FEATURE-Cash-strapped Brazil bets house on pension reform

www.forbes.com Reuters, 02.11.03, 6:40 PM ET By Carlos A. DeJuana SAO PAULO, Brazil, Feb 11 (Reuters) - Ricardo Berzoini trained as an engineer and earned a living as a congressman before Brazil's new president, Luiz Inacio Lula da Silva, tapped him to run the social security ministry. But 42-year-old Berzoini should have studied to be a magician, because the task at hand -- restructuring a pension system that drained $15 billion from government coffers last year -- may require him to pull a few rabbits out of a hat. If he hopes to rein in the chronic deficits that plague Brazil's public-sector pension system, Berzoini will have to shake up "a hornet's nest of interest groups," from teachers to civil servants, one analyst noted. The system -- including both public and private sector workers -- produced an enormous deficit equal to 5.5 percent of gross domestic product last year. "If you turn that around, it is the single most positive thing you can do for the country," says James Barrineau, vice president of emerging market research at Alliance Capital Management in New York. The reform has become a Holy Grail of sorts for Lula's center-left government. Even before taking office on New Year's Day, Lula flagged it as one of the government's most important projects this year. So entrenched is the regime, however, that the past administration of President Fernando Henrique Cardoso tried and failed numerous times to make it work properly. If Berzoini succeeds, he may be responsible for one of the most important changes to the Brazilian economy in years. Economists say the current system for state workers will become increasingly unsustainable as more and more Brazilians retire. The ratio between those making pension payments to retirees slid to 1.2 in 2002 from 3.0 in 1980 and 7.9 in 1950. "The pension reform is a necessity for the country, not just from a fiscal point of view, but for its sustainability," Berzoini has said. But perhaps just as important, overhauling the system would prove to skeptical investors that Brazil is serious about controlling spending and in turn, able to service its delicately balanced $250 billion debt. If Lula can convince investors that the Brazilian economy is on sound footing, he can more easily keep his promises to improve the lot for Brazil's poor and create more jobs as money starts to flow into the country. "It's more of a medium-term reform. But the impact on confidence in the country's sustainability would be pretty powerful," says Barrineau at Alliance Capital Management. CONSENSUS BUILDING Lula has said he wants to send Congress a reform that has already won the approval of most sectors of society by May. In search of consensus, Berzoini has been making the rounds with labor leaders to seek out their views. Although there is still no official proposal, the government is expected to try to unify the private and public sector pension systems to cut costs. That could prove a difficult task, however, as government workers would lose the right to retire with pension payments equal to their last salary. Their social security benefits would instead be capped as they already are for retirees from the private sector, whose pension system was reformed under the previous administration. According to a report by BBV Banco in Sao Paulo, government retirees on average receive about $357 a month. Private workers are paid $109 and their benefits are limited to $438. At a meeting with the Confederation of Brazilian Public Workers, civil servants made it clear they were not about to give up benefits so easily. Berzoini, the former head of Sao Paulo's banking labor union, looked on quietly. "It wasn't the social security system that bankrupted the state, but the state that bankrupted the social security system," Joao Domingos dos Santos, the confederation's president, shouted to loud applause. The military has also said it won't give up rights to special pensions and, so far, Lula has capitulated. Supreme Court Chief Justice Marco Aurelio Mello, last month created a stir by saying it might be unconstitutional to deprive workers of their "acquired rights." His comments were interpreted to mean the court will block any attempt to change retirement terms for current employees or those already drawing their pension. But after meeting with Berzoini last week, Mello appeared more amenable to a reform that would transition workers from one system to another. The uproar has led Sergio Abranches, a Rio de Janeiro-based political consultant, to warn that Lula's drive for political consensus could backfire. "Opening up the debate to society would appear to be a positive thing. But what it really does is increase the number of obstacles," he said. "It creates a much more complicated negotiation." THE BIGGER THE BETTER Even though it is early in the game, some analysts are worried Lula may have to bow to too many interests to push the reform through Congress, thereby lessening its bite. One debate is centered on exactly who will be affected by the changes -- current retirees and employees or just new workers. Although the latter may be more feasible politically, it will delay the impact on the government's accounts. "If you exempt all retirees and all current civil servants, then you will have to find the fiscal benefits of this reform with a magnifying glass," says Arturo Porzecanski, head of emerging markets at ABN Amro in New York. As it is, a reform that affects at least portion of current workers could take more than four years to impact the government treasury, according to BBV. Indeed, the reform should cost the government more money initially as it will have to start paying social-security tax on its own employees as companies do now for their workers. Regardless, analysts are optimistic. Lula, a former metalworker and union leader, may be the only president with enough credibility with labor groups to successfully push through a social-security reform, they say. Just like no one could accuse U.S. President Richard Nixon of coddling Communists when he visited China in 1972, no one can accuse Lula of being insensitive to Brazil's working class, says Riordan Roett, director of the Western Hemisphere Program at Johns Hopkins University in Washington. "The labor people realized that they're never going to get a better deal from the Planalto (presidential palace) than having Lula as president. So it's certainly not in their interests to see him fail," he says. "I think they're going to come up with a reasonable reform package that they all can live with."