Professional Documents
Culture Documents
The opinions expressed and arguments employed herein do not necessarily reflect the official views of the Brazilian National Treasury Ministry of Finance
Agenda
1.
Social Security Systems and Public Policy Brazilian Demographic Profile and Future Trends Social Security and Social Development. Social Security and Fiscal Policy in Brazil Brazilian General Social Security Regime (RGPS) Public Sector Social Security Regime (RPPS) Policy Recommendations
2.
3.
4.
5.
6.
7.
High Transaction Costs: Private firms run in a higher administrative costs (including substantial commissions for the salespeople) to provide retirement annuities than public sector. US Department of Labor (1998) estimates in 1% administrative cost of public sector in providing social security against 6% of private insurances companies. Inability of Private Markets to Insure Social Risks: Private firms are unable to provide guaranties against social risks in comparison to the Government. Gov. is in a position to meet its obligations by raising taxes or engaging in risk sharing across generations. Adverse Selection: Life insurance companies are interested in people who will live longer. Retirement annuities companies look for people who will die sooner. In practice, it is costly to identify those risks (due to adverse selection of people). Gov., however, can force all individuals to purchase the insurance. In doing so, it is engaging in some distribution: good risks are paying more and bad risks are paying less. Moral Hazard: This failure is faced by both public and private sector. It happens when individuals have no incentives to reveal their real abilities for a specific situation. If you guarantee individuals 100% retirement annuities after certain age, even people who are productive and healthier to work will have no incentives to continue working. Social Security is a merit good!!!: It is a paternalistic idea that government should require individuals to save money for their benefits in the future (for their own good). In fact, social security systems reduces poverty among elders and the beneficiaries are not only the recipients, but also their children and sons, who otherwise would have to support them or felt guilty in not doing so. * Stiglitz (1999)
Increase in Longevity: Brazilian populations life expectancy is increasing 0,36 yrs per year. Reasons for Reforms (not only fiscal imbalance justifies reforms in the System): Fiscal Imbalance: It is the essence. It means the financial sustainability of the system. Adverse Effect on Savings: Provision of social security reduces individuals need to save, thus
investment and productivity growth (Long Run Growth). Policy makers must design mechanisms (in reforms) to correct incentives and avoid this problem.
Adverse Effect on Labor Supply: It induces individuals to retire earlier. Reform should reward
workers who keep their labor activities after retirement age. Brazilian Fator Previdenciario works in this direction.
Low (perceived) Rate of Return: Pay-as-you-go does not provide a competitive rate of return as
regular investments. Complementary private system can be encouraged in order to achieve this goal.
Inequities: Need of transparency in systems: (i) subsidies, (ii) beneficiaries, (iii) impact over
poverty and income distribution (as a regular social program).
Age
Age
Brazilian population is getting old fast. In 2010, the 65 yrs old or more group represented 6,8% of the population. It is projected to reach 22,7% in 2050 (3 times more). Between 2020-25 (in 10 years!), the share of working age group will start to decline. After 2035, there will be more elders than children in Brazil.
Brazilian Population Distribution by Age Group (1975 2055)
Inverse of the dependence ratio represents the numbers of working age people per elder or youth. This is a very important indicator for the financial sustainability of a payas-you-go retirement systems such as the Brazilian one. Nowadays, there are 10 working age people per Elder. In 2050 there will be only 3! This trends means that the Brazilian Social Security will face real increase in the expenditures (quantity) and smaller revenue collection base => Higher Deficit!.
