## 1. Recent Changes in Retirement Incentives ## Source details **Canonical URL:** [1. Recent Changes in Retirement Incentives](https://www.imf.org/-/media/files/publications/wp/2017/wp1799.pdf) ## Other formats - [Markdown version](/-/media/files/publications/wp/2017/wp1799.pdf.md) - [Structured JSON version](/-/media/files/publications/wp/2017/wp1799.pdf.json) --- ### Overview and demographic drivers - Brazil’s fertility rate has halved over the past half century and is now in line with that of more advanced economies. - Those aged 65 and above constitute about 7½ percent of the total population, two percentage points more than a decade ago. - UN projection: by 2050 Brazil’s old-age dependency ratio will reach close to 37 percent; IBGE projects old-age dependency reaching 36 percent by 2050. - Because of falling fertility, the population will start declining in absolute terms in Brazil by mid-century. ### Fiscal implications and projected age-related spending - The Brazilian pension system is already in deficit, projected to reach 3.2 percent of GDP in 2016 (Tesouro Nacional, 2015). - Public age-related spending (retirement, other pensions, and health) represented half of total public spending in 2015, equal to 16 percent of GDP. - In the absence of reforms, pension and health expenditures are projected to increase to 21 percent of GDP in 2025. - Beyond that, projected spending needs would continue to rise, reaching 40 percent of GDP by 2050 as the elderly share of population more than triples from today. - Under unchanged policies (the “no reform” scenario): - Spending on pensions alone would reach 21.5 percent of GDP by 2050. - Public spending on health would increase to 5.6 percent of GDP in 2025 and 9.5 percent of GDP by 2050 from 4.6 percent of GDP in 2015. - NPV of the funding gap of the social security system estimated at 25 percent of GDP over the following two decades (IMF, 2012). ### Structure of Brazil’s pension system and key parameters - System composition: - Three main defined-benefit public schemes and voluntary private defined-contribution schemes. - Regime Geral de Previdência Social (RGPS), Regimes Próprios de Previdência Social (RPPS), Benefício de Prestação Continuada (BPC), and voluntary Regime de Previdência Complementar (RPC). - RGPS (2015/2016 figures as provided): - Contributors: 53 million. - Beneficiaries: some 30 million (Table 1: 29.1 million). - Disburses 7.1 percent of GDP in pensions (2015 estimate; Table 1: 7.4 percent of GDP). - Financing: employee contributions 8−11 percent on wages, employers’ contributions 20 percent, plus COFINS and CSLL. - Retirement eligibility: age 65/60 (men/women) after 15 years of contribution (“Age”), or full benefit after 35/30 years for men/women (“Contributory”). - Average retirement age: mid-50́s (Table 1: 54; Box 1 lists 58 for “age” pensions and 55 for “contributory” pensions). - Indexation: old-age benefits indexed annually to inflation, except those equal to one minimum wage. - Rural pension (Previdência Rural): - Eligibility: males/females aged 60/55 with at least 180 months of rural work; benefit equal to the minimum wage. - In 2015 about 9 million beneficiaries; approximately 31 percent of all recipients of pensions. - Represented 20 percent of Government’s pension expenditures or 1.7 percent of GDP in 2014. - RPPS: - Schemes for federal, state, and municipal government workers. - Cover 1.5 million beneficiaries and disburse about 4 percent of GDP (Table 1: beneficiaries 3.6 million; disbursement 4.5 percent of GDP). - Statutory retirement age for full public-sector pension: 60 for men and 55 for women (for those joining after the 1998 reform; earlier entrants: 53 for men and 48 for women). - BPC: - Assistance benefit for persons 65 and older and disabled people whose household income per capita is under one-quarter of the minimum wage. - Recipients receive an amount equal to the minimum wage. - In 2015 nearly 1.8 million received a BPC, about 6 percent of all recipients of pensions. - BPC represented 4 percent of government’s pension expenditures or 0.3 percent of GDP in 2014. - Additional key figures: - Table 1 selected figures: - Average monthly benefit (est.): RGPS R$1,249; RPPS R$6,134.3. - Expenditure (billions): RGPS 436; RPPS 265. - Contributors (millions): RGPS 53; RPPS 6.5. - Contributions (gross, billions): RGPS 350; RPPS 116. - Contributions as percent of GDP: RGPS 5.9; RPPS 2.0. - Interest rate on contributions (monthly, Dec. 2015): 6 percent. - Minimum pension: R$880 in 2016. - As of 2015, about 67 percent of individual benefits paid by the RGPS corresponded to 1 minimum pension and were thus indexed to minimum pension growth. ### Main challenges identified - Low average retirement age relative to OECD: 54 in Brazil compared to 64 on average in the OECD. - Pension spending as percent of GDP is high relative to the share of elderly in the population. - Benefits are growing faster than revenues due to aging, limited gains from labor formalization, and the connection between pension values and the minimum wage formula. - Multiplicity of pension systems increases inequities and duplication of benefits. - RGPS redistribution features (contribution exemptions, reduced contribution rates for low-wage earners, minimum-wage floor) create complex redistributive effects and targeting concerns. - Contributors represent only 46 percent of working age population compared with 86 percent in advanced economies; pension coverage (pensioners to population