Note No. 52 March 2001 Enhancing Economic Reforms through Social Development: Brazil State Pension Systems Reform LIL Social Development Best Practice Elements · Analysis of adverse impacts of the project on the poor · Institutionalized mechanisms for participation and consensus building within the government · Ongoing monitoring and evaluation of social development outcomes by the government and community Brazil is in the throes of tackling its crippled fiscal debt could cost billions of dollars. Strategically, system. Serious problems exist at both the federal helping the states to address technically the and state levels. The fiscal situation in Brazil's 26 pension debt may be one of the most difficult but states is under inordinate strain due to the necessary policy actions. Reducing the fiscal country's enormous pension obligations. These burden on the states also will indirectly reduce constitute a large and growing component of each poverty by freeing resources for poverty reduction state's debt and consume 30 percent to 50 percent programs. of revenues in some states. Resolving the pension crisis in Brazil has been The Brazil State Pension Systems Reform Project neither straightforward nor technically easy. The was aimed at diagnosing the problems in the World Bank provided technical assistance via pension system. The project uses important social diagnostic tools that assessed the impacts of development practices, including involving current pensions at the state level. The analysis stakeholders, nurturing internal champions, identified likely impacts various pension reform disaggregating data by social groups, and models might have on different social groups, monitoring social impact. including the poor. The project was realistic in scope. It was intended only to equip the states The gravity of Brazil's fiscal problem is illustrated technically to address pension reform and to assist by the ratio of pension expenditures to salaries of in setting up stakeholder discussion groups to civil servants. In the states of Minas Gerais, Rio de openly examine and debate the merits of various Janeiro, and Rio Grande do Sul, this ratio ranges pension reform proposals. from 50 percent to 120 percent. Retiring pension ____________________________________________________________________________________________________________ This project was recognized as Best Practice in Social Development by the Social Development Family in June 2000 and received an award for Excellence in Quality at Entry from the Quality Assurance Group (QAG). The task team leader was Chris Parel. This best practice note was prepared by Kathleen Kuehnast. The views expressed in this note are those of the author(s) and do not necessarily reflect the official policies of the World Bank. The government allowed the testing of these hopeful. Involving stakeholders in consensus- diagnostic tools on the social security system. In building was critical for ownership of the reform the end, such technical assistance could achieve process to commence. only part of the reform. The critical component was building internal government support for The resulting Learning and Innovation Loan (LIL) constitutional reforms of the pension system. funded two stages of the project. First, it assisted the federal ministry to gain the capacity to Creating the Capacity for Learning, Trust, undertake the data collection and modeling and Reform necessary to analyze the problems. To achieve this, the government set up the Department of Pensions Capacity building and technical assistance are for States and Municipalities. Because it had the critical to redesign a pension program. Equally technical expertise, the ministry was perceived as important is consensus building and strengthening the credible leader on the pension issue. This led to cohesion and cooperation among key stakeholders. the second phase: to help the states build local The project demonstrates how Bank cooperation capacity to address pension reform issues. with governmental departments can help develop champions and build stakeholder support for The process of involving both state and federal institutional and political reform. stakeholders proved successful, since the two constituencies were able to reach their own The Government of Brazil and the Bank agreed conclusions about the extent of the pension that resolving the pension crisis was an essential problem and the liabilities. Further analysis step toward the Brazilian states' achieving fiscal revealed that the subsidy for government stability, since pension obligations constitute a employees' pensions was larger than for the rest of large and growing component of state debt. In the social security system. Even though the December 1997, debt was 13 percent of GDP and Ministry of Social Security was responsible for 38 percent of total government debt. Although most of the pension system, at the national level no there was consensus about the nature of the single entity was responsible for the government problem, the solution was less clear. employee pension system. Government officials quickly realized that existing options and models Identifying a reform champion in a governmental failed to address these deeper structural problems. department proved somewhat difficult since the Ministry of Social Security was wary of Bank In addressing the gap between government involvement and concerned that the Bank would employees' pension funds and those of all other impose its own solution on the country. workers, it became evident that the next major Nevertheless, the ministry gave the Bank team the barrier toward pension reform was political. To challenge of demonstrating the usefulness of new change the pension system, constitutional reform data collection and modeling techniques by first was required. Subsequent defeat of a constitutional testing them on the social security system. reform component dealing with reform of age/eligibility demonstrated that pensions are The Bank used the opportunity to demonstrate to politically sensitive. Thus, constitutional reform the ministry how comparisons and forecasting will be a laborious process--one that is opposed by could provide the government with tools to create the powerful civil service workers' unions. viable solutions for reforms. Bringing more stakeholders into the process proved critical to Building consensus for pension reforms in Brazil is long-term reform. In April 1998, the Ministries of underway. The Bank's report on pension reform Finance, Social Security, and Administrative will be circulated throughout the states, in the Reforms hosted a seminar for their state media, and on the internet to build awareness of counterparts, in which the Bank team presented the the need for constitutional reform and to create results from the brief study. The seminar popular support for it. Public workshops and emphasized the importance of forecasting tools in stakeholder meetings continue to be key formulating alternative solutions. State ministers components to build the coalitions for change found the results and new information helpful and necessary to implement pension reform. "Social Development Notes" are published informally by the Social Development Family in the Environmentally and Socially Sustainable Development Network of the World Bank. For additional copies, contact Social Development Publications, World Bank, 1818 H Street, NW, MSN MC5-507, Washington, DC 20433, USA, Fax: 202-522-3247, E-mail: sdpublications@worldbank.org. 2 Printed on Recycled Paper