Our Brazil team was much more optimistic than most that pension reform would be passed in 2019.
Brazil will have a historic opportunity to pass pension reform in 2019. We highlight four reasons for our optimism that the Bolsonaro administration will be able to pass pension reform in 2019.
1. There is near-consensus that pension reform is necessary. Over the past two years, the Temer administration succeeded in making the country's fiscal situation part of the public debate. The government worked tirelessly to explain the need for the reform to the population, which finally appears resigned to the fact that the current retirement system is unsustainable.
2. Bolsonaro has the popular support that Temer lacked - for now. Unlike Temer, who took office after former President Dilma Rousseff had been impeached, Bolsonaro was elected with just over 55% of the votes. Although this is positive news now, Bolsonaro's longer-term approval hinges on economic improvements, which, in turn, depend on the passage of unpopular reforms.
3. Guedes has put together a team with strong political skills. Final appointments to his team have shown that he increasingly understands the importance of having staff who have not just strong technical but also political skills. Arguably, the best example is the appointment this week of Rogerio Marinho. Marinho has said that his goal is to have the reform passed in the first half of the year, which is when Bolsonaro should still be in the throes of his political honeymoon.
4. State governments need pension reform even more than the federal government. The situation for states is worse than that of the federal government because all of their pensions are paid to civil servants, who are the most privileged class of public employee - not only do they retire with 100% of their final salary; their pensions are indexed to the wages of the employee who is currently performing their previous function. Although the pension reform would not be an overnight cure for the fiscal woes of Brazilian states, it would help to bring some much-needed relief to their budgets in the medium term.
Pension reform in 2019 is our base case. Besides the reasons cited above, we make this judgement based on the fact that Paulo Guedes and key members of the Bolsonaro team understand that the window to pass this reform will not remain open forever. That is why it is essential that the government come up with a pension reform strategy early next year, so that once the Senate and Lower House leaders have been elected in February, it can begin moving ahead with the reform. The weak opposition and the shift to the right of the Brazilian electorate will help the administration pass this reform.
After five years of abortive attempts, pension reform was finally passed in July 2019.