aged 65 and older) is 93 percent. ### Recent reforms, the fator previdenciário, and the 85/95 formula - Fator previdenciário (1999 law): - Actuarial coefficient introduced into RGPS. - Optional for age-based retirement; mandatory for length-of-contribution retirement. - Benefit formulas summarized: - Age-based: benefit = (average of the highest 80 percent monthly earnings) × (70 percent + 1 percentage point for each set of 12 months of contribution, capped at 100 percent) × fator — only if fator > 1.0. - Contribution-based: benefit = (average of the highest 80 percent monthly earnings) × fator. - Fator increases with contribution rate, contribution period, and age, and decreases with life expectancy. - Observed effect: contributed to lengthening contribution periods and increasing retirement age from 2009 on; generated lower pension benefits by about a third of what would have been paid out in the absence of this mechanism (Pereira, 2013). - Mid-2015 change: 85/95 formula (and provisions) - Allows workers to retire with full benefits when sum of age and contribution years equals 85/95, with minimum contribution of 30/35 years for women/men. - Use of fator became optional; workers retiring with 30/35 years regardless of age would have benefits curtailed by application of fator. - Adjustment schedule: formula adjusted every two years until it reaches 90/100 in 2026. - Expected net effects: postpone retirement; increase benefits in the period during which pensions are enjoyed, thus pushing up pension spending over the medium term. - Early implementation experience (nine months in): - Rapidly increasing retirement applications. - Widening spread between benefits based on length of contribution (mainly higher-income workers) and benefits based on age (informal and precarious workers). - Processing backlogs from INSS strike and anticipatory retirements due to public debate complicate definitive assessment. ### Realism of baseline projections and sensitivity scenarios - Projections cover overall private and public systems aggregate; system-specific features not fully captured. - Forces potentially pushing expenditures above baseline: - Higher participation of women in labor force: female participation increased to over 60 percent in 2014 from 45 percent in the 1990s; share of female retirees increased to 56 percent. - Women’s earlier retirement under current rules and higher female longevity imply pension expenditure may grow faster than baseline. - Population of retirees growing at about 3.6 percent a year. - Given minimum wage updating rule linked to pensions, nominal growth in contribution revenue is barely enough to pay for annual rise in benefits of existing pensioners. - Sensitivity / risk scenarios relative to baseline: - “Low fertility” scenario: spending on pensions and health would increase by 3 percentage points of GDP by 2050 (25 p.p. by 2100). - “Longevity risk” scenario (mortality rates for age 65+ decline 50 percent faster than in baseline): pension and health spending would be 1.6 p.p. of GDP higher by 2050 (4.8 p.p. higher by 2100). ### Reform options and illustrative quantitative trade-offs - Two broad policy groups: policies affecting labor force participation; policies directly affecting features of spending programs. - Labor force participation measures: - Female participation (2014): 65 percent of population age 15−64 versus male participation 85 percent. - Halving that gap (absent decline in productivity) would boost GDP and reduce age-related spending to GDP by 2.2 percentage points by 2050. - Labor participation for ages 55−64 in Brazil was 56 percent in 2014 compared to 81 percent for ages 25−54. - Halving that gap would reduce age-related spending to GDP by 1.3 percentage points by 2050. - Pension system reforms (general instruments): - Contain eligibility: raise retirement ages; must be accompanied by reforms reducing actuarial imbalances. - Increase revenues: increase taxes on pensions for upper income groups and/or increase payroll contributions. - Reduce replacement rates: abandon indexation of benefits to the minimum wage; lengthen period for estimating pensionable wage; modify accrual rates. - Illustrative trade-offs to stabilize pension spending over 2015−30 without increasing payroll taxes: - Reduce average benefits by almost 35 percent, or - Increase retirement age by almost 6 years. - Revenue alternative: assume raising about 0.4 percent of GDP per each contribution point; to achieve 6.5 percent of GDP in savings would require raising pension contributions by 16.2 percentage points (6.5/0.4). - Specific measures estimated impacts (2015‒30, Figure 11 summary): - Projected spending increase: 5.9 (Ppt. of GDP) - Impact of reforms: -7.1 (Ppt. of GDP) - Retirement Age Increase: -4.7 (Ppt. of GDP) - Indexation of Benefits: -2.6 (Ppt. of GDP) - Benefit Freeze: -0.8 (Ppt. of GDP) - Decrease in Social Contributions: 1.0 (Ppt. of GDP) - Net Change: -1.2 (Ppt. of GDP) - Specific policy recommendations: - Gradually raise retirement ages; an increase of 5 years over the next 5 years would generate savings in pension spending equivalent to 4.7 percentage points of GDP by 2030 compared to the “no reform” baseline. - Caveat: model assumes pension payments remain unchanged (replacement rate does not rise), which may overestimate savings when contributory histories lengthen. - Even with this reform, pension spending would be above the level in 2015 by about 1 percentage points of GDP by 2030 in the model. - Remove