployment insurance, createdin the 1990s.

During the 1930s and 1940s, these company-based, isolated programs were consolidated into sector systems.Commerce, bank employees, federal level public servants, and the employees of the industrial and transportationsectors had their own systems (and corresponding fund). It should be noted that this movement roughly coincidedwith the first efforts to industrialize the country and the emergence of the labor movement in Brazil. Most socialsecurity sector funds became part of the Ministry of Labor, Industry and Commerce. The first sectorial fund wasthe Instituto de Aposentadoria e Pensões dos Marítimos, created in 1933, which covered all individuals employedin the Brazilian Merchant Navy. These programs were operated under a full capitalization regime with a tripartitefunded scheme, with equal shares by employer, employee, and the State. Under the sectorial funds, all urbanemployees of companies were covered. The differences among sectorial funds were enormous, mainly becauseof the funding systems, which were based not only on wages but also on transactions particular to each sector.For example, the Bank Employee Fund received a fraction of all bank transactions made in the country. A largeportion of the working population worked in the informal market and had no coverage, a situation that persiststo the present day.

In 1945, a new law established the Brazilian Social Service Institute Q4(ISSB—Instituto de Serviços Sociais doBrasil), whose goal was to merge all existing sectorial funds and harmonize social security benefits, extendingthe system to the whole of the formal economically active population in Brazil. In spite of the importance of thisinitiative, the Instituto de Serviços Sociais do Brasil never came into being, largely because the following Govern-ment, inaugurated in 1946, failed to provide it with a budget (Oliveira et al., 1997).

While originally the sectorial funds operated under a full capitalization regime, very soon it became clear thatthe state would never fulfill its commitment to one third of the funds and never actually contributed to the fundsat all. Besides this, reserves were often used for other purposes, such as building hospitals, infrastructure, socialhousing, and industrial facilities for national companies (e.g., National Steel Company). At that time, given thesmall number of benefits being paid, because of the initial stages of the system, administrators felt free to createnew benefits. As a result, by the 1960s, the social security system had shifted to a pure pay-as-you-go DB scheme.

In 1960, a Social Security Organic Law was approved, unifying benefit and funding schemes among the variousfunds. Six years later, the National Social Security Institute (INPS) was created, replacing the old funds andincorporating their revenues and expenditures, as well as their assets and liabilities. In theory, most of the urbanworkers, including employers and self-employed were covered by the system. Because of the low level of formal-ization in the economy, however, overall workers’ coverage remained low.

Despite various attempts during the 1960s to include the rural population in the system, it was only in 1974 thateffective coverage of them was achieved. A flat benefit comprising half of the national minimum wage was grantedto rural workers at the age of 65 years or to the disabled at any age, without a minimum waiting period. Rural em-ployees, so far excluded from the system, were included among potential beneficiaries under Law No. 6260 in 1975.

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Benefits were granted per family, and the head of the family was the one entitled to it. Medical assistance wasalso supplied, mostly through contracts with private and philanthropic hospitals. The cost of the program wasfinanced by a special contribution of 2.4 per cent on the urban wage bill, plus a contribution of 2.5 per cent leviedon first commercialization of rural produce. A specific agency—Funrural—was created to manage the newprogram. At that time, a SA benefit was also instituted to benefit excluded categories from the aforementionedarrangements. Its targets were elderly people (70 years old and over), or incapacitated, destitute individuals withno formal work history. In this case, the SA cash benefit was also equivalent to half of a minimum wage. A SocialInsurance and SA Ministry was created in 1974, from the dismemberment of the previous Ministry of Labor andSocial Security. From 1978 to 1988, the institutional setup was of functional specialization, with the previous agen-cies (INPS and Funrural) divided into the following activities: (i) INPS (payment of pensions to urban and ruralbeneficiaries, as well as SA benefits); (ii) INAMPS (curative health services); (iii) IAPAS Q5(collecting contributionsand managing its funds, although it was not directly responsible for the liabilities); (iv) Legião Brasileira deAssistência (SA services to the needy); (v) Fundação Nacional do Bem-Estar do Menor (caring for abandonedand criminal juveniles); and (vi) Dataprev (data processing supporting agency).

