depec-bradesco economic highlights · receive retirement benefits/pensions by age (2013) source:...
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Depec-Bradesco Economic Highlights
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Year XII Number 108 - June, 22 2015
Population aging and the impact on pensions: Brazil’s turn
Brazil’s demographic transition is taking place at an exceptionally fast pace. A few years ago, a great deal of attention was centered on the accelerated growth of the active population; now, however, the focus has shifted to the increasingly rapid aging of the population. This poses a massive challenge for the country’s pension industry, which is already overloaded and will be forced to absorb an increasing number of beneficiaries in the coming decades. In addition, life expectancy is on the way up so they will be receiving their benefits for a longer period of time. It is vital, therefore, to discuss measures for augmenting the system’s sustainability, especially in regard to incentives for increasing the retirement age (currently around 55 years for an important percentage of the population).
The population aging issue has been discussed at length in certain countries, mostly developed nations, since the beginning of the 1990s. However, the demographic transition process is now a reality in the emerging countries as well, including Brazil.
The country’s fertility rate peaked in the 1960s and 70s at around six children per woman, and fell rapidly thereafter until reaching 1.9 children per woman, lower than the population replacement rate (around 2.2). At the same time. the mortality rate has fallen, pushing up average life expectancy to 75 years, versus 50 in the mid-60s.
As a result, the composition of Brazil’s population has altered substantially. According to the IBGE (Brazilian Institute of Geography and Statistics), the difference between the number of 15-to-59-year-olds and the sum of the 0-to-14-year-olds and the over-60s will reach its maximum of 65 million in 2021. In addition to the already heavily discussed effects on the job market due to the future reduction in the working-age population likely to be in work, the sustainability of Brazil’s pension system will be severely jeopardized, given that the demographics will result in an upturn in the number of beneficiaries as the over-60s group expands and favor a decline in the number of contributors.
Ana Maria Bonomi BarufiLeandro Câmara Negrão
9,93 14,33 17,4430,64
41,2451,94
70,19
93,14
119,00
146,83
173,45
193,16
210,06
231,41 227,59 226,46218,92
0
50
100
150
200
250
1872 1890 1900 1920 1940 1950 1960 1970 1980 1991 2000 2010 2020 2030 2040 2050 2060
Milh
ões
60 or more15 - 590 - 14Total
Population growth trends and breakdown by age group – 1872-2060 (2013 revision of IBGE population projections
Source: IBGEProduction: BRADESCO
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It is important to compare this demographic transition process with those that have occurred in other developed and emerging countries. In fact, Brazil’s population aged much more rapidly than in the developed nations throughout the 20th century. In France, for example, it took 113 years for the participation of those aged 65 or more to increase from 7% to 14% of the total population and 45 years to rise from 14% to 21%, according to the UN’s projections. In the case of Brazil and other emerging countries (Colombia, Chile, South Korea and China), this process has been much faster: each country will take between 21 and 25 years to increase the share of this population group from 7% to 14% and between 10 and 22 years to rise from 14% to 21%. In other words, Brazil and other emerging nations will be aging rapidly long before they reach an advanced stage of economic development. In addition, Brazil’s dependency ratio (the ratio of those
aged between 15 and 64 to those aged 65 or more) will decline from the current 9.3 to 2.3 by 2060.
There are certain explanations for the fact that populations are aging much faster in the emerging countries than the developed ones. On the one hand, there was an exceptionally rapid reduction in the fertility rate in these nations due to new and cheaper means of contraception and the increased propagation and awareness of the importance of family planning. As a result, families had increasingly less children. On the other, advances in medicine throughout the 20th century allowed people to live longer, lowering the early mortality rate and increasing life expectancy. Consequently, the share of young people in the population tends to fall quickly, while that of the aged tends to increase even faster, resulting in the rapid aging of the population.
Number of years needed for the share of those aged 65 or more to increase from 7% to 14% and from 14% to 21% (2013 revision of UN projections) and the years in which these percentages are reached
Source: ONUProduction: BRADESCO
Note: an example of how to read this graph is to look at the case of Japan: it took 25 years for those aged 65 or more to rise from 7% to 14% of the total population, and 13 years to rise from 14% to 21%. These landmarks were reached in 1970 (7%), 1995 (14%) and 2008 (21%).
