Latin America’s largest economy, Brazil, is at a crossroads. Fixing its public finances could open the door to a virtuous cycle of expansion; failing that, it risks slipping deeper into junk-level credit ratings and sub-par growth. Much depends on the nation’s costly pension system, the target of the first sustained legislative push by President Jair Bolsonaro and his economic team. Mustering lawmaker support for pension reform failed as recently as 2017 under former President Michel Temer, and Bolsonaro’s effort is already running into headwinds.

1. Why is pension reform so important?

Brazil’s pension expenditures are already high compared to other countries, and a rapidly aging population makes the current system a ticking time bomb. Brazil spends the equivalent of 13 percent of gross domestic product on social security, well above the average of 8 percent for G-20 nations, according to a government report published in December. The pension fund for private sector workers is expected to run a deficit of 218 billion reais ($54.7 billion) this year up from 195.2 billion reais in 2018, while the fund for public servants will also be in the red. At present, Brazil’s economically active population pays for retirees’ pensions. The number of citizens over the age of 65 will jump to 25.5 percent of the population in 2060 from just 9.5 percent now, according to the national statistics agency.

2. What is Bolsonaro’s plan?

His government, under Economy Minister Paulo Guedes, wants to establish minimum retirement ages — 65 for men and 62 for women, with a transition period of 12 years. Currently, retirement is determined by a formula that considers both age and contribution time, allowing some workers to claim benefits as early as in their 50s. Bolsonaro would also implement individual savings accounts for workers who enter the labor market, so that future generations will be responsible for saving for their own pensions. The goal of those and other steps is to generate roughly one trillion reais in savings over 10 years.

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