Brazilian Demography: Inverse of the Dependence Ratio Youth and Elders (1980 2050)
10
11
Year
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
BRAZIL 19.2 18.9 18.6 18.2 18.6 19.4 20.3 21.3 22.5 23.9 25.3 27 29 31.3 33.6 35.8 37.9 39.9 41.9 43.8 45.6
South America 20.4 20.1 19.7 19.3 19.6 20.2 20.9 21.7 22.7 23.9 25 26.5 28.2 30 31.9 33.8 35.6 37.3 39.1 40.6 42.1
North America 29.8 29.9 29.3 28.1 27.9 28.7 30 31.5 32.8 34 35.3 36.2 36.9 37.5 38.3 39.1 40 40.7 41.3 41.7 42.1
Europe 29.7 30.1 30.7 31.1 31.8 32.1 32.7 33.7 34.8 36.1 37.6 38.9 40.2 41.5 42.7 44 45.3 46.4 46.9 46.8 46.6
Asia 22.3 21.5 21 20.1 19.7 20.2 21.1 22.1 23 24.3 25.8 27.4 29 30.4 31.9 33.5 35.2 36.8 38.1 39.3 40.2
Africa 19.2 18.9 18.4 18 17.7 17.5 17.5 17.4 17.5 18 18.5 19.1 19.7 20.4 21.2 22.2 23.4 24.6 25.9 27.2 28.5
Oceania 28 27.6 26.9 25.6 25.3 25.6 26.6 27.7 28.9 30.1 31.3 32.2 33 33.9 34.7 35.5 36.4 37.2 37.9 38.5 39.1
Source: Population Division of the Department of Economic and Social Affairs of the UN, World Population Prospects: The 2008 Revision
12
13
** Rural Workers; *** Social security beneficiaries who is still working, but not paying for the System. Source: PNAD/IBGE 2008 in SPS/MPS (2009)
14
Social Security Coverage: Evolution of 60 years Old or More Elders who receive social security benefits
15
General Social Security It includes retirement benefits (age, length of contribution, and Regime (RGPS) invalidity), survivor pensions, temporary aids, etc. Public Service Regime (RPPS) Social Assistence Programs (LOAS and RMV) It includes public servants retirement benefits and survivor pensions from Federal, State and Municipal Governments It gives one minimum wage benefit to +65 yrs old elders whose income is less than 1/2 minimum wage (formal or informal sector) or to families with a physically disabled member whose income is less than 1/2 MW. Benefit given to unemployed formal sector workers for a period of 3 to 5 months long Annual benefit (one monthly minimum wage) given to all formal workers whose income is less than 2 MWs Monthly conditional cash transference given to poverty-stricken families found in a situation of poverty (formal and informal sectors) in a condition of school attendance (5 - 17 yrs old kids/teens) and vaccination (0 - 5 yrs old kids).
4.3% GDP
3.1 millions
0.60% GDP
1.6 millions
Unemployment Security
0.62% GDP
7.3 millions
Abono Salarial
0.25% GDP
15.5 millions
Bolsa Familia
0.42% GDP
11.1 millions
16
!!!However!!! Public Service Regime (alone) creates a very negative impact on income distribution. According to World Bank (2005), 50% of the total benefits are given to the richest 20% of the population and only 10% to the poorest 20%.
Income Inequality (Gini Index) and the Social Security System in Brazil
2003
2004
2005
2006
2007
2008
Violet line represents the observed poverty line and the light violet line represents a estimated poverty line considering the nonexistence of social security benefits. Social Security system has an important role in poverty reduction in Brazil mainly among the oldest segments of the population. Young age groups poverty reaches almost 50%!!! Observation: this information does not evaluate the efficiency of poverty reduction comparing Social Security system to other social programs.
Percentage of Population Earning less than Minimum Wage (Poverty) considering Social Security Income (2008)
Is raising Social Security Benefits Value (Minimum Wage) an Efficient Way to Combat Poverty?
Poverty Level: Total Poverty = 22% of the population, Extreme Poverty = 8% of population. Most beneficiaries are non-poor families with no children. !!!97.8% of extreme poor families are excluded of the program and 80% of them have at least 1 child!!!
Social Security Benficiaries: Distribution of Families According to Poverty Level and Numbers of Children (2008)
Families Total Numbers Families Beneficiaries of Social Security No Children 1 Child 2 Children 3 Children 4 or More Children Families Non-Beneficiaries of Social Security No Children 1 Child 2 Children 3 Children 4 or More Children
Source: Giambiagi and Tafner (2010) based on PNAD 2008
18
Minimum Wage 2008: R$ 415. Definition poverty line 2008: per capita income = R$ 200. Extreme poverty = R$ 100.
Non-Poor 46.926 mi 35.5% 80.0% 14.1% 4.5% 1.1% 0.3% 64.5% 47.9% 32.2% 15.8% 3.4% 0.7%
Poor Total Extreme Poor 12.350 mi 4.800 mi 9.0% 25.8% 28.1% 23.1% 14.1% 8.9% 91.0% 17.2% 30.2% 28.0% 14.9% 9.7% 2.2% 11.2% 13.2% 23.8% 24.5% 27.2% 97.8% 19.7% 29.2% 22.9% 14.8% 13.4%
Social Security Benefits Value Adjustment (Minimum Wage Increase) 19 vs. Bolsa Familia Expansion
Simulation proposed by Giambiagi and Tafner (2010): In 2009, the government increased the minimum wage (lowest benefits) in 5.8% + inflation and benefits above the minimum wage was adjusted by inflation (5.9%) Base Scenario. If government adjusted the value of all benefits just by inflation and re-distributed theses savings to the Bolsa Familia Program, what would be the impact over extreme poverty? Answer: We could have reduced the extreme poverty 13% more than the current minimum wage policy!