automatic link between pensions and the minimum wage (or change minimum wage formula): would reduce pension expenditure by about 2.6 percentage point in 2030 (6.1 percentage points of GDP in 2050). - Frontload rescue by removing existing payroll tax exemptions; consider a levy of 10 percent on nominal benefits as part of a package to create space to gradually lower high payroll contributions. - After 2050, stabilize system by linking increase in retirement age to gains in life expectancy. ### Legislative proposals under discussion (summary) - Government proposal includes: - Minimum retirement age of 65 for women and men, with transitional arrangements for men age 50 and above and women age 45 and above (an increase of 50 percent of the remaining required contribution time under current rules). - Minimum contribution period extended from 15 years to 25 years. - Equalization of RPPS and RGPS for certain cohorts; contribution rate increases to 14 percent from 11 percent currently for those cohorts. - Survivors’ benefits reshaped: sum payable to widow/widower = 50 percent of value of main beneficiary; additional 10 percent per minor dependent (up to 100 percent for a family with 5 children); pensions de-linked from minimum wage; combining survivor benefit with own retirement benefit not possible going forward (transitory protection for current combiners). - BPC: minimum age for beneficiaries increases from 65 to 70 over the next 10 years; value of benefit defined in law rather than based on minimum wage. - Rural pensions and export revenue exemptions: options include eliminating exemption on contributions for export companies in the agricultural sector (revenue forgone estimated at R$ 6 billion in 2016) and applying a contribution of 5 percent of the minimum wage of rural worker’s income. - Termination of exemptions from social security contributions on export revenues (annual revenue forgone about R$ 6 billion). ### Health system reform options and efficiency measures - Health-adjusted life expectancy of 65 years in Brazil associated with higher public spending on health than in several comparative groups, indicating scope for efficiency gains. - Identified inefficiencies and opportunities: - Evidence of oversupply of technology and underutilization of medical infrastructure; adoption of new technologies not subjected to opportunity-cost scrutiny. - Micro-level reforms to improve outcomes without increasing spending: - Health technology assessment for selection of new programs, drugs, diagnostics and equipment. - Focus on prevention and management of chronic non-communicable diseases through education and prevention. - Abolish tax-deductibility of private insurance contributions. - Elaborate clinical guidelines, reduce dependency on imported technologies, renegotiate deals with pharmaceutical companies. - Replace backward-looking line-item budgeting with global budgets and activity-based payment mechanisms. - Financial impact of health reforms is difficult to quantify; potential efficiency gains discussed but tentative. ### Concluding comments and timing - Brazil’s population is aging rapidly and fiscal pressures will rise over time under current benefits and contributions. - Labor market interventions to boost participation can provide temporary respite, but reforms directly addressing high replacement rates and early retirement ages cannot be avoided. - Health care growth will be difficult to sustain; reforms must contain budget growth without adversely affecting outcomes by linking marginal expenditure to incremental health benefits. - Social security reform is of utmost importance; reforms should start as soon as possible to preserve the system’s ability to carry out its functions in the future. *Source: IMF working paper — "1. Recent Changes in Retirement Incentives" (excerpt provided).* ### 1. Recent Changes in Retirement Incentives ________________________________ 9 ### 1. Recent Changes in Retirement Incentives ### Overview and demographic drivers - Brazil’s fertility rate has halved over the past half century and is now in line with that of more advanced economies. - Those aged 65 and above constitute about 7½ percent of the total population, two percentage points more than a decade ago. - According to the UN, by 2050 Brazil’s old-age dependency ratio will reach close to 37 percent; IBGE projects old-age dependency reaching 36 percent by 2050. - Because of falling fertility, the population will start declining in absolute terms in Brazil by mid-century. ### Fiscal implications and projected age-related spending - The Brazilian pension system is already in deficit, projected to reach 3.2 percent of GDP in 2016 (Tesouro Nacional, 2015). - Public age-related spending (retirement, other pensions, and health) represented half of total public spending in 2015, equal to 16 percent of GDP. - In the absence of reforms, pension and health expenditures are projected to increase to 21 percent of GDP in 2025. - Beyond that, projected spending needs would continue to rise, reaching 40 percent of GDP by 2050 as the elderly share of population more than triples from today. ### Recent reforms and their limits - Past reforms included: - 1998 pension reform (limited impact on deficits). - 2003 parametric changes in the mandatory public sector pension regime. - 2012 establishment of a defined contribution pillar for the public regime (reduced replacement rates for higher earners, enhanced progressivity and equity). - Introduction of the