Pension system needs longer contribution periods, says Economics professor

Changes to the Social Security rules recently introduced by the government indicate a tendency towards older retirement ages and longer Social Security contribution periods, according to an Economics Professor at the Federal University of Rio de Janeiro (UFRJ), José Carlos Oliveira.

Specializing in Brazilian economic policy, Oliveira explained that the pension system remains in deficit despite successive corrective initiatives implemented over time that have fallen short of solving the problem. And the first reason is the changing population profile in the country.

He said the families have become much smaller and this has resulted in a larger proportion of elderly population than in the past, when more young people were entering the job market. “In other words, the total number of [Social Security contribution] payers was far more significant than that of pensioners,” the professor told Agência Brasil. “The demographic pyramid is now changing into a square, and should become an inverted pyramid in the future,” he added.

The professor explained that the population ageing is a global trend now that people live longer thanks to improvements in health and nutrition.

In his opinion, the unhealthy financial situation of our system has deep roots. “Our pension system is [funded through] the so-called pay-as-you-go [PAYG model], unlike in the United States and some European countries, where defined contribution plans are more prevalent. Here [in Brazil], all Social Security revenue goes into a general fund earmarked for pension payments. The money that is credited in a calendar month is spent in that same month, but goes to someone else,” the economist explained.

The 1988 Constitution extended benefits to more population groups, including rural workers and fishermen. “They get the money even though they don't pay the contributions,” the professor said. And the costs get even higher when you add other benefits including funeral coverage and widow's and disabled pensions.

Oliveira explains that Brazil's Social Security system has not always faced cash difficulties. “In the fifties, when it [the pension system] was separated by activity areas – and the system varied in each of them – the benefits were calculated based on employee occupation, including sales, banking, rail, and factory workers. Each of these categories had their own pension plan. Some of them were in surplus because they were small classes with a large young contribution payer base. In addition, the employer's contribution was often larger than the employee's. But that was only sustainable thanks to the demographic patterns back then, with young people outnumbering the elderly,” he explained.

In the defined contribution plans adopted in the United States, Chile, and some European countries, the money from individual contributions is credited to a personal for the holder's own use in the future. “You define what you want for the future and make your own payments to save for it. A healthy Social Security system should be based on defined contributions,” Oliveira said.

The best model to transition from a PAYG plan like Brazil's to a defined contribution system is Chile's, according to the economist. But it is also costly. “This change would demand efforts from all sides – the government, employers, and individuals. In Chile, the government had to sell government property to invest in the fund in order to provide liquidity. Then workers were given a choice on the system they'd like to . It's the kind of transition that takes at least 35 years to complete,” he said.

“A pension system can only be sustainable if the number of people starting work is larger than the number of people retiring from work, and no additional benefits are created for retirees. Also, the 'grace period' before someone can actually use their right to retire has to be longer,” the professor concluded.

Translated by Mayra Borges

Relacionadas

Government publishes new rules for pension calculation