Simulation: Increase in the Social Security Benficiaries VS. Expansion of Bolsa Familia Program
Cost in 2009 (R$ mi)
(i) Real Increase Adjustment for the Minimum Wage and (ii) Inflation to the others Adjustment equal to Inflation for all beneficiaries Adjustment equal to Inflation (all beneficiaries) and redistribution of the remaining balance to the Bolsa Familia
Benefit Type
Retirement Pensions Total Social Security Expansion Bolsa Familia Total Spending % Poverty % Extreme Poverty % Change Extreme Poverty
Source: Giambiagi and Tafner (2010) based on PNAD 2008
20
21
Source: OECD Pensions at a Glance 2009 and STN (2009) * Brazilian Data include RGPS and RPPS (Federal, State, Municipal Governments) and exclude LOAS. ** OECD countries data include in kind (non-cash) benefits (eg. housing) and mandatory private.
22
Dependence Ratio (in the Graph below) = proportion of 65 yrs old population in relation to the 15 - 64 yrs old population. Brazil is an outlier! Its spending is relatively much higher to the population profile compared to other countries.
International Comparison: Expenditure on Social Security System vs. the Dependence Ratio
Source: Rocha and Caetano (2008) based on OECD, UN, World Bank and other Domestic Sources.
23
Social Security System is the most important sector of public spending in Brazil. It took 31% of the public sector budget in 2008. It represents more than 2 times the spending on Education. Looking on the bright side Reforms in the Social Security System can raise considerable amount of resources to be re-allocated in other important development areas such as infrastructure and human capital.
Brazilian Public Sector Expenditure in 2008 (By Sectors)
Others, 8.1% Defens e, 2.2% Labor/Work, 2.4% Urbanism , 3.4% Social Assistance, 3.7% Trans portation, 3.9% Public Security, 4.0% Judiciary, 4.9% Social Security, 30.9%
Education, 14.3%
24
Social Security Revenues come from payroll taxes. High Payroll taxes is an argument used by some Brazilian companies (sectors) to justify the Brazilian international lack of competitiveness and also one of the reasons (incentive) for the high rate of economys informality and low rate of employment.
International Comparison: Taxation for the Social Security System Funding
Source: Rocha and Caetano (2008) based on OECD, World Bank and other Domestic Sources.
25
7,00%
6,50%
% GDP
6,00%
Expenditure: General Social Security Regime spending increased from 5% to 7.2% in the last 12 yrs.
5,50%
5,00%
4,50%
4,00%
Public Service Retirement Regime (RPPS) spending has presented a more stable trend in relation to the GDP, around 3.7%, but it is still very high compared to other countries.
% G DP
2,0% 1,5% 1,0% 0,5% 0,0% 2002 2003 2004 Federal 2005 State 2006 Municipal 2007 Total 2008
26
5,0% 4,0% 3,0% 2,0% 1,0% 0,0% Transferences Payroll General Social Other Current Total Primary GDP to States and Security and Capital Spending Source: OECD Economic Survey: Brazil (2009) Municipalities Regime Expenditures
% GDP
5% 4% 3% 2% 1% 0%
1997
Payroll
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Others
27
AVERAGE COST (R$) Beneficiaries Rural 465,49 464,73 464,83 464,51 463,69 467,53 675,12 463,92 492,14 509,04 255,91 497,80 473,93 438,25 469,39 484,51 507,16 255,64 509,37 509,37 509,86 509,17
TOTAL GENERAL REGIME BENEFITS Social Security Contributory Retirements by Age by Invalidity by Length of Contribution Suvivor Pension Temporary Benefits Sickness Benefits Partial Invalidity Imprisionment Benefit Maternity Benefit Others Labor Accident Insurance Retirement by Invalidity Suvivor Pension Sickness Benefits Partial Invalidity Supplementary Benefit SOCIAL ASSISTANCE BENEFITS Social Assistance Pension (LOAS) for the Age for the Impaired Lifelong Indemnization Pensions Old Social Assistance Benefit (RMV) for the Age for the Impaired OTHER TREASURY OWED PENSIONS (EPU)
SOURCE: DATAPREV, SUB, SINTESE.