fator previdenciário in 1999 and its replacement with a progressive 85/95 formula in 2015. - Tightening of criteria for survivor benefits in 2015. - These reforms were insufficient to contain the growth of pension spending ahead. ### Structure of Brazil’s pension system (core features) - The system includes three main defined-benefit public schemes and voluntary private defined-contribution schemes. - Regime Geral de Previdência Social (RGPS): - Public system with 53 million contributors and some 30 million beneficiaries in the private sector. - Disburses 7.1 percent of GDP in pensions (2015 estimate). - Financing: employee contributions 8−11 percent on wages, employers’ contributions 20 percent, plus COFINS and CSLL. - Private-sector employees can retire at age 65/60 (men/women) after 15 years of contribution (“Age”), or at any age with a full benefit after 35/30 years for men/women (“Contributory”). - Average retirement age is in the mid-50́s. - Old-age benefits are indexed annually to inflation, except those equal to one minimum wage. - Rural pension (Previdência Rural): males/females aged 60/55 with at least 180 months of rural work; benefit equal to the minimum wage. - In 2015, about 9 million beneficiaries received a rural pension, approximately 31 percent of all recipients of pensions. - The rural program represented 20 percent of the Government’s pension expenditures or 1.7 percent of GDP in 2014. - Regimes Próprios de Previdência Social (RPPS): - Schemes for federal, state, and municipal government workers. - Cover 1.5 million beneficiaries and disburse about 4 percent of GDP. - Statutory retirement age for full public-sector pension: 60 for men and 55 for women (for those joining after the 1998 reform; earlier entrants have easier eligibility: 53 for men and 48 for women). - Benefício de Prestação Continuada (BPC): - Assistance benefit for persons 65 and older and disabled people whose household income per capita is under one-quarter of the minimum wage. - Recipients receive an amount equal to the minimum wage. - In 2015, nearly 1.8 million received a BPC, about 6 percent of all recipients of pensions. - BPC represented 4 percent of government’s pension expenditures or 0.3 percent of GDP in 2014. - Voluntary private schemes under Regime de Previdência Complementar (RPC): closed private pension entities and open private pension systems provided by authorized financial institutions. ### Key parameters and fiscal figures (2015, 2014, 2016 where specified) - RGPS: contributors 53 million; beneficiaries some 30 million; disburses 7.1 percent of GDP in pensions (2015 estimate). - Rural pensions: about 9 million beneficiaries in 2015; 1.7 percent of GDP in 2014. - RPPS: cover 1.5 million beneficiaries; disburse about 4 percent of GDP. - Table 1 figures (selected): - RGPS beneficiaries: 29.1 million; RPPS beneficiaries: 3.6 million. - Average monthly benefit (est.): RGPS R$1,249; RPPS R$6,134.3. - Expenditure (billions): RGPS 436; RPPS 265. - Percent of GDP: RGPS 7.4; RPPS 4.5. - Contributors (millions): RGPS 53; RPPS 6.5. - Contributions (gross, billions): RGPS 350; RPPS 116. - Contributions as percent of GDP: RGPS 5.9; RPPS 2.0. - Interest rate on contributions (monthly, Dec. 2015): 6 percent. - Minimum pension: R$880 in 2016. - As of 2015, about 67 percent of individual benefits paid by the RGPS corresponded to 1 minimum pension and were thus indexed to minimum pension growth. - Average retirement age: 54 in Brazil compared to 64 on average in the OECD. ### Main challenges identified - Average retirement age is low by international standards (54 vs OECD average 64). - Spending on pensions as percent of GDP is high relative to the share of elderly in the population. - Benefits are growing faster than revenues due to aging, limited gains from labor formalization, and the connection between pension values and the minimum wage formula. - Multiplicity of pension systems increases inequities and duplication of benefits. - RGPS redistribution features (contribution exemptions, reduced contribution rates for low-wage earners, minimum-wage floor) create complex redistributive effects and targeting concerns. ### Reform options and policy recommendations highlighted - Pensions: - Combination of reforms to revise benefits eligibility to contain future deficits while minimizing distortionary effects on labor incentives. - Delaying retirement would generate significant fiscal savings, but is not sufficient on its own. - Changing the benefits indexation formula is potentially useful. - Removing existing payroll tax exemptions is potentially useful (note: some observers argue removal may simply shift revenue sources rather than change INSS finances, but generate economies for general government). - Health: - Cost-containment in health is an unexplored area in Brazil. - Experience of advanced economies offers approaches to contain health spending growth. - Effects of health reforms are difficult to quantify given trends in longevity, evolving standards of care, and new technologies; continuous refinement of efficiency approaches in provision and utilization is needed. - Timing: - Reforms to age-related spending programs should start now so they can be gradual. *Source: IMF working paper — "1. Recent Changes in Retirement Incentives" (excerpt provided).