After the end of almost 20 years of military rule, the 1988 Constitution was promulgated. This new fundamentallaw reflected increasing social concerns as well as democratization and represented an important step toward theuniversalization of social security. After such a long period of military rule, and hoping to cement a new era ofsocial reform, a large number of social insurance provisions were embedded in the Constitution itself. Up to thismoment, eligibility conditions for social security benefits included: old age for urban workers (65 years old formale workers and 60 years old for female workers), old age for rural workers and employees (at 65 years old forboth sexes), seniority for urban workers (35 working years for male workers and 30 for female workers), reducedseniority for certain urban workers (30 working years for male workers), disability for urban and rural workers, andsurvivors’ benefits for urban and rural widows and orphans.

In general, the basic new provisions for the private sector were the following: (i) introduction of the SocialSecurity concept, as an integrated set of social insurance, health, and SA; (ii) creation of a Unified Social SecurityBudget, financed by contributions levied on salaries, gross business revenues, business profits, lotteries, and bytransfers of general tax revenues; (iii) health as a universal citizenship right; (vi) reduction of 5 years on the ageeligibility for rural workers and employees (male rural workers became eligible for old age retirement at 60 years,and female at 55 years, while urban workers remained with the previously established conditions); (v) recalculationof all benefit values in order to recover real values at the time of the concession of the benefit; (vi) full inflationindexing on all contribution salaries in the benefit calculation formula at the time of concession; (vii) full inflationindexing on all benefit values to preserve their “real value”; and (viii) floor values of social insurance and SAbenefits equal to the minimum wage at least. These were all very generous provisions, which would prove costlyover time.

In the case of civil or public servants, the Constitution adjusted the differences between the two major categoriesof federal civil servant contracts existent in Brazil since 1964. These two major forms of contracts were the follow-ing: tenured civil servants, who, among other things, were entitled to benefits equaling their last salary, with fullequivalence between retirement benefit values and active civil servant salaries in tenured jobs; and contracted CivilServants, through the Labor Laws Statute, with both social security and labor rights equal to private sector workers.

For civil servants, the Constitution determined new rules. A single system encompasses all civil servants(workwise and with respect to social security) with (i) tenured employment, for example, full stability in the job,(ii) retirement benefits equal to last salary, and (iii) value of benefits pegged to the current salaries of workingpersonnel.

It should be noted that, when the Constitutional provisions were regulated in 1990, all civil servants working atthat time were immediately transferred to the new system (RJU which stands for General Exclusive Legal Regimefor Civil Servants). As a consequence, some estimated 400 000 persons that used to contribute to private systemswere shifted to the new scheme, thus being entitled to full salary benefits without the previous corresponding con-tributions. At the state and municipal government level, the situation was even worse in terms of affordability: mostgovernments followed the federal example with even more generous benefit schemes.

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In addition to the National Retirement Fund (known as FGTS) created during the 60s, another unemploymentinsurance scheme was implemented in 1990, to compensate for the fact that most workers would not be able toaccumulate sufficient funds in their FGTS accounts to survive during periods of unemployment. The FGTSaccounts function as individual workers’ saving accounts but funded by employers. High turnover workers—thosewho by definition need the benefit the most—were the ones that would not be able to save enough and at the time ofunemployment collected very meager benefits. Considering this fact, the new program would provide an employ-ment benefit of 50 per cent of the average covered earnings during the last 3months prior to dismissal—up to threetimes the minimum wage payable for up to 4months. The program was administered by the Ministry of Labor.

Aside from another institutional reform that took place in 1990, when all the healthcare activities weretransferred to the Ministry of Health and a single social insurance agency was created (the INSS, the NationalInstitute of Social Security), no real major changes occurred until 1995. To try to curb the increasing deficit, theGovernment proposed a Constitutional Amendment regarding the Social Security System (CA20). It had no effect,except for eliminating one type of seniority benefits (i.e., the one referring to proportional retirement for length ofservice for new entrants into the labor force, by defining a minimum age for retirement for civil servants), andintroducing a new benefit formula, as opposed to a simple average of the last 3 years’ salary prior to retirement.

Later, a new law, nicknamed the Fator Previdenciário (the Social Insurance Factor Law), which defined acomplicated formula to calculate pensions for seniority retirement (length of service) was enacted. The formulaincluded, among others, a list of actuarial variables such as life expectancy, years of work, contributions, age,and sex but had no actuarial theory backing it. The government had expected people to postpone retirementbecause of the lower pension they would receive. The effects of this Constitutional Amendment were mainlyrelated to the elimination of proportional retirement, because the Brazilian legal system does not penalizepensioners who decided to re-enter the labor force. The Constitutional Amendment No. 20 also allowed federal,state, and municipal governments to set a ceiling on civil servant pensions conditional on setting a contributorycomplementary fund. However, this complementary fund was only regulated in 2012 (Law 12618, 2 May).

