Brazil: Lula Wins Round One

Unfortunately for Lula, the pension vote alone is not a magic
wand, and much more needs to be done. The next battle—reforming
the inefficient taxation system—could be just as hard fought,
since the federal government will need cooperation from state
governors. They, in turn, will be expecting a payback.

John Fitzpatrick

 

When President Luiz Inácio Lula da Silva took office on January 1^st , the streets of Brasília were packed with hundreds of thousands of supporters celebrating the arrival of this former metalworker in the Planalto Palace. Many of these supporters were back in Brasília in the past week, protesting at the impending vote in Congress to begin reforming Brazil's costly pension system. Some carried placards calling for Lula to resign, and accusing him of being a traitor of public service workers.

One group climbed onto the Senate building and waved the red flag of the Workers Party (PT), which Lula founded over 20 years ago. Most dramatically, some idiots started smashing windows of the Congress building. If these protestors thought they would hold back the reform by intimidating, insulting or attacking the Executive and Legislative branches of government, they were wrong.

I have made no mention of the Judicial branch of government, since most of its members were on the side of the protestors in their obdurate hostility to the reforms. By behaving as they did, the demonstrators not only shamed themselves but strengthened the will of the government and Congress. The result was a victory for the electorate, which wants an end to privilege for pampered civil service workers, many of whom would not last a day in a real job in the private sector. 

The first vote in the House of Representatives was a decisive victory. There were 358 votes in favor with 126 against, 9 abstentions and 19 deputies did not vote at all. The government easily won the 308 votes required to amend the Constitution, i.e. a majority of three-fifths of the 513-member House. However, around 80 deputies from the parties within the governing alliance voted against the reforms or abstained. For example, three PT members voted against and eight abstained, and four Communist Party members voted against.

This mini rebellion means that victory would not have come about had 62 deputies from opposition parties, like the PSDB and PFL, not voted with the government. But this is not necessarily bad. The breadth of Lula's coalition is such, ranging from the evangelical PL to the Communist Party, that there were bound to be differences over such a complex issue.

It's interesting to note that 49 percent of the PSDB deputies (29 out of 59) and 47 percent of the PFL deputies (33 out of 69) voted with the government. Ironically, those opposition members who voted for the reform showed a political maturity that the PT seldom displayed when it was the main opposition to the administrations of former President Fernando Henrique Cardoso.

The process has not stopped, and we will have a further vote this week in the Lower House before the bill goes to the Senate. The government aims to have the procedure finished by September. There are still plenty of details to be worked out, and further amendments to be considered, but since Lula virtually caved into the judiciary and made substantial concessions to civil servants in other areas, these should not put the process in doubt.

What's the Fuss?

Foreign readers may wonder why a subject as dull as pension reform should cause such a fuss. This is because public service workers in Brazil enjoy benefits that are well above those in the private sector, and out of proportion to the contributions they make, particularly in terms of years of service. Due to legal loopholes, it is common for people to retire in their early 50s, continue to receive a pension that is equivalent to their last salary, and have the amount regularly upgraded in line with salary increases obtained by servants still on the job. There are even cases of people retiring in their 40s.

Under the new proposals—which, it must be stressed, will affect future civil servants and not those currently employed—the maximum pension for a civil servant will be the same as for a private sector worker: R$ 2,400 per month (about US$ 800). A cap of R$ 17,200 a month (about US$ 5,700) will be put on pensions for federal judges, and R$ 15,600 (about US$ 5,100) for appeal court judges. Under the current system there is no limit, and some judges receive monthly pensions of up to R$ 50,000 per month (about US$ 16,500).

Remember, this is happening in a country where the minimum monthly wage is a mere R$ 240 (about US$ 78). Under the proposal that passed in the first-round vote, the retirement age will stay the same at 55 for women and 60 for men, but with tax incentives to encourage people to remain working longer.

The existing generous system places an enormous financial burden on individuals and corporations, which pay around 35 percent of their income in tax. Even then, the government's finances are in the red to the tune of around US$ 300 billion, of which a respectable chunk has to do with sustaining the existing pension system.

In a report published in 2001, the World Bank said the fiscal situation in Brazil's 26 state governments was under "inordinate strain" because of the country's enormous pension obligations. These, according to the report, were a "large and growing component" of each state's debt, and consumed 30 to 50 percent of revenues in some cases.

The pension scheme is expected to show a deficit of US$ 26 billion this year alone. To meet these payments, the government has to borrow at extremely high interest rates at home and abroad. According to the government's figures, these reforms will bring savings of around US$ 17 billion between 2004 and 2010.

Unfortunately for Lula, the pension vote alone is not a magic wand, and much more needs to be done. The next battle—reforming the inefficient taxation system—could be just as hard fought, since the federal government will need cooperation from state governors. Lula depended on these governors to get his pension proposals through, and they will be expecting a payback in the form of tax benefits and special privileges for their states, just as the civil servants and judges demanded for their pensions.

 

John Fitzpatrick is a Scottish journalist who first visited Brazil in 1987 and has lived in São Paulo since 1995. He writes on politics and finance and runs his own company, Celtic Comunicações— www.celt.com.br, which specializes in editorial and translation services for Brazilian and foreign clients. You can reach him at jf@celt.com.br

© John Fitzpatrick 2003

This article appeared originally in Infobrazil, at www.infobrazil.com