* ### Box 1. Recent Changes in Retirement Incentives ### Box 1. Recent Changes in Retirement Incentives ### Design and mechanics of the fator previdenciário (fator) - A 1999 law introduced an actuarial coefficient called fator previdenciário (fator) into the RGPS. - Use: - Optional in the calculation of pensions in case of retirement on the basis of age. - Mandatory in the calculation of benefits based on retirement on the basis of length of contribution. - Benefit formulas (as described in the source): - For retirement on the basis of age: benefit = (average of the highest 80 percent monthly earnings) × (70 percent + 1 percentage point for each set of 12 months of contribution, capped at 100 percent) × fator — only if fator > 1.0. - For retirement on the basis of length of contribution: benefit = (average of the highest 80 percent monthly earnings) × fator. - The fator increases with the insured’s contribution rate, contribution period, and age, and decreases with life expectancy. - Variables (as defined in the source formula): - f — fator - Tc — contribution time to retirement - t — contribution rate (0.3) - Le — remaining life expectancy at retirement - Age — age at the time of retirement - Objective: provide disincentives for early retirement and generate savings on pension benefits by offering higher pensions to new entrants with a longer contribution history and shorter residual life expectancy at retirement. - Observed effect after transition period in the 2000s: - Contributed to lengthening contribution periods and increasing retirement age from 2009 on. - Generated lower pension benefits by about a third of what would have been paid out in the absence of this mechanism (Pereira, 2013). ### Mid-2015 rule change: the 85/95 formula and associated provisions - New rule introduced mid-2015: - Allows workers to retire with full benefits when the sum of age and contribution years equals 85/95, with a minimum contribution of 30/35 years for women/men. - The use of fator became optional. - Workers who retire with 30/35 years of contribution regardless of age would have their benefits curtailed by application of the fator. - Adjustment schedule: the formula is to be adjusted every two years until it reaches 90/100 in 2026. - Expected net effects (as stated in source): - Postpone retirement. - Increase benefits in the period during which pensions are enjoyed, thus pushing up pension spending over the medium term. ### Early implementation experience and data limitations - Nine months into implementation: - Rapidly increasing retirement applications. - Widening spread between benefits based on length of contribution (mainly higher-income workers) and benefits based on age (informal and precarious workers with shorter contribution histories). - Assessment caveats: - Strike of INSS employees in the second half of 2015 contributed to a backlog in processing retirement applications. - Public discussions about pension reforms—including introduction of minimum retirement age—may have advanced retirement decisions, creating confounding effects. - Therefore, a definitive assessment of the change in retirement incentives was not possible in the immediate aftermath. ### Comparative indicators, coverage, and labor market implications (selected figures from the source) - Pension system size and outcomes: - Total pension expenditure (public and private) in Brazil is higher than advanced- and emerging-economy averages as a share of GDP and per pensioner. - Estimated spending on pensions in Brazil in 2015 was among the highest in a sample of about 100 countries. - Gross and net replacement rates are above the OECD average (at 70 and 76 percent of average wage for men respectively). - Contribution, coverage, and retirement ages: - Pension contribution rates in Brazil are described as extremely high and exacerbated by additional payroll levies. - Contributors represent only 46 percent of working age population compared with 86 percent in advanced economies. - Pension coverage (pensioners to population aged 65 and older) is 93 percent. - Minimum retirement age with full contributory history in the mandatory public regime: 48 for women and 53 for men. - Average retirement age in the RGPS: 58 for “age” pensions and 55 for “contributory” pensions; OECD average retirement age: 64. - Fiscal and system balances: - RGPS revenues increased from 4.7 percent of GDP in 2003 to 6.1 percent of GDP in 2014. - RGPS expenditures increased from 6.2 percent of GDP in 2003 to 7.5 percent of GDP in 2014. - Number of pension recipients increased by 40 percent (Caetano, 2015). - Urban pension balances were positive in recent years; overall deficits driven by limited contributions in rural areas. - In 2015, the overall deficit in the RGPS reached 1.5 percent of GDP. - Authorities’ projection of the imbalance: 3.2 percent of GDP in 2016 (Tesouro Nacional, 2015). ### Fiscal and distributional implications highlighted in the source - The fator helped reduce the ratio of pensioners to the elderly population (i.e., benefit coverage). - The 2015 85/95 rule was expected to: - Postpone retirement (reducing some pressures). - Increase pension spending in the medium term because higher benefits would be enjoyed for longer periods. - Data and institutional constraints (processing backlogs; public debate about reforms) complicate timely empirical evaluation of reform impacts. *Source: Box 1. Recent Changes in Retirement Incentives (wp1799).