Pension Reform Tests Brazilian President - Cutting Large Payments Could Help Economy but Hurt Workers Whose Votes Put Lula in Office

www.washingtonpost.com By Jon Jeter Washington Post Foreign Service Monday, March 3, 2003; Page A12

 	President Luiz Inacio Lula da Silva is considering revisions to a pension system that gives full pay to many retired workers. 

RIO DE JANEIRO -- To understand the difficulties facing Brazilian President Luiz Inacio Lula da Silva, get to know Carlos Borges.

The 46-year-old Borges is, in his own words, "just a regular Joe" who has put in 25 years on municipal road crews in Rio de Janeiro and is looking forward to retiring 10 years from now. No one, he said, cheered more loudly when voters in October elected Lula, as Brazil's leader is commonly known, as the first working-class president of this country of 176 million people.

But few have more to lose than Borges, depending on how Lula crafts a plan to reduce the generous public pensions that bog down this country's already indebted public treasury.

"I know that there is much pressure on Lula to cut our pensions," Borges said recently over a cup of espresso on a sizzling hot afternoon. "But many people like me voted for him because we felt the previous government paid too much attention to the bankers and the business community and ignored the needs of the poor and the ordinary workers. We voted for him because we see Lula as one of us and if he cuts our pensions, many of us will be very, very disappointed in him."

Borges's concerns reflect the political balancing act that the new president encounters in an attempt to reconcile the expectations of the broad coalition that catapulted him into office -- made up of the poor, the liberal middle class and disaffected business interests -- with the concerns of prosperous Brazilians and international lenders whose disengagement can wreck both his government and the fragile economy he is trying to manage.

The Brazilian retirement system, which doles out full-pay pensions after 35 years of service for many civil servants, contributed last year to a $20 billion deficit in the social security system and represents 42 percent of all government payroll costs, according to government statistics.

Neither Lula nor any of his advisers has made public any final proposals. But economists say that revisions to Brazil's social security system would likely focus on the ample benefits provided to some civil servants, especially the military, judiciary and police, who often receive more after retirement than they did during active service because they are entitled to wage increases along with active employees.

In the best scenario for people like Borges, lower-paid employees would suffer less than Brazil's higher-level public servants and the military, who can retire after only 30 years and are charged less than the 11 percent payroll deduction for most other government employees. Whether pension reform would treat rich and poor equally is one controversial issue. Another is whether a new plan would affect current recipients as well as new pensioners. Top-ranking military officials, prominent judges, diplomats and others are demanding that they continue receiving special treatment.

"Brazilians have no basis of comparison with other pension systems in other countries," said Richard Foster, a Brazil specialist in Washington who publishes the biweekly Brazil Watch newsletter. "Pension reform in Brazil is like health care reform in the United States, indispensable to the long-term prosperity of the country, but nearly impossible to approve because of special interests."

Heloisa Guerra, for instance, has never held a full-time job. She is 53 and draws a federal pension of nearly $750 a month. Under existing law, the unmarried daughters of high-ranking military personnel receive a lifetime benefit following the death of their parents.

Still, Guerra, like many others here, says that the pensions are one of the few tools that the poor and middle class can depend on to stay afloat in a country deeply divided between rich and poor. "Reforms will make the middle class even poorer," said Guerra. "It's going to hurt society."

Brazilian society is mostly poor, with a minuscule wealthy class and a middle class principally located in southern cities. The consumer price index is running at an annual rate of about 21 percent. But a majority of working-age Brazilians are underemployed and subsist below the minimum monthly wage of less than $100.

The president's support for pension reform runs counter to the way a leader of an organization called the Workers' Party would be expected to behave. A former lathe operator, Lula became famous in the 1980s as a trade union leader in the industrial heartland of Sao Paulo state, campaigning for workers' rights in the automotive industry. Early on, he opposed periodic efforts by the government to change Brazil's pension and retirement laws. Since then, his message has been progressively moderate.

"Pension reform has been the 800-pound gorilla in the room for years," said one Western diplomat. "Everyone knows it but Lula may be the only one with the political capital to do it. This may be the first really big test of his administration."

Less than 90 days into his presidency, Lula enjoys a honeymoon with the nation's news media and draws good reviews from diverse sectors. Last month, he told a gathering of anti-globalization activists in the southern city of Porto Alegre that he is committed to their social agenda. He then shuttled off to Switzerland, where he promised a meeting of bankers, corporate leaders and international diplomats that Brazil will not follow neighboring Argentina into default and will continue payments on its $250 billion public-sector debt.

Also last month, he submitted to Congress a budget proposal with $14 billion in spending cuts but also launched a crusade against hunger, introducing a $1.6 billion federal entitlement to provide food stamp-like vouchers for the neediest Brazilians.

He has been careful, meanwhile, to distance himself from presidents Fidel Castro of Cuba and Hugo Chavez of Venezuela, both of whom attended his inauguration as concerns were raised in the United States and elsewhere about his populist Workers' Party reputation. He has found room in his government for politicians such as Henrique Meirelles, a former executive of FleetBoston and a free-market disciple whose appointment as central bank president appealed to the international financial community.

"What you are seeing is a revolution but it's not a socialist revolution; it is a capitalist revolution," said Congressman Fernando Gabeira, a member of Lula's Workers' Party from Rio de Janeiro. Gabeira is a onetime guerrilla opponent of Brazil's former military dictatorship who participated in the 1969 kidnapping of U.S. Ambassador Charles Burke Elbrick.

"The government is not trying to overturn capitalism but to attract more poor people, more marginalized people to the capitalist center," he said.

One indication of Lula's calming influence has been the absence of any dramatic, sudden changes in economic policy.

"He understands that we have to fight poverty but he's practical about it. What's the use of making beautiful speeches about fighting poverty and then not being able to do anything about it," said Eliezer Batista, a former president of Companhia Vale do Rio Doce, the world's largest iron ore exporter, and an informal adviser to Brazilian presidents.

The new administration faces hurdles down the road. Despite his landslide victory, Lula's Workers' Party controls less than 20 percent of the seats in a fragmented Congress and political analysts say Lula will have to forge coalitions. He won a pledge of support on his pension and tax reforms last week from Michel Temer, leader of the opposition Brazilian Democratic Party, who hinted at joining forces with Lula to create a majority in Congress. "We will support and will approve the reforms," Temer said in a speech before the Chamber of Deputies, the lower house in Congress.

It is still early in Lula's presidency. Crime and entrenched poverty are chronic concerns. The public debt is now equal to nearly 56 percent of the nation's gross domestic product. Foreign analysts are uncertain there will be enough money for Lula to accomplish lasting changes.

"He's really done an impressive job of balancing people's needs so far," said one Western diplomat "But will he be able to maintain that very delicate balance on top of a pinpoint? That's what everyone is waiting to see."

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