Ultimately, Constitutional Amendment No. 41/2003 created a bonus paid to civil servants who were alreadyeligible for retirement and opted to continue working. This benefit had been part of the package of benefits offeredto workers in the private sector previous to the 1988 Constitution, but was discontinued, because very few peoplefiled for the benefit, preferring to retire and continue working instead. As mentioned earlier, Brazilian legislationneither prohibits nor penalizes pensioners who re-engage in the workforce.

EVOLUTION OF THE BRAZILIAN POPULATION ACCORDING TO OCCUPATIONAL AND SOCIALSECURITY STATUS

We consider in this section the population disaggregated according to formal social security status (beneficiary,contributor, neither) and their occupational status with respect to the labor market. With respect to the labor market,individuals can be part of it or not. If they are part of the formal active population, they may have an employer ornot. If they do not have an employer, they can be employers themselves or self-employed. Alternatively, they maybe part of the informal labor market, which involves no money transactions. Individuals can work planting goodsfor self-consumption or building a house to live in. They can also work with the remaining family members on arural plot. For the purposes of this article, dependents of either formal or informal workers are assumed to be out-side the labor market even if they may be performing household duties such as care of children: they are identifiedas “other.” Only those in the formal labor market may be contributors to the social security, and these individualsmay have a formal tie to the Private Sector System or to one of the Public Sector Systems. Beneficiaries of socialsecurity include pensioners and survivors’ benefit recipients, and these may or may not have been contributors (i.e.,they may have come from the informal or the formal workforce).

Given the dimensions of the informal market in Brazil, as well as the complexity of the Social Securitylegislation, in order to break down the population according to occupational and social security status at leastfour categories are needed: (i) formal sector (including formal employees and domestic servants, publicservants, and employers and self-employed contributing to the system); (ii) informal sector (including

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informal employees and domestic servants, individuals working with family members with no salary, individualsworking in self-construction and for its self-consumption, employers and self-employed not contributing to thesystem, and unemployed individuals); (iii) pensioners; (iv) dependents (i.e., none of the previous categoriesand the non-economically active population not receiving social security benefits). As already mentioned, thereare a fair number of individuals collecting pensions and still working. These are categorized in the followingparagraphs as workers in either the formal or informal sector. In Brazil, formal employees must be formallyregistered and have the required working documents (carteira de trabalho), which entails social security contri-bution and participation. The same holds true for domestic servants. Among rural workers, subsistence agricultureis the most common activity.

Brazilian legislation neither penalizes nor prohibits current pensioners who continue working. Therefore, thereare an estimated 30 per cent of pensioners formally employed. As we will show in the next sections of this paper,this situation poses an extra problem for the Brazilian market: job vacancies may not be made available tonewcomers in the job market. Furthermore, early pensioners are entitled to reduced pensions. Although in the shortrun, pensioners can accumulate total pension and salary, in the long run, when individuals stop working, they willreceive only the initial reduced pension, that is, the extra-working years will not add anything to their pensionvalue.

It is noteworthy that among the elderly pensioners, that is, those over 60 years old, around a quarter are receivingmore than one benefit. This group is mainly composed by survival pensioners also receiving seniority or old agepensions.

Data shown in this section are provided by the Brazilian National Household Sample Survey, [PesquisaNacional por Amostra de Domicílio (PNAD)]. PNAD is a household survey conducted annually by The CentralBrazilian Statistical Office (IBGE) in years in which there is no census. As defined in the PNAD, the economicallyactive population comprises those who have taken some effective steps toward finding work during the referenceweek or who have worked during all or part of the period. Pensioners are defined as those who, during the referenceweek, were classified as retirees. It also considers survivors’ pensioners in the General Regime for Social Securityor in the social security regime for civil servants of the federal, state, or municipal governments, or those whoreceived some sort of SA benefit on a continuous basis.

As can be seen in Figure F11, which provides information on the Brazilian Social Security and labor market as awhole for selected years (1992/1997/2002/2007/2012), there was an increase in formal ties to Social Securityamong the workforce. An expansion of the population collecting benefits is also noticeable, concomitant with acontraction of the population excluded simultaneously from the labor market and social security benefits.