27.391.315 100,00 23.797.123 23.001.212 15.271.522 7.969.178 2.924.627 4.377.717 6.519.953 1.134.766 1.079.919 27.003 27.844 74.354 617 795.911 162.344 126.193 156.638 277.266 73.470 3.583.906 3.261.624 1.572.743 1.688.881 14.616 307.666 79.423 228.243 10.286 86,88 83,97 55,75 29,09 10,68 15,98 23,80 4,14 3,94 0,10 0,10 0,27 0,00 2,91 0,59 0,46 0,57 1,01 0,27 13,08 11,91 5,74 6,17 0,05 1,12 0,29 0,83 0,04
19.172.908 8.218.407 15.718.699 8.078.424 14.952.909 8.048.303 9.441.619 5.829.903 2.586.396 5.382.782 2.492.158 4.363.065 1.003.534 960.436 18.380 24.718 57.962 617 765.790 152.033 121.808 147.522 270.957 73.470 3.443.923 3.261.624 1.572.743 1.688.881 14.616 167.683 38.994 128.689 10.286 432.469 14.652 131.232 119.483 8.623 3.126 16.392 30.121 10.311 4.385 9.116 6.309 139.983 139.983 40.429 99.554
18.752.551.475 100,00 16.906.985.056 16.402.928.952 11.287.632.767 4.153.880.293 1.915.128.577 5.218.623.897 4.149.548.704 926.821.891 899.498.699 10.995.808 16.327.384 38.631.265 294.325 504.056.103 137.054.164 93.424.501 141.364.723 122.215.776 9.996.939 1.831.525.283 1.660.802.374 801.273.614 859.528.760 14.114.778 156.608.130 40.484.661 116.123.470 14.041.136 90,16 87,47 60,19 22,15 10,21 27,83 22,13 4,94 4,80 0,06 0,09 0,21 0,00 2,69 0,73 0,50 0,75 0,65 0,05 9,77 8,86 4,27 4,58 0,08 0,84 0,22 0,62 0,07
14.926.988.640 3.825.562.835 13.152.725.164 3.754.259.892 12.661.869.621 3.741.059.331 8.579.602.219 2.708.030.548 1.657.933.807 2.495.946.487 1.712.936.427 5.208.731.985 3.188.872.609 862.237.844 838.677.494 8.789.074 14.771.276 30.862.625 294.325 490.855.542 132.214.308 91.299.937 136.741.436 120.602.922 9.996.939 1.760.222.340 1.660.802.374 801.273.614 859.528.760 14.114.778 85.305.187 19.871.518 65.433.669 14.041.136 202.192.150 9.891.912 960.676.095 64.584.047 60.821.205 2.206.734 1.556.108 7.768.640 13.200.561 4.839.856 2.124.564 4.623.287 1.612.854 71.302.943 71.302.943 20.613.143 50.689.801
1.192,09 1.193,82
4.449.177 2.070.776
1.365,07 1.365,07
Social Security Deficit: General vs. Federal Public Service 28 Regime Social Security Balance 2009 - Federal Government (% GDP)
Fiscal deficit comparison between the General Social Security Regime and the Federal Public Regime reveals an very unfair situation where 1 mi beneficiaries (Fed. Public Regime) cost (in terms of deficit % GDP) more than 23 mi beneficiaries in the General Regime.
Public Servants Regime (RPPS): 1.0 mi Beneficiaries* Revenues Expenditure Balance General Social Security Regime (RGPS): 23.2 mi Beneficiaries Revenues Expenditure Balance Total Federal Social Security Regime
Reason? Generous rules that Public Service Regime used to enjoy (changed only by 93, 98 and 2003 reforms): (i) no retirement minimum age, (ii) low rate of contribution (4%), (iii) 1988 Constitution public regimes unification, and so on... As public servants contribute for social security based on the full salary (no limit) and they have the retirement benefit based on the last salary (or even active workers salaries!), their average benefits are much higher than the General Regime.
29
30
31
Benefit Salary: It is the basic value used to calculate the retirement benefits. It represents the average of the workers 80% highest salaries since July 1994. Retirement Benefit = Benefit Salary x Social Security Factor. Social Security Factor: It is calculated taking into consideration the age, life expectancy and length of contribution (Women receive 5 yrs contribution bonus):
F=
Proposed Simulation: On average, Brazilians start to work at 20 yrs old. When they reach 60 yrs old, the factor will be 1.02. They will receive 2% more of the Benefit Salary when they retire on the age of 60 yrs. This age is lower than most developed and developing countries apply.
32 Retirement due to Age: It is given to the insured who has a minimum age of 60 yrs for women and 65 yrs for men (Rural workers can retire 5 years earlier). Minimum length of contribution is 15 years. The benefit correspond to 70% of the benefit salary + 1% per year of contribution. Retirement due to Length of Contribution: It is given to the insured who has a minimum length of contribution of 35 yrs for men and 30 yrs for women (Rural workers and teachers can retire 5 years earlier). Minimum age = 53 yrs (men) and 48 yrs (women). The Retirement Benefit correspond to 100% of the Benefit Salary times the Social Security Factor. Transition rules apply for workers who were enrolled in the system before 1998.
