Opinion – Pablo Acosta: Sustainability of state pensions is still a challenge

The social security system consumes a disproportionate share of public spending in Brazil. Particularly onerous is the social security system for public servants. Although it covers only 9% of Brazilians who are entitled to social security, spending on public servants is equivalent to more than 30% of the country’s total social security spending. The problems originate with the great wave of civil servants hiring after the enactment of the 1988 Constitution, and the generous benefit packages granted to civil servants at that time still impact the fiscal and political sustainability of state governments.

Retirement is a benefit, not a salary. But two unique attributes of this pension benefit blur this distinction and make the pension scheme especially onerous. The pension system was established based on the integrality and parity of the benefit. Integrality guaranteed that the retirement and death pension benefit corresponded to the entirety of the last salary of the civil servant when he was an active worker. Parity meant that retirees and their dependents were entitled to all salary increases associated with the position from which the former employee retired.

During the first decades, the impact of this generous provision of the benefits package on the finances of subnational governments was not significant, as the number of retirees was still low. The beginning of the 21st century, however, marked a rapid maturation of these pension schemes, particularly when the big wave of hires translated into a big wave of retirements. Thus, the ratio of contributors to beneficiaries has decreased significantly. The phenomenon has damaged subnational finance, compromising service provision and investment, a trend that is expected to continue for at least another two decades. A recent World Bank report reflects on the problem and points out ways to move towards a more sustainable path.

The 2003 pension reform abolished integrality and parity, but only for those who entered public service after the reform, and crucially, it did not include military personnel. This introduced a huge inequality of treatment in the public service, with strong retirement subsidy to older workers. As a consequence, the stabilization of the growth of social security expenses started to be glimpsed only in 2035-2040.

The Fiscal Responsibility Law, together with other fiscal measures and pension reforms, has managed to curb increases in personnel and current expenditures. But this is no substitute for long-term fiscal prudence. For example, states in the Midwest and North, as they have pension systems that are still young, were less affected by the Fiscal Responsibility Law and were then allowed to significantly expand the wage bill in the 2000s. Today, they spend around 40% of state revenues on wages alone, substantially more than older states spend. This signals problems further down the road, when wages will turn into unsustainably high pension benefits.

It is also increasingly evident that policy reforms aimed at controlling the growth of the payroll and pensions at the macroeconomic level have proved ineffective. This requires a closer examination of issues that contribute to the growth of these expenditures. In addition, the multiplicity of statutes for state and municipal civil servants (today around 2,154 regimes belonging to different entities) makes inspection and regulation complex. The introduction of more sensible, efficient and fair human resources policies is necessary, with greater transparency and responsibility in rendering accounts to society.

Most states have met most of the mandatory requirements of the 2019 federal pension reform. The biggest financial impact, however, comes from items labeled as optional adoption by states. The expansion of the contribution base for the retirement of civil servants, for example, an item with the greatest potential for immediate reduction of the social security deficit, has been slowly adopted. Only seven states (Alagoas, Ceará, Distrito Federal, Goiás, Mato Grosso do Sul, Rio Grande do Sul, and São Paulo) have so far successfully reduced the exemption from contribution to a minimum wage, following the example of the federal government. In general, the adoption of optional items made available to states and municipalities was very low, but their adoption is absolutely necessary. Even with all the optional measures adopted, most states will not be able to achieve fiscal sustainability.

An analysis of the country’s social security situation also indicates some administrative measures that can contribute to fiscal improvement. The consolidation of management and the implementation of audits of the social security records of the three branches of government demonstrate positive results in states that have already adopted this measure. There is also a pressing need for greater transparency, better governance and policy-maker-friendly technology solutions. The requirement that all public employers declare the individual data of their employees on eSocial, a federal platform, offers an advance in the systematization of information in a common format, as is already done by employers in the private sector.

In the future, it may be easier to find lasting solutions by coordinating fiscal, human resources, governance, information management, investment management and pension policies as integral parts of a single system.

This column was written in collaboration with World Bank colleagues Asta Zviniene and Rovane Battaglin Schwengber, authors of the World Bank report “Welfare regime for state and municipal civil servants in Brazil: context, history and lessons from reform”.