* ### Box 2. Realism of Baseline Pension Expenditure Projections ### Box 2. Realism of Baseline Pension Expenditure Projections ### Realism of baseline projections and demographic/policy nuances - Projections cover the overall private and public systems aggregate; some system-specific features are not fully captured. - Growth in benefits is slightly overestimated because in the RPPS system virtually all pensions are above the minimum wage and are therefore adjusted upward in line with average wage—not in line with the growth of the minimum wage. - Civil servants tend to retire earlier, particularly in the states where employment is disproportionally more concentrated in education and security services. - A force not factored into projections that may push expenditures up compared to the baseline is the higher participation of women in the labor force. - Female labor force participation increased to over 60 percent of the working age female population in 2014 from 45 percent in the 1990s. - The share of female retirees in total has increased to 56 percent (Informe de Previdência Social, 2014). - Reflecting current retirement rules which allow women to retire earlier, and given higher female longevity, pension expenditure can be expected to grow faster than in the baseline. - This may be partly mitigated by lower wages, and therefore also pensions, that women typically enjoy. - Higher female labor force participation could increase contributions, which would mitigate social security deficits. - Incidence of duplication of benefits (combining one’s own pension and a survivor’s pension) is likely to increase and may not be fully captured in simulations. - Projections exclude possible delayed effects of past reforms; the net effect of all these factors is not clear. - The population of retirees is growing at about 3.6 percent a year. Given the rule for updating the minimum wage and its link to pension benefits, most retirees’ benefits grow about as fast as nominal GDP; thus, the nominal growth in contribution revenue is barely enough to pay for the annual rise in the benefits of existing pensioners: little money is left over to finance the increase in the number of retirees. ### Long-term pension and health spending projections and sensitivity analysis - Under unchanged policies (the “no reform” scenario): - Spending on pensions alone would reach 21.5 percent of GDP by 2050 in Brazil. - Public spending on health would increase to 5.6 percent of GDP in 2025 and 9.5 percent of GDP by 2050 from 4.6 percent of GDP in 2015. - The NPV of the funding gap of the social security system was estimated at 25 percent of GDP over the following two decades (IMF, 2012). Since then, Brazil’s potential growth was revised downward, adversely affecting revenues and contributing to an even larger funding gap. - Demographic estimation uses UN baseline population projections under the “medium variant” scenario; beyond 2065 pensions are projected to grow in line with demographic developments. - Sensitivity / risk scenarios relative to baseline: - “Low fertility” scenario: spending on pensions and health in Brazil would increase by 3 percentage points of GDP by 2050 (25 p.p. by 2100). - “Longevity risk” scenario (mortality rates for age 65 and older decline 50 percent faster than in baseline): pension and health spending would be 1.6 p.p. of GDP higher by 2050 (4.8 p.p. higher by 2100). - Model notes: - Holding everything else constant, an increase in the share of population aged 65 and above translates into an increase in pension and health spending to GDP. - In the short run, effects of different assumptions on growth should be small because current pensions are determined by past growth/wage realizations. - Pension spending can diverge from the model outcome if pensions are indexed to minimum wage growth and minimum wages grow above productivity, as in the “no reform” scenario in Brazil. - Second order interactions are not taken into account in the model. ### Reform options — labor force participation - Two broad groups of policies to address fiscal pressures: policies affecting labor force participation, and policies directly affecting features of spending programs. - Labor force participation policies can partially offset aging impacts: - Female participation in Brazil (2014): 65 percent of population age 15−64 versus male participation 85 percent. - Absent a decline in average productivity per worker, halving that gap would boost GDP and increase financing for age-related spending so that the ratio of such spending to GDP would fall by 2.2 percentage points by 2050. - Labor participation for ages 55−64 in Brazil was 56 percent in 2014 compared to 81 percent for ages 25−54. - Halving that gap would reduce the ratio of age-related spending to GDP by 1.3 percentage points by 2050. - Figure-based international perspective shows potential gains for pensions and health from increasing participation of women and the elderly (comparisons with “More developed” and “Less developed” groups). ### Reform options — pension system reforms - General policy instruments: containing eligibility, increasing revenues, reducing replacement rates. - Containing eligibility: - Raising retirement ages is especially attractive and complements boosts in older-worker participation. - To be effective, raising retirement age needs to be accompanied by reforms that reduce actuarial imbalances (e.g., adjust rate of accrual of benefits); otherwise deficits may be pushed forward in time. - Increasing revenues: - Options include increasing taxes on pensions for upper income groups and/or increasing payroll contributions. - Reducing replacement rates: - Abandon indexation of benefits to the minimum wage; lengthen