Population aging in Brazil is accompanied by a complex situation involving the age of retirement and the beginning of benefit reception. The percentage of people receiving retirement benefits and/or pensions (public or private) begins to become relevant at the age of around 55 and grows rapidly with age, especially in
the case of women. At the same time, the percentage of individuals in the economically active population (EAP) begins to decline at around the same age. In addition, the share of women in the job market is much lower than that of men (a difference of more than 20 percentage points in certain age groups).
Years in which those aged 65 or more reach 7% - 14% -
21% of the population
11382
7470
6645
4525
19
8662
5246
3126
2522
222121
2120
4551
2923
1733
5413
10
2024
4114
291114
1028
1516
2211
1850 1900 1950 2000 2050 2100
France [1865 - 1978 - 2023]Sweden [1890 - 1972 - 2023]
Australia [1938 - 2012 - 2041]United States of America [1944 - 2014 - 2037]
Canada [1944 - 2010 - 2027]Spain [1947 - 1992 - 2025]
United Kingdom [1930 - 1975 - 2029]Japan [1970 - 1995 - 2008]
Republic of Korea [1999 - 2018 - 2028]
Azerbaijan [1951 - 2037 - 2057]Argentina [1970 - 2032 - 2056]
Hungary [1941 - 1993 - 2034]Poland [1966 - 2012 - 2026]
India [2024 - 2055 - 2084]China [2001 - 2027 - 2038]Chile [1999 - 2024 - 2038]
Singapore [1999 - 2021 - 2031]Indonesia [2023 - 2045 - 2073]
Tunisia [2011 - 2032 - 2047]Brazil [2011 - 2032 - 2048]
Colombia [2017 - 2038 - 2060]Thailand [2002 - 2022 - 2033]
Years to rise from 7% to 14%Years to rise from 14% to 21%
Emerging countries
Developed countries
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0,3%
83,4%
86,2%
4,6%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 7880
or m
ore
Study - men Study - womenRetirement benefits/pension - men Retirement benefits/pension - womenEAP - men EAP - women
Age
Percentage of men and women who only participate in the EAP or who only study or who only receive retirement benefits/pensions by age (2013)
Source: PNAD/IBGEProduction: BRADESCO
The above graph shows that pension contributions become increasingly less important as the population ages and the dependency ratio moves up substantially.
Before examining the evolution of the pension system1, it is worth remembering that there are two types of public retirement system: the RGPS (General Social Security Regime), which includes private sector workers and voluntary contributors; and the RPPS (Own Social Security Regime), for public sector workers and members of the different branches of the military. The RGPS consists of the following modalities: retirement by time of contribution (35 years for men and 30 for women; by advanced age (minimum of 65 years for men and 60 for women, with 180 months of prior contributions); rural retirement (in theory a contributive system, but in practice financed by urban contributions – with minimum ages of 60 years for men and 55 for
women, with 180 months of rural activity and exercising this activity at the time of retirement); BPC (Continued Payment Benefit), for men and women aged 65 or more who have no history of contributions and with a household income of less than one quarter of the minimum age; and retirement due to invalidity (accident benefits or pension, in the case of contributors).
If we look at the evolution of active RGPS benefits we can see that that they have been rising rapidly. Between 2002 and 2013, the total number increased by 45.9%, from 17.81 to 25.99 million. In the case of retirement by age and length of contribution only, the total number moved up by 51.9%, from 9.33 to 14.17 million. Even if we assume that some of the benefits were granted to people who had not previously had access to them (but had the right), this steep trajectory raises concerns over the future sustainability of the public pension system.
RGPS pension benefit trends by type (2002-2013)
Source: MPSProduction: BRADESCO
1 It is worth noting that, although we are concentrating here on retirements per se, pension system expenditures also include transfers and pensions for death.