Special Retirement: Benefit is awarded to the working insured who exercise activities subject to special conditions that are harmful to their health or physical integrity. According to the risk, length of contribution varies from 15 to 25 years. Disability Retirement: Benefit is awarded to the insured who is totally or definitely incapacitated for the job. Minimum of 12 months of contribution. Retirement Benefit is equal to 100% of the Benefit Salary. Survivors Pension: This benefit is given to the dependants in the case of the death of the insured. The rights for this benefit go as follows: husband/wife/companion; non-emancipated child under 21 yrs and handicapped child of any age. The value correspond to 100% of the retirement benefit that the insured used to receive. LOAS / RMV (Social Assistance Program): This program gives one minimum wage benefit to +65 yrs old elders whose income is less than 1/2 minimum wage (formal or informal sector) or to families with a physically disabled member whose income is less than 1/2 MW.
33 Life Expectancy is a usual argument (from people who are against reforms) to justify differences in the minimum retirement age in Brazil compared to other countries. However, life expectancy at birth is not a good indicator for the social security system (especially in developing countries) because it is biased by the high infant mortality rate. The most appropriate indicator is the life expectancy at age 60 or 65. Brazilian life expectancy at birth increased 18 yrs from 80s to 2005 (men) and 15.8 yrs for women. Life expectancy at 60 yrs increased 3.2 yrs for men and 5.3 for women. Brazil has a considerable difference in the life expectancy at birth indicator compared to European countries, however, at age 60, the differences are just 2 yrs (m) and 3 yrs (w). Thus, life expectancy can not justify significant differences in the retirement age between Brazilians and Europeans countries. They have close numbers and Brazilian society will reach the European demographic profile soon (IBGE projections).
Life Expectancy at Birth and at Age 60 According to Gende for Men and Women
Countries Brazil Life Expectancy at Birth Life Expectancy at Age 60 Average European Countries Life Expectancy at Birth Life Expectancy at Age 60
Source: Giambiagi and Tafner (2010)
Men
1970/80 55.0 16.0 1990 62.9 17.2 2000 66.7 18.8 2005 68.2 19.2 1970/80 60.0 17.0
Women
1990 70.9 20.0 2000 74.4 21.7 2005 75.8 22.3
70.8 17.7
73.9 18.9
75.0 20.2
75.8 21.1
77.5 22.0
79.6 23.2
80.9 24.2
81.7 25.0
34
Length of Contribution Regime represents almost 50% of the retirement expenditure and 30% of the numbers of beneficiaries. The average retirement age in this regime is 54.4 yrs (men) and 51.3 yrs (women). It is almost 10 years younger than the average of OECD countries. Expected retirement lengths in OECD countries are 16 yrs (men) and 21 yrs (women) and in Brazil 23 yrs men and 29 yrs women. In the case of women, it is almost the same length that they have to work (contribute)! Teachers Special Treatment: Teachers retirement age is 5 years less than the regular categories. There is no reasonable justification for this privilege (e.g. health risk or harmful activities). If the Brazilian society believes this is a special (honorable) profession, raise their salaries now! Dont give earlier retirement compensation. Retirement Age: International Comparison
(Average)
35 Equal rights, but equal responsibilities too! In a modern society, it is clear that women have a key role in the labor market. They have better education indicators (on average) and able to share markets jobs in a equal position to the men. Recent data of labor market show that the participation rate of women in the labor force increased from 35% in the 1990 to 50% in 2008 (men reduced from 75% to 70% in the same period). The Brazilian Social Security System should not pay the price of any kind of discrimination against women. 66% of the countries in the World apply same statutory age for men and women. Within the minority group, which Brazil belongs (34% countries who apply different ages), we usually find a difference in less than 5 yrs (the Brazilian rule).
Social Security Systems - International Comparison of Gender Staturory Pensionable Age Rules
Region Number of Countries According to Statutory Pensionable Age by Gender Different Ages Same Ages Percentage of Countries According to Statutory Pensionable Age by Gender Different Ages Same Ages
11 22 20 7 60
23 28 28 36 115
Brazil Applies Diferent Ages Source: Social Security Systems Throughtout the World 2008 and 2009
36
Survivor pensions represent 25% of the social security spending in Brazil. Women represents 88% of the program beneficiaries. The Brazilian survivor pension spending is approaching to 3,5% GDP. Again, Brazil is an outlier compared to other countries [OECD (2003)]. Brazilian Pension System still have generous rules compared to the other countries.