the period for estimating pensionable wage; modify benefit formulas (accrual rates). - Brazil-specific fiscal context and illustrative trade-offs: - Brazil had a pension system deficit equivalent to 1.5 percent of GDP in 2015 (includes RGPS and RPPS of the federal government); authorities project it to reach 4.2 percent in 2025 in the authorities’ scenario (Tesouro Nacional, 2015). - Minimum objective of reform: stabilize the financing gap so the annual subsidy from the federal budget does not grow. - Illustrative quantitative trade-offs to stabilize pension spending over 2015−30 without increasing payroll taxes: - Reduce average benefits by almost 35 percent, or - Increase retirement age (without raising individual pensions as a result) by almost 6 years. - Any combination of options along the illustrated trade-off line would achieve the same result. - Numerical illustration and assumptions: - There is a 6.5 percentage point increase in spending on pensions between 2015 and 2030 (from 12.2 to 18.7 percent of GDP). An across-the-board reduction in benefits of 35 percent (6.5/18.7) would bring spending down to 12.2 percent of GDP in 2030. - To achieve the same result via retirement age: estimate that in 2013 about 28 percent of the population age 60+ is aged 60−64. An increase in retirement age by 5 years would cut beneficiaries by about 28 percent; to achieve a 35 percent cut, pensionable age would have to increase by 5.7 years. - Revenue option: assume raising about 0.4 percent of GDP per each contribution point. To achieve 6.5 percent of GDP in savings, it would be necessary to raise pension contributions by 16.2 percentage points (6.5/0.4). - Specific measures estimated impacts (2015‒30; Figure 11 summary): - Projected spending increase: 5.9 (Ppt. of GDP) - Impact of reforms: -7.1 (Ppt. of GDP) - Retirement Age Increase: -4.7 (Ppt. of GDP) - Indexation of Benefits: -2.6 (Ppt. of GDP) - Benefit Freeze: -0.8 (Ppt. of GDP) - Decrease in Social Contributions: 1.0 (Ppt. of GDP) - Net Change: -1.2 (Ppt. of GDP) - Specific policy recommendations mentioned: - Gradually raise retirement ages; an increase of 5 years over the next 5 years would generate savings in pension spending equivalent to 4.7 percentage points of GDP by 2030 compared to the “no reform” baseline. - Caveat: the model assumes pension payments remain unchanged (replacement rate does not rise), which may overestimate savings when contributory histories lengthen. - In the model, even with this reform, pension spending would be above the level in 2015 by about 1 percentage points of GDP by 2030. - Remove automatic link between pensions and the minimum wage (or change minimum wage formula): would reduce pension expenditure by about 2.6 percentage point in 2030 (6.1 percentage points of GDP in 2050). - Frontload rescue by removing existing payroll tax exemptions; consider a levy of 10 percent on nominal benefits as part of a package to create space to gradually lower high payroll contributions. - After 2050, stabilize system by linking increase in retirement age to gains in life expectancy. ### Reform options under legislative discussion (Box 3 summary) - Government proposal submitted to Congress includes: - A minimum retirement age of 65 for women and men, with transitional arrangements for men age 50 and above and women age 45 and above (an increase of 50 percent of the remaining required contribution time under current rules). - Contribution time: minimum contribution period extended from 15 years to 25 years. - Equalization of RPPS and RGPS: for certain cohorts (men under 50 and women under 45 who entered public service before 2003) retirement no longer based on full salary; benefit adjustments no longer follow active workers’ wages; those who entered public service before 2003 and have not yet retired would be entitled only to inflation adjustment. Contribution rate increases to 14 percent from 11 percent currently. - Survivors’ benefits: sum payable to widow/widower = 50 percent of value of main beneficiary; additional 10 percent for each minor dependent (up to 100 percent for a family with 5 children); pensions de-linked from minimum wage; combining survivor benefit with own retirement benefit not possible going forward (transitory protection for current combiners). - BPC: minimum age for beneficiaries increases from 65 to 70 over the next 10 years; value of benefit defined in law rather than based on minimum wage. - Rural pensions: options include eliminating exemption on contributions for export companies in the agricultural sector (revenue forgone estimated at R$ 6 billion in 2016) and applying a contribution of 5 percent of the minimum wage of rural worker’s income. - Termination of exemptions from social security contributions on export revenues (annual revenue forgone about R$ 6 billion). - The proposal is ambitious and addresses many main sources of financial imbalance; detailed evaluation is beyond the scope of the paper and models used are not designed to simulate some detailed aspects. ### Health system reform options and efficiency measures - Health-adjusted life expectancy of 65 years in Brazil is associated with higher public spending on health (share of GDP and per capita) than in several comparative groups, indicating opportunities to achieve better outcomes without larger resource pools. - Evidence of oversupply of technology and underutilization of medical infrastructure; adoption of new technologies has not been subject to opportunity-cost