Figure 1. Brazilian population according to occupational and social security status—1992/2012.

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Figure F22 presents the age/gender pyramid further disaggregated by occupational/social security status. One canclearly see the discrepancy in the distribution between the low level of formalization with respect to social security(few individuals in the formal labor market able to make contributions—see comments on Figure F33 for the rate offormalization by sex and age group), but among the elderly population, coverage is almost universal (mainlyamong men see comments on Figure 3 for the probability of receiving pensions by sex and age group). Amongwomen, the population not covered is composed basically of the main beneficiaries’ spouses, eventually entitledto survivors’ pensions. As such, the system has some loopholes: it allows people to become beneficiaries withouta correspondingly lengthy contribution period (15 years of contribution is required, but it was only 5 years up to the1988 Constitution). It is also worth noting that there is a problem in Brazil with regard to measuring female activity,particularly in rural areas, although the problem also occurs in urban settings. This is mainly because women’swork is not valued as highly as that of men, and thus, it is not accurately reported during interviews. Often, awoman’s work is restricted to the region around the house, including the plot of land used for subsistence, andit is not associated with economic activity. Individuals working with family members with no salary, individualsworking in self-construction and for their self-consumption, are included in category (ii), which illustrates thesesituations.

Figure 3 presents the distribution of occupational/social security status for a given combination of 5-year agebracket and sex. The highest proportion of formal workers (contributors to social security) occurs in the age bracketfrom 25 to 29 years of age for both sexes, that is, around 55 per cent for men and 42 per cent for women. The eco-nomically active population is proportionally higher among men than women. On the other hand, in the agebrackets above 60 years, over 95 per cent of men and 80 per cent of women receive some kind of benefit (theworkers’ categories with no pay at the upper end of the age scale are also recipients of social security benefits). Thisfigure confirms the discrepancy between the low level of formalization with respect to social security at workingages and the high coverage of benefits at older ages.

Urban/rural population

Figure F44 presents the data on the social security and labor market for the Brazilian urban and rural population,respectively, the left and the right of the graph, for the same years shown for total population. The same pointscan be made here: an increase in formal ties to social security among the workforce, an increase in benefitscollected, and a reduction in the population excluded both from the labor market and social security benefits.

Figure 2. Age/gender distribution of Brazilian population according to occupational and social security status—2012.

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As in the case of the total population shown in Figure 3, the distribution of occupational/social security status foreach gender and age group of the urban and rural population is quite diverse. The urban population is more formalizedwith respect to social security than the population as a whole, and the maximum for the formal activity rate is attainedat the same age bracket (25 to 29 years old) but with higher values: 60 per cent for men and 46 per cent for women. Theuniversality of coverage for older age brackets is also noticeable, bearing in mind that part of this must be SA.

For the rural population, Figure 4 does not show a steady increase in the population contributing to the systembut shows that the population not working and not receiving benefits was steady from 2002 onwards. There hasbeen a continuing increase, however, in the number of people receiving benefits. The rural population is lessformalized with respect to social security than the urban and total populations, the other two groups alreadydescribed. The maximum of the formal activity rate is attained at a younger age bracket (20 to 24 years of age) thanamong the urban population: 29 per cent for men and 11 per cent for women. At the upper end of the age scale, onecan notice that benefit coverage is almost universal, this including SA.

Figure 3. Distribution of the Brazilian population according to occupational and social security status by age/gender—2012.

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Figure 4. Distribution of the total Brazilian urban population according to occupational and social security status—1992/2012.

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PROSPECTIVE TRAJECTORY

If the current social security situation is already one of indebtedness, its future is even more bleak because of thepressure put on it by the aging population. The broad age group population distribution illustrated in Figure F55shows, according to IBGE projections (IBGE, 2013), the growth of the elderly contingent (defined by the Brazilianlegislation as the population group 60 years old and over) as compared with the other population groups (children:population below 15 years old and population in active ages): the proportion of older age groups within the popu-lation will reach almost 20 per cent by 2030 and 34 per cent by 2060.

Figure F66 shows pensioners as observed up to 2011 in population and as a percentage of the total population,respectively. The projection under the present legislation is shown up to 2030. The 18 million social securitypensioners (21 million if SA is included) in 2002 expanded to 26 million (30 million with SA) in 2011 and, accord-ing to the projection, may reach 49 million in 2030 (57 million with SA).