Survivor Pensions Rules: International Comparion Elegibility Criteria
Criteria Minimum Length of Contribution Marriage Status Age New Marriage Status Brazil None Beneficiary doesnt need to be married No minimum age Pension doesn't change in a new marriage situation International Experience Requires a minimum period of contribution to request the benefit Minimum (Period) Length of Marriage or Civil Union Restrictions apply specially for suvivors younger than 45 years old Usually, pensions are cancelled after a new marriage
Source: Soares and Caetano (2008) based on Missoc (2005) and Social Security Administration (2005)
37
In April 2010, Social Assistance Benefits (LOAS) represent 10% of the total expenditure of the Social Security Ministry and 13% of the beneficiaries of the overall Social Security System. LOAS spending is increasing fast and the coverage of the benefits among the >= 65 yrs old population raised from 6.2% in 1996 to 12.7% in 2009. Poverty Reduction: PNAD data reveal LOAS is an efficient program for poverty reduction (example: 55% of the beneficiaries are illiterate and most beneficiaries would be below the poverty line without the benefit). Problem 1 (Incentives): The problem associated to this program is the creation of bad incentives in the labor market. As the LOAS beneficiaries receives the same benefit as most formal worker retiree (minimum wage), there is no incentive (premium) for workers (who receive a minimum wage salary) to be in the formal sector. Problem 2 (Income Benefit Calculation): Giambiagi and Tafner (2010) show that LOAS can create a unfair situation due to its calculation formula. Reason: LOAS benefit is not considered individuals income for the S. Security System. Problem 2 (an example):
Expenditure on Social Assistance Benefits (LOAS) 0.65% 0.60% 0.55% % GDP 0.50% 0.45% 0.40% 0.35% 0.30% 0.25% 2003 2004 2005 2006 2007 2008 2009
1) If a married couple has a member retiree by the RGPS who receives a minimum wage (MW), the 2nd member will not be qualified to receive the LOAS benefit because their per capita income will be exactly MW. 2) However, if a married couple has a member (who was in the informal sector all life) and already receives LOAS benefit (a minimum wage), the 2nd member will be eligible to receive the LOAS benefit because their per capita income will be zero as LOAS benefit is not considered income for this purpose. 3) So the married couple who used to work in the informal sector will receive twice more benefits than couple who was in the formal sector.
38 Importance: Rural Workers retirement systems are an important progressive program that does not only creates incentives for workers stay in the rural sector (avoiding migration to the urban centers) but it is also important for small municipals public accounts and economies. Given its non-contributive bias (Figure below), this program works as a social assistance program. Rule Part 1: Rural Retirement Benefit is given just for subsistence agriculture (agricultura familiar) workers. Their contributions are based on a fraction of commercialized product from workers excess production. Rule Part 2: However, during the programs implementation, it became clear that most workers rarely had excess production. Thus, The Constitution guaranteed the right of retirement for rural workers independently of their contribution. They just need to prove their required working time (length) [5 yrs less than the urban workers].
Urban vs. Rural Revenues and Spending (2009)
!!!Important!!! Although it looks like the social security system is running on surplus if you dont consider rural retirement system, this doesnt mean we dont have a problem to face. According to Caetano and Soares (2008), LOAS and Rural Workers Programs just explain of the distortion of the social security (high) spending in Brazil compared to other countries.
Source: SPS/MPS (2010)
39
Rural Workers Retirement Regime is under discussion on the Brazilian Congress. According to Campos (2006), the main topics for its reform are: 1) Improve the parameters that define the concept of subsistence agriculture (agricultura familiar). 2) Expansion of the benefits for other categories (such as rural workers who live in urban areas and temporary agriculture workers). 3) Discuss the working length in the subsistence agriculture eligibility criteria as a parameter for the benefit request. 4) Maintenance of the contribution criteria based on the excess of commercialized agriculture products. 5) Development of an identification systems for rural workers beneficiaries.
Expenditure on Rural Workers Retirement Benefits
1.45% 1.40% 1.35% %G P D 1.30% 1.25% 1.20% 1.15% 1.10% 1.05% 1.00% 2001 2002 2003 2004 2005 2006 2007 2008 2009
40
41
The Brazilian Public Service Pension System is large and complex. It includes employees of Executive, Legislative and Judiciary Branches and also for Army Force (Federal) and Military Police (State Level). There are 27 states and more than 1.900 municipal systems. According to OECD (2010), their rules differ slightly among each other, however they are usually more generous than the private system (RGPS).