scrutiny. - Micro-level reforms to improve outcomes without increasing spending: - Health technology assessment for selection of new programs, drugs, diagnostics and equipment. - Focus on avoiding and curing chronic non-communicable diseases through education and prevention. - Abolish tax-deductibility of private insurance contributions (which undermines SUS funding and supports private coverage for expensive treatments). - Elaborate clinical guidelines, reduce dependency on imported technologies, renegotiate deals with pharmaceutical companies. - Replace backward-looking line-item budgeting with global budgets and activity-based payment mechanisms to improve transparency and efficiency. - Financial impact of health reforms is difficult to quantify; Figure 12 provides tentative comparative assessments of potential efficiency gains. ### Concluding comments - Brazil’s population is aging rapidly and fiscal pressures will rise over time under current benefits and contributions. - The demographic profile and extensive benefits system will put finances under considerable strain over the next decades; as dependency ratio climbs, spending on pensions and health could surpass 31 percent of GDP by 2050 if the existing system is not reformed. - Labor market interventions to boost participation can provide temporary respite, but reforms directly addressing high replacement rates and early retirement ages cannot be avoided. - Health care growth will be difficult to sustain; reforms must contain budget growth without adversely affecting outcomes by linking marginal expenditure to incremental health benefits. - Recommendations include reducing reliance on expensive hospital treatments by strengthening outpatient care and regional networks, reducing pharmaceutical spending via generic drugs and clinical guidelines. - Social security reform is of utmost importance; reforms should start as soon as possible to preserve the system’s ability to carry out its functions in the future. *Source: IMF Working Paper — Box 2. Realism of Baseline Pension Expenditure Projections.* ### References ### References ### Pension, Social Protection, and Previdência - Caetano, M., 2015, “Previdencia Social,” manuscript. - Clements, B., Coady, D., Eich, F., Gupta, S., Kangur, A., Shang, B., and M. Soto, 2013, “The Challenge of Public Pension Reform in Advanced and Emerging Economies,” Occasional Paper No. 275, International Monetary Fund. - Clements, B., Dybczak, K., Gaspar, V., Gupta, S. and M. Soto, 2015, “The Fiscal Consequences of Shrinking Populations,” IMF Staff Discussion Note, SDN/15/21, International Monetary Fund. - Clements, B., Coady, D. and S. Gupta, S., “The Economics of Public Health Care Reform in Advanced and Emerging Economies,” International Monetary Fund. - Informe de Previdência Social, 2014, Vol. 26, No. 2, February. - La Forgia, G. and B. Couttolenc, 2008, Hospital Performance in Brazil: The Search for Excellence, The World Bank. - Ocké-Reis, C.O., 2013, “Mensuração dos gastos tributários: o caso dos planos de saúde—2003‒11, Nota Técnica N. 5, IPEA. - OECD, 2015, Pensions at a Glance, OECD. - Pereira, E.S., 2013, “Evolução das idades médias de concessão e dos tempos médios de contribuição das aposentadorias por tempo de contribuição concedidas entre 1999 e 2012,” Informe de Previdência Social, Ministério da Previdência Social, Brazil. - Queiroz, B.L. and M.G.B. Figoli, 2010, “The Social Protection System for the Elderly in Brazil,” Background paper prepared for the Workshop on Aging in Brazil, The World Bank, Brasília, April 6–7. - Tafner, P., Botelho, C. and R. Erbisti, 2015, “Reforma da previdência—a visita da velha senhora, a gestão pública.” - Tesouro Nacional, 2015, “Relatório resumido da execução orcamentária e outros demonstrativos,” December. - Valdés-Prieto, S., 2007, “Pension Reform and the Development of Pension Systems: An Evaluation of World Bank Assistance,” The World Bank Country Study, No. 56343. ### Health, Health Policy, and Healthcare Systems - Gragnolati, M., Jorgensen, O.H., Rocha, R., and A. Fruttero, 2011, “Growing Old and Older in Brazil,” The World Bank. - Gragnolati, M., Lindelow, M. and B. Couttolenc, 2013, “Twenty Years of Health System reform in Brazil: An Assessment of the Sitema Unico de Saude,” The World Bank. - Couttolenc. B. and T. Dmytraczenko, 2013, “Brazil’s Primary Health Care Strategy,” Universal Health Coverage Studies Series, No. 2, The World Bank. - Schmidt, M.I., Duncan, B.B., Azevedo e Silva, G., Menezes, A.M., Monteiro, C.A., Schmidt, M.I., Barreto S.M., Chor, D., and P.R. Menezes, 2011, “Chronic, non-Communicable Diseases in Brazil: Burden and Current Challenges,” The Lancet Series, No. 9781, Vol. 377. - Victora, C.G, Barreto, M.L., do Carmo Leal, M, Monteiro, C.A., Schmidt, M.I., Paim, J., Bastos, F.I., Almeida, C., Bahia, L., Travassos, C., Reichenheim, M., and F.C. Barros, “Health Conditions and Health-Policy Innovations in Brazil: The Way Forward,” The Lancet Series, No. 9782, Vol. 377. ### Brazilian Economic and Fiscal Sources - Fazenda, 2015, “Cenario Macroeconomico 2016‒19,” Ministerio de Fazenda, October 27. - Credit Suisse, 2016, Brazil Economic Digest, June 21. - IMF, 2012, Selected Issues Paper for the 2012 Article IV Consultation, International Monetary Fund. - Receita Federal, 2016, Demonstrativo dos gastos tributários, estimativas bases efetivas—2013, Ministério da Fazenda. *Source: wp1799 - References* --- _Source: https://www.imf.org/-/media/files/publications/wp/2017/wp1799.pdf_