Figure F77 presents expenditure and revenue as observed up to 2011 and the projection for the years up to2030. This shows revenue continuing below expenditure throughout the projected period, and the gapincreasing over time.

Alternative reforms

This section lists a set of parametric reforms that could be adopted within the existing broad structure and appraisestheir potential impacts. In terms of the economic/demographic hypotheses, we assume the following: (i) GDP andminimum wage real growth at 2 or 4 per cent; (ii) age/sex specific activity rates and level of formalization will beconstant; (iii) age specific fertility and mortality rates will come in according to the IBGE, 2013 projection, includ-ing an improvement in life expectancy at birth (IBGE, 2013); (iv) probability of accessing benefit is constant overtime as a function of gender and age; (v) age/sex specific mortality rates of pensioners are the same as those of thepopulation as a whole; and (vi) salaries and benefits are inflation indexed, but the average benefit can present a realincrease because in some groups of pensioners, those receiving the minimum benefit (indexed to the minimumwage) are in a majority.

In this model, the number of pensioners (with the exception of survivors’ pensioners) are updated annually bycorrecting the previous year’s population using the corresponding mortality rate and adding in new beneficiaries.The equation for old age retirement (other benefits are treated accordingly) is

Figure 5. Social insurance and assistance benefits according to broad age groups, Brazil, observed and projected—2002/2030.

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OAtþ1 ¼ OAt þ NOAt;tþ1� �

* 1�MROA;t

� �;

where

OAt denotes OA pensioners at the beginning of year tNOAt,t+ 1 denotes OA pensioners starting between beginning of year t and year t + 1MROA,t denotes OA pensioners’ mortality rate in year t. The mortality rate for each age/sex group and year is

calculated as the weighted average of the age/sex specific mortality rates, as defined by IBGE in theprojection.

Expenditure is also calculated annually as the product of the number of pensioners and the average benefit value.Average benefit values are updated annually following the impact of the real growth of the minimum wage on the

Figure 6. Social insurance and assistance benefits according to broad age groups, Brazil, observed and projected—2002/2030.

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Figure 7. Revenue and expenditure on social insurance and assistance benefits according to broad age groups, Brazil, observed and projected—2002/2030 (as % of gross domestic product, growing at 2% per annum).

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benefit value distribution. Figure F88 shows the cumulative distribution of benefit values in minimum wage bracketsup to 50 minimum wages: the first bracket represents 1 minimum wage, the second between 1 and 2 minimumwages and so on. For example, 20 per cent of seniority benefits have values of exactly one minimum wage, while90 per cent of old age benefits are of the same amount. Among seniority pensioners, 40 per cent receive less thantwo minimum wages and 71 per cent less than three minimum wages. Seniority pensioners are less affected byminimum wage minimum increase than the old age pensioners who are strongly affected.

Based on previous academic work (Giambiagi et al., 2004, Giambiagi, 2007) and our own studies, a number ofalternatives for reform have been discussed extensively, including the following: (i) harmonizing rural and urbanold age benefits (5 more years for rural workers—base 2); (ii) harmonizing men’s’ and women’s’ eligibilityconditions (5 more years for females—base 3); (iii) differentiating eligibility for old age and SA (5 more yearsfor SA—base 4), which does not affect social insurance benefits; (iv) setting a minimum age for seniority pensions(60 years for women and 65 for men—base 5); (v) setting more stringent conditions for survivors’ pensions(defining a minimum age for eligibility and excluding multiple benefits—base 6); and (vi) unpegging the benefitfloor from the minimum wage (base 7).

Figure F99 shows the projection for the number of pensioners under the present set of rules (base 1) and thealternatives just described (the blue lines refer to social insurance only and the green lines include both socialinsurance and SA). Alternative (i) (harmonizing rural and urban old age benefits—base 2) would have an impactof close to 9 per cent on the number of pensioners by 2030. Alternative (ii) (harmonizing men’s and women’seligibility conditions—base 3) would produce a further reduction leading to an accumulated 17 per cent reduction.Alternative (iii) (differentiating eligibility for old age and SA—base 4) would diminish the total by another 4percentage points. Alternative (iv) (setting a minimum age for seniority pension—base 5) combined with all theprevious parametric reforms would entail a reduction of 30 per cent in total. Finally, alternative (v) (setting morestringent conditions for survivors’ pensions—base 6) would diminish an extra 6 points bringing the overallreduction to 36 per cent. The best option of all, namely, applying all of these combined parametric reforms, wouldlead to a near stabilization of the pensioner population as a percentage of the population as a whole. It is worthnoting that alternative (vi) only affects expenditures and not the pensioner population.