42
Minimum Retirement Age (only after 1998 Reform!!!): Men 60 years and women 55 years Incentives Structure: Creates incentives (premiums) for servants who will postpone retirement request after eligibility criteria [2003 Reform]. Contribution (% Salary): 11% of salaries (Before 1993, public servants just needed to contribute 4%!!!). Contribution Base and Cap: Nowadays, the mandatory contribution is based on full salary and the benefit is equal to the final salary (or Active workers salaries). Only after 2003 Reform regulation (Compl. Law) public servants will have a contribution and benefit capssame limit of private sector workers. Complementary Contributive Regimes: 2003 Reform establishes the possibility to implement complementary regime, however it is still dependent on a Complementary Constitutional Law. Supportive Retired Servants Contribution: 2003 reform required retired public servants to continue contributing to the system (but less than the working employees). Limit Earlier Retirement for invalidity or illness: Annuities based on the contributive period (proportional). Forced Retirement: is given to men and women after 70 years old. Annuities Cap (2003 Reform): Application of general wage cap (Federal, State and Municipal) avoiding abusive high benefits.
43
Disability retirement shows a wave behavior throughout the last 13 years. It reached 30% of retirement requests in 2004 and 2005! However, It is observed a decline trend over the past 5 years. It seems the Federal Government has improved its controls over these benefits. Forced Retirement (compulsoria) reached 10% in 2005, however nowadays is less than 5%. Thus, voluntary retirement represents 90% of the requests.
44
It seems the 2003 Reform was effective in increasing the retirement age from 58 (men) in 2003 to 61 in 2008 and 54 years for women in 2003 to 58 (2008). However, we still have 75% of retirement applications requested by people younger than 65 yrs old (minimum retirement age in most countries).
Dec/2009
45
46
Palacios and Whitehouse (2006), Bontori (2002) and OECD (2005 and 2007) recognize the Brazilian Public Sector Pension System as one of the most benevolent in the world. In fact, Brazil spends MUCH more in the civil pension system than most countries in the world (available data).
47 Brazilian Public Sector must be ready to deliver new services for a society that is getting older faster. Brazilian public sector servants are older not only compared to other OECD countries, but also to the Brazilian overall labor force. Almost 40% of servants are more than 50 yrs old!
Old Labor Force brings challenges and opportunities to the Brazilian Public Sector:
Sooner there will be a fast growth in the government retirement system spending. Replacement of old workers can provide a very important opportunity to: (i) reallocate labor in most pressured areas (demand for each public services changes over the time), (ii) bring new people with new competencies and qualifications and (iii) reduce payroll cost (new workers receive lower salaries than older).
Percentage of 50 Years Old or Older Public Sector Workers (Federal Government) in Brazil and OECD
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More than 50% of OECD countries have special regimes for public employees. OECD (2010) recognizes that public special regimes are usually more generous than private sector workers regimes because: (i) Public annuities are usually based on the final salary (rather than on the contribution history); (ii) Permit provisions for earlier retirement; (iii) Recognition of non-contributive periods such as for education and children care. Most OECD countries are engaged in reforms for the Public Service System. The general trend is to extinct special rules for public employees in favor of equality between private and public workers (Unify these systems). This would encourage mobility between private and public sectors workers (with productivity gains for both sectors)
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Policies Recommendations
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Retirees and pensioners should not suffer any change in their rules as the Brazilian Constitution states (Direitos Adquiridos). Among active workers, reforms should be applied based on the previous working experience. Older workers should receive less changes proportionally to younger workers. The young population who have not entered the labor market yet will receive the full reform changes. First Best vs. Feasible Reforms: Sure, the gradualism reform principle will only provide Brazilian convergence to international benchmarks in the long run (more than 30 years), however this is possibly the only way to approve reforms due to political difficulties. Brazil is not a isolated island in the worlds economy. International experience comparisons should be considered as a very important reference for future reforms. Fact is: Brazil is spending much more in the social security system, given its demographic profile, than other countries. It is also observed that Brazil still have generous rules that permit workers to retire earlier or benefits that last longer. Given the huge change in the population dynamics (that we will face throughout the next 40 years), the time for adjustments is now! There is no reasonable justification to keep different rules for public servants (all levels), militaries, teachers and other general workers. Special Regimes: professions whose exercise activities are subject to special conditions harmful to health or physical integrity should continue to be treated differently.
2. International Comparison
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International Evidence: Most developed countries are applying 65 years old minimum age and many are reforming their system to reach this level. As the social security reform will (probably) be fully implemented just for new workers (over the next 30 years), the Brazilian demography that time will be the same as Euro Countries. If any worker found himself in a situation that he can not work until 65 yrs old, he should obviously apply for the invalidity retirement, following this criteria rule.
2. Length of Contribution should not be used as a Criteria for Retirement Requests, but as a base to a New Social Security Factor which gives a premium (higher retirement value) for workers who have longer contributive period.