3,41 3,61 4,06 4,60 4,991,65 2,02 2,38 2,81 3,184,28 4,63
5,145,66 6,002,31
2,632,80
2,963,08
5,325,77
6,296,80
7,17
0,861,28
1,18
1,381,58
17,81 18,4819,34 19,94 20,69 21,14 21,85 22,54
23,47 24,21 25,0425,99
-
5
10
15
20
25
30
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Milh
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Título do Gráfico
Retirement by age of contribution Retirement by age - urban
Retirement by age - rural Retirement by invalidity
Pension by death Others
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One means of verifying the distortion between the current pension system and the accelerating transformation of the country’s demographics is to compare the average age at which pensions are received for the first time (in the case of retirement by age and length of contribution) and life expectancy at birth. In the 20 years between 1993 and 2013, life expectancy at birth increased by around six years to 78.5 for women and 71.2 for men. At the same time, the average age at which the first pension payment was received remained virtually flat (upturn of less than two years). In addition, this average age was lower for women, even though their life expectancy is higher, due to the retirement rules.
In addition, the abrupt increase between 1994 and 1999 was due to early retirement by many workers who were
uncertain regarding the pension reform being discussed at the time, which resulted in the creation of the so-called pension factor. This could make the disparity even worse, given that it meant that only part of the benefit would be paid to private sector contributors in the case of retirement before the minimum age. In any event, the factor does not appear to have satisfactorily resolved the system’s imbalance.
More recently, some of the fiscal measures announced since the end of last year are designed to reduce federal government spending on pensions, thereby correcting certain existing distortions. Presidential Decree 664 contains these measures, the most important of which being the change in the rules for the payment of pensions for death and the extension of employers’ responsibility in regard to sick pay.
63,965,5 66,3 67,1 67,7 68,4 68,8 69,6 70,6 71,2 71,6 72,5 73,3
71,773,2 74,0 74,7 75,3 75,9 76,4 77,1 77,9 78,5 78,8 79,6 80,3
53,452,651,3
49,2
52,4 52,954,5 54,4 54,4 54,4 54,8 55,3
51,249,4
47,850,2 50,9 51,6 51,4 51,4 51,5 51,9 52,2
45,0
50,0
55,0
60,0
65,0
70,0
75,0
80,0
85,0
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Life expectancy - men Life expectancy - womanAverage RTC - men Average RTC - women
Life expectancy at birth in years and average age for the initial reception of pensions for retirement by time of RGPS contribution between 1993 and 2013 (2014 - 2020 – IBGE projections)
Source: MPS, IBGEProduction: BRADESCO
Note: RTC: retirement by time of contribution
After its passage through Congress, the second item was removed in its entirety, leaving the rule as it stands now, i.e. employers are responsible for paying the first 15 days of an employee’s sick leave, after which time it becomes the government’s responsibility. As for the first item, spouses may only acquire a pension for the death of their partner if the period of marriage or stable relationship is more than two years and if the insured party had contributed to the INSS (national insurance system) for at least 28 months. Previously, there was no minimum contribution period for dependents to obtain this right, the only related requirement being that the deceased person must have been contributing at the time of his or her death. The Decree also imposed a period during which this type of pension would be received, with age as the criterion. It would only be granted for life if the spouse was 44 years old or more.
On the other hand, during its passage through Congress, a proposal was inserted to replace the
current retirement rule by altering the so-called pension factor to respect the 85/95 formula (the sum of the age and contribution period of women and men, respectively). According to several studies, this change would result in additional costs of R$100 billion over ten years. In an attempt to avoid this loss, the president vetoed this item when the Decree became law. At the same time, a new Presidential Decree was issued (676), which proposed making the 85/95 formula a progressive one by including the increase in life expectancy. i.e. as of January 2017, one year would be added to the formula so that it became 86/96, this process being repeated until it reached 90/100 in 2022, the idea being to make the pension accounts more sustainable. Additionally, the government will be discussing the adoption of a minimum retirement age in the Forum for Debate on Employment, Labor, Income and Pension Policies, which was created in April of this year and involves government and trade union representatives, as well as specialists in the respective
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areas. It is worth noting, however, that Decree 676 still has to be approved by Congress.