Figure F1010 presents the costs corresponding to the projections just described, using a GDP growth of 2 per centper annum. The combination of all the alternatives would entail a reduction of 63 per cent in total benefit expen-ditures by 2030, not enough to level expenditure as a percentage of GDP, but enough to curb mounting financingneeds. The last alternative, which would have the greatest impact, involves dissociating the minimum benefit

Figure 8. Cumulative distribution of benefit values per group of benefits, according to minimum wage brackets.

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from the minimum wage. Under current law, GDP growth is incorporated into the minimum wage with a lagof 2 years.

Changes in GDP growth are the most important parameter likely to affect expenditure projections. To estimatethe impact of this parameter, we recalculated the expenditure projections with a more optimistic perspective, underthe assumption of a GDP growth of 4 per cent per annum. This calculation provides a sensitive analysis.

Figure F1111 presents the costs corresponding to the 4 per cent assumption as a percentage of GDP. Thetrajectory with no parametric changes is also upward but reaches values hard to pay in the long run, 29per cent. On the other hand, the combination of all the alternatives proposed would entail a slightly largerreduction in total benefit expenditures by 2030, 65 per cent, enough to stabilize expenditures as a percentage

Figure 9. Total social insurance and social assistance benefits under alternative rules, Brazil, observed and projected—2002/2030 (as %of the population).

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Figure 10. Total social insurance and assistance benefits expenditure under alternative rules, Brazil, observed and projected—2002/2030 (as %of gross domestic product, growing at 2% per annum).

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of GDP. Although projected figures differ under the two alternatives, the impact of the proposed measures inthe system is rather similar.

FINAL COMMENTS

Social security reforms are a controversial topic in any country where the subject appears, be it in Japan, Germany,or the USA, or in any Latin American country. It requires discussions about concepts of social welfare, individualand labor rights, and fiscal austerity and financial sustainability. Local politics play a big role in creating thepreconditions to change the system. In order to promote any change, some kind of political cohesion or coalitionis required. In Brazil, social security regulation is strongly tied up by constitutional rules, and it is more difficulty tochange than an ordinary law. Furthermore, there are myriad political parties, leading to political fragmentation thatobstructs consensus in the Legislative. The presidential coalition system in place also hinders political partnershipsand creates a scenario of endless negotiation.

In Brazil, benevolent social security benefits that award expensive benefits are not sustainable in the long run.The social security debt may jeopardize future generations causing social, political, and economic instability. Theparametric reforms proposed here provide possible solutions to a problem caused by early retirement packages,pegged benefit adjustments, high floor pensions, and the lack of long periods of contribution.

As distinct from most other Latin American countries, which have adopted policies involving a move towardindividual capitalization account systems, Brazil has pursued a parametric reform approach, maintaining the publicsector role as the main social security provider. On the one hand, this political choice has meant a more sociallyagreeable change to the system in place; on the other hand, the Brazilian parametric reforms to date have beenheavily criticized as being a palliative approach, which neither challenged the social security paradigm in placenor contributed a sufficient decrease in the system’s indebtedness in the long run. Yet, the Brazilian parametricapproach to social security system reform seems to offer a way to gradually address the needed changes to entitle-ments, as well as identify a means to create additional resources, without radically privatizing the whole system.Undeniably, such an approach also requires regular adjustments, according to the changing characteristics of thepopulation.

Parametric reforms, even with constant system analysis and performance assessment, do not require radicalpolitical and social re-alignment. For example, for deep changes in the social security system, such as a move toprivate DC accounts, it would require constitutional reform and political parties’ realignment.

Figure 11. Total social insurance and assistance benefits expenditure under alternative rules, Brazil, observed and projected—2002/2030 (as %of gross domestic product, growing at 4% per annum).

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The Brazilian political and societal system is not conducive to such deep changes, leaving aside technicalconsiderations and potentially promising projections. The constitutional nature of the constraint is compoundedby political considerations. Given wide political party fragmentation and a history of opposition to any governmentproposals to implement changes, the federal government must make concessions to guarantee alliances and gainnecessary legislative support. Also, any reform would require social support from different stakeholders, such asunions, associations, and smaller political parties to cite a few. Although there seems to be a growing convergenceabout the need to create a sustainable system, some of these stakeholders are yet to acknowledge the intergenera-tional burden associated with current arrangements and so limiting the extent of reform that is possible in the shortterm.