Few countries in the world (most in the Middle East) adopt length of contribution as a criteria for Retirement Requests. As the minimum age for this kind of retirement criteria is just 53 years old for men (48 yrs women), the cost due to this criteria is still very high. Correcting Incentives: length of contribution should be considered as a premium in the value of the benefit but workers must complete 65 yrs old to request the benefit. International Evidence: Brazil belongs to the minority group (1/3 of countries) who still discriminates retirement ages for men and women. This proposal can save considerable amount of resources in the long-run as the fraction of women in the labor force is increasing. If the Brazilian society wants to give a benefit, rise their salaries now, not in the future! Low salaries and early retirement policy creates no incentives to attract the best professionals to the teachers career which is an essential policy to improve education quality in Brazil.
3. Apply Same Age for Statutory Retirement Age between Men and Woman
4. Apply for Teachers the same Statutory Retirement Age as other workers.
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According to Giambiagi and Tafler (2010), 95% of salaries in Brazil are below the benefit cap. Average retirement benefit is equal to 130% of the average salaries of working age population. These indicators are higher than most countries experience. ?Why Brazil (Brazilians) doesnt have a higher saving rate? One of the reason is simple: consume as much as possible today and depend on the government tomorrow. Uncertainty creates incentives to people increase savings (Keynes). Government should encourage people to develop their own strategy of savings. Complementary System: International experience shows that if people desire to receive your last working salary in the retirement, they have to engage in a complementary plan or invest their money in other opportunities (e.g. savings, real estate, stocks, Tesouro Direto, etc). Convergence of the Brazilian generous rules to the international experience (Slide 36). Changes needed to be addressed to eligibility criteria (length of contribution, age, marriage status) and benefit value calculation formula (number of dependents, age and other source of income). Regulation of the 2003 Reform must be designed considering the long term convergence of both system. Retirement Benefit should be based on the average contributive history, not in the active workers salaries. Higher Spending: Assuming a retirement substitution rate of 1 (1 retirement will imply in 1 hiring), Brazilian Federal Government will have its despesas de pessoal under pressure in medium term (40% of total employees are 50 yrs old or older). Public service personnel renew provides opportunities to the government for better human resources management (Slide 47), however planning is needed [OECD (2010)].
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Avoiding Distortions: LOAS benefit must be considered as income for the social security system. Correcting Incentives (politically difficult): Fix the value of the benefit as a share of the minimum wage (such as 90%). This reform aims to create incentives for workers to stay and contribute to the social security system (formal sector economy). Nowadays, many formal workers receive a minimum wage as a retirement benefit which is equal to the LOAS benefit (informal sector workers). Rural workers retirement system spent R$ 45 bi in 2009 (3 times more than Bolsa Familia). As a social program, we have to monitor its effectiveness for poverty reduction and its incentives for people to stay in the rural sector (avoiding urban problems). Possibly, the most difficult problem in the Rural Retirement System design is related to the information asymmetry given the particularities of the rural activities. How can we select and subsidize who really needs? and How can we improve our tax collection from people who can contribute more (reducing the deficit)? It is important to improve governments information of the rural sector (not only for the social security system, but also for the general revenues collection). If we apply todays Minimum Wage Rule in the long run (real increase), all Brazilian workers will receive a minimum wage someday. It is clear this rule is unsustainable. Brazilian society needs to decide what is its minimum wage long term value and define strategy to gradually reach that level. The most important binding constraint to increase the value of the minimum wage is the social security spending.
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Periodical Beneficiaries Re-registration and Better Death Registration Systems. Sickness Temporary Benefit Requirement: It became an important topic/program due to its increase from 0.5 million requests in 2000 to 1.7 million in 2005. The idea is to create incentives for (i) a better diagnosis of the beneficiary disease/problem (avoiding frauds), (ii) workers to reveal their real health situation (if they are able to return to work) and (iii) better integration of the Social Security and the health care network. Rural Regime: Todays proofs of rural sector employment required by the Social Security are very flexible (e.g. registers in commercial firms or churches). It permits people who never worked in rural activities to request the benefit. Information System Improvement for Data Analyses: Information exchange provide clues of tax evasion through data analysis (as the Income Tax System works). Exchange can be implemented between (i) General Revenue Tax System (SRF) and Social Security System or (ii) GPS and GFIP. Information System Integration between Federal and Social Security Revenues : Integration of the systems can result in gains through economies of scale and synergies. Compensation between Federal and Social Security Revenues Social Security Debt Payment through Judiciary Credits (Precatorios Previdenciarios). Limit Debt Schedule Payments Length Social Security Debt Securitization. Classification of Debts to be Received by Recovery Risk Degree. * (Caetano [2006])
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Thank you!
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Backup Slides
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Education, 26%
Transportation , 6%
Urbanism, 13%
Administrative, 8%
Health, 23% Administrat., 13%
Health, 15%