Brazil’s pension system

Brazil’s pension system and the 2019 reform

Like many other countries around the world, Brazil faces major challenges in financing its current pension system. Seven reforms have been implemented over the past 35 years, the most recent in 2019. The main reasons cited by the government were rising expenditure and an increasingly ageing population.   

According to data presented by the government, Brazil is expected to have the world’s fifth-largest population aged over 65 by 2030. In emerging economies such as Brazil, population ageing tends to progress more rapidly than in developed economies. According to the Institute for Applied Economic Research (IPEA), the proportion of very elderly people will rise from 7.3% in 2010 to around 40.3% in 2100, while the proportion of young people (aged under 15) in the country is expected to fall from 24.7% to 9%.

The growing number of people entitled to a pension comes at a cost. Pension subsidies from the federal budget reached their highest level in ten years in 2019: 299.7 billion reais (equivalent to 4.2% of GDP). On average, this figure has grown by 12% annually since 2011.

The current figures reveal a substantial and unsustainable imbalance between pension contributions from the working population and pension payments. A pension reform was adopted in 2019 to avoid placing an excessive burden on future generations and to safeguard the continued viability of the pension system.

The new rules

The calculation of pension entitlements has been revised and is now based on average lifetime earnings, whereas previously the lowest 20% of earnings were excluded. In addition, subject to transitional rules, the earliest possible retirement age has been set at 65 for men and 62 for women.

Once the minimum contribution period has been reached (15 years for women and 20 for men), the pension entitlement amounts to 60% of average earnings since 1 July 1994 (the date on which the current national currency, the real, was introduced). Each additional year of contributions increases the entitlement by 2 percentage points. To receive the full pension, women must therefore accumulate 35 years of contributions and men 40 years.

Before the reform, the minimum retirement age was 60 for women and 65 for men. It was also possible to retire on the basis of accumulated contribution years (30 for women and 35 for men), even before reaching the minimum retirement age. This rule no longer applies. Previously, the highest 80% of earnings were used to calculate the pension amount.

The minimum pension is always linked to the minimum wage. The government last increased the minimum wage in May 2023 to its current level of 1,320 reais (approximately €250). According to the National Social Security Institute (INSS), 23 million out of 36 million benefit payments are equal to the minimum wage. The increase in the minimum pension will raise total pension expenditure by 3.29 billion reais in 2023. The maximum pension is currently 7,507.49 reais (€1,390).

Conclusion

The central objective of the reform was to reduce pension subsidies from the federal budget. The estimated pension deficit for 2023 is 2.6% of GDP. The pension reform is expected to reduce this figure further by 2029. Although the reform was heavily criticised by pensioners, savings of 156 billion reais (approximately €30 billion) have already been achieved since it came into force.

Despite the 2019 pension reform, the pension deficit is expected to rise again from 2030 and could reach 5.9% of GDP by 2060 and 10.4% of GDP by 2100. These projections make it clear that further pension reforms will be necessary in the coming years to prevent the system from collapsing.