With respect to party politics, the last two decades saw the polarization between the Social DemocratParty and the Labor Party, respectively, personified in the Cardoso (1995/2002) and Lula (2003/2006)governments. Both administrations have tried to address the problem in complementary ways, but both havebeen unable to overcome oppositional groups. In sum, these political and social aspects have a direct impacton any reform agenda.

This study, and the models presented, shows that parametric reforms have the potential to meet the financialsustainability challenge, but the more stringent measures involved will still require considerable political courageand skill. The radical reforms carried by the neoliberal regimes, based on the eradication of previous systems, haveso far shown poor results in terms of avoiding debt, creating sustainability, and promoting an all-encompassing andbalanced social security system (Orszag and Stiglitz, 2001).

Essentially, the system in place yields a political and economic interdependence that would be hard todismantle, despite concerns about its sustainability. This article provides evidence that some alternativereforms, parametric in nature, could be adopted, without upsetting this interdependence while delivering verypositive impacts in terms of an economic/demographic equilibrium. We show, for example, if a parametricreform model were to be applied, comprising more stringent measures to the whole contingent of workers,it could yield more balanced results Q6.

The simulations presented here show that postponing the eligibility age can affect positively the social securityaccounts, particularly when seniority benefits are eliminated. Setting more rigorous conditions for survivors’pensions would, with other reforms, offer an overall reduction in the number of pensioners of 8 per cent. In termsof costs for the system, if the government were to combine all the alternatives identified by the authors, it wouldentail a reduction of 63–65 per cent in total benefit expenditures by 2030. Although these reforms would not reduceoverall expenditures (as a percentage of GDP), it would definitely curtail its current growth, and under an optimisticscenario (4% GDP growth) would stabilize expenditures.

Finally, however gradual and incremental reform in Brazil might be, it will attract some level of resistance. Thechallenge is to create balance in such way that guarantees adequate coverage in the present, sustainability in thefuture, and at the same time, resources to deal with unexpected events. Q7

SOCIAL SECURITY ACRONYMS AND TECHNICAL TERMS

Aposentadoria Retirement.CLT Labor Laws Estatute.CNT (Conselho Nacional do Trabalho) National Labor Council, a federal Government office.Dataprev Data processing supporting agency.Fator Previdenciário Social Insurance Factor Law.FGTS (Fundo de Garantia do Tempode Serviço)

National Retirement Fund.

Funabem (Fundação Nacional doBem-Estar do Menor)

National Foundation for the Welfare of Children and Teenagers.Agency caring for abandoned and criminal juveniles.

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Funrural (Fundo de Assistênciaao Trabalhador Rural)

Rural Worker Assistance Fund.

IAPB (Instituto de Aposentadoriae Pensões dos Bancários)

Bank Sector Employee Fund.

IAPM Instituto de Aposentadoria e Pensões dos Marítimos, the firstsectorial fund, which covered all individuals employed in theBrazilian Merchant Marine.

IBGE Central Brazilian Statistical Office.INPS (Instituto Nacionalde Previdência Social)

National Social Insurance Institute.

INSS National Institute of Social Security.ISSB (Instituto de Serviços Sociaisdo Brasil)

Brazilian Social Service Institute.

LBA (Legião Brasileira de Assistência) Brazilian social assistance services.MPAS Ministry of Social Assistance.PIB GDP (Gross Domestic Product).PNAD (Pesquisa Nacional por Amostrade Domicílio)

Household survey conducted annually by the Central BrazilianStatistical Office (IBGE)

RGPS General Regime for Social Security.RJU Unified Legal Regime.SSS Social Security System.U Q8SSB Unified Social Security Budget.

REFERENCES

Q9Beltrão KI, Sugahara S. 2005. Brazilian population and the social security system: reform alternatives. Texto para discussão n° 1067. IPEA: Riode Janeiro.

Q10Beltrão KI, Sugahara S, Oliveira FEBO. 2002. Population and Social Security in Brazil: An analysis with Emphasis on Constitutional Changes.Texto para discussão n° 862. IPEA: Rio de Janeiro.

Q11Beltrão KI, Sugahara S, Oliveira FEBO. 2004. Rural population and social security in Brazil: An analysis with emphasis on consti-tutional changes. International Social Security Review 57(4): 19–49. Q12BRASIL, Decreto nº 16.027, de 30 de Abril de 1923. Crêa oConselho Nacional do Trabalho. Disponível em: http://www2.camara.leg.br/legin/fed/decret/1920-1929/decreto-16027-30-abril-1923-566906-publicacaooriginal-90409-pe.html

BRASIL, Decreto-Lei nº 7.526, de 7 de Maio de 1945. Lei Orgânica dos Serviços Sociais do Brasil. Available at: http://www2.camara.leg.br/legin/fed/declei/1940-1949/decreto-lei-7526-7-maio-1945-434158-publicacaooriginal-1-pe.html

Q13BRASIL, Lei nº 4.130, de 28 de agosto de 1962. Dá nova redação dos §§ 1° e 4° de art. 32, da Lei nº 3.807, de 26 de agosto de 1960 (LeiOrgânica da Previdência Social). Available at: http://www010.dataprev.gov.br/sislex/paginas/42/1962/4130.htm

Q14BRASIL, Lei Complementar nº 11 de 25 de maio de 1971. Institui o Programa de Assistência ao Trabalhador Rural, e dá outras providências.Available at: http://www010.dataprev.gov.br/sislex/paginas/43/1971/11_2.htm

Dataprev. Aeps InfoLogo. Base de Dados Históricos da Previdência Social. Available at: http://www3.dataprev.gov.br/infologo/ [01/04/2014].Q15Galdino MAM. Fevereiro 2011. A pensão por morte no direito previdenciário brasileiro. Monografia de final de curso – Direito, UNB.

Giambiagi F. Oct./Dec. 2007. Reforma da previdência: o encontro marcado. Rev. Econ. Polit. 27(4): São Paulo. Q16Giambiagi F, Mendonça JLdO, Beltrao KI, Ardeo VL. December 2004. The Brazilian social security: what has been done and what should bestill reformed? Pesquisa e Planejamento Economico 34(3). Q17

IBGE. 2013. Projeção da população do Brasil por sexo e idade para o período 2000–2060. Rio de Janeiro. Available at: ftp://ftp.ibge.gov.br/Projecao_da_Populacao/Projecao_da_Populacao_2013/nota_metodologica_2013.pdf [01 setembro de 2013].

Q18IBGE. Características da população e Domicílios do Censo Demográfico de 2010. Available at: ftp://ftp.ibge.gov.br/Censos/Censo_Demografico_2010/Resultados_do_Universo/xls/Brasil/tab1_1_1.zip [14 September 2012]

Q19Ibrahim FZ. 2009. Curso de direito previdenciário (14ª Edição). Impetus: Rio de Janeiro.Q20ILO. Conventions. Available at: http://www.ilo.org/dyn/normlex/en/f?p=1000:12000:0::NO:::Q21MPAS. 2007. Histórico da Previdência. Available at: http://www.mpas.gov.br/conteudoDinamico.php?id=64

Oliveira FEBO, Beltrão KI, Ferreira MG. Agosto 1997. Reforma da Previdência. TD 508. IPEA: Rio de Janeiro.Q22Oliveira FEBO, Beltrão KI. 2000. The Brazilian Social Security System. Texto para discussão n° 775. IPEA: Rio de Janeiro.

Orszag PR, Stiglitz J. 2001. Rethinking pension reform: ten myths about social security systems. New Ideas About Old Age Security: TowardSustainable Pension Systems in the 21st Century.

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Social Security Administration/Office of Retirement and Disability Policy/Office of Research, Evaluation, and Statistics. March 2011a. Socialsecurity programs throughout the world: Asia and the Pacific, 2010. SSA Publication No. 13–11804.

Social Security Administration/Office of Retirement and Disability Policy/Office of Research, Evaluation, and Statistics. August 2011b. Socialsecurity programs throughout the world: Africa, 2011. SSA Publication No. 13–11803.

Social Security Administration/Office of Retirement and Disability Policy/Office of Research, Evaluation, and Statistics. February 2012a. Socialsecurity programs throughout the world: the Americas, 2011. SSA Publication No. 13–11804.

Social Security Administration/Office of Retirement and Disability Policy/Office of Research, Evaluation, and Statistics. 2012b. Social securityprograms throughout the world: Europe, 2012. SSA Publication No. 13–11801.

Q23Sousa JP. 2002. 80 anos de Previdência Social: a história da Previdência Social no Brasil—um levantamento bibliográfico documental eiconográfico. MPAS: Brasília.

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