After evaluating retirement’s demand side, which will increase in the coming years, it is essential to understand the possibility of expanding the supply of funds to finance the system. Firstly, the change in the number of contributors was positive and relatively high throughout the last decade. However, certain factors contributed to this trajectory, including the growth of the working population (fueled by the increasing
number of people aged between 15 and 64) and the higher number of officially-registered (formalized) workers, who make pension contributions. These two factors will be less prevalent in the coming years, as the growth of the population aged between 15 and 64 and the expansion of labor formalization will be slower. Tha latter is due to the fact that overall economic growth will be slower than in the previous decade (on the other hand, the flexibilization of labor relations, currently under discussion, may increase formalization and pension contributions).
58,3%59,7%
61,0%
64,0% 64,3%65,6%
5,6%
7,0%
3,6%
7,0%8,1%
3,5%
7,7%
4,9%
3,6%
1,8% 1,7% 1,6% 1,5% 1,4% 1,3% 1,3% 1,2% 1,2% 1,1% 1,0% 1,0% 0,9% 0,8%
0,0%
2,0%
4,0%
6,0%
8,0%
10,0%
12,0%
14,0%
16,0%
18,0%
20,0%
40%
45%
50%
55%
60%
65%
70%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
% officially-registered workers
Grow in number of contributors
Population grow of those aged between 15 and 64
Percentage of officially-registered workers*, annual population growth of those aged between 15 and 64, and annual growth in the number of RGPS contributors (2004 – 2020)
Source: MPS, IBGEProduction: BRADESCO
(*) Private and public sector workers with an employment record book, domestics with an employment record book, employers and employees who contribute voluntarily to the pension system .
Not only are the future pension prospects worrying, but the current situation is also suggesting that the accounts are, to a certain extent, unsustainable. As can be seen in the graphs below, both the RPPS and the RGPS have been
recording deficits for some time. In the case of the RPPS, the deficit was primarily due to the negative balance of the states, ameliorated by the slight annual surplus recorded by the municipalities (excluding the state capitals).
5,0%5,7%
7,1%6,8% 6,9%
7,3%
4,6% 4,7%
5,0%5,5%
5,9% 6,1%
-0,4%
-0,9%
-2,0%-1,3% -0,9% -1,0% -1,1%
-3,0%
-1,0%
1,0%
3,0%
5,0%
7,0%
Mar
-98
Aug
-98
Jan-
99Ju
n-99
Nov
-99
Apr
-00
Sep-
00Fe
b-01
Jul-0
1D
ec-0
1M
ay-0
2O
ct-0
2M
ar-0
3A
ug-0
3Ja
n-04
Jun-
04N
ov-0
4A
pr-0
5Se
p-05
Feb-
06Ju
l-06
Dec
-06
May
-07
Oct
-07
Mar
-08
Aug
-08
Jan-
09Ju
n-09
Nov
-09
Apr
-10
Sep-
10Fe
b-11
Jul-1
1D
ec-1
1M
ay-1
2O
ct-1
2M
ar-1
3A
ug-1
3Ja
n-14
Jun-
14N
ov-1
4A
pr-1
5
RGPS - benefits - 12 months accum - % of GDPRGPS- revenue - 12 months accum - % of GDPRGPS - balance - 12 months accum - % of GDP
RGPS revenue, benefits (expenses) and balance as a percentage of GDP (12 month accumulated)
Source: MPS, IBGEProduction: BRADESCO
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-0,09% -0,06% -0,06% -0,06% -0,06% -0,06% -0,06% -0,06% -0,07%
-1,02%-0,95%
-0,81% -0,83%-0,74% -0,75% -0,81% -0,87% -0,84%
0,09% 0,09% 0,10% 0,10% 0,11% 0,11% 0,10% 0,11% 0,11%
-1,01%-0,91%
-0,77% -0,79%-0,69% -0,70%
-0,76%-0,82% -0,80%
-1,20%
-1,00%
-0,80%
-0,60%
-0,40%
-0,20%
0,00%
0,20%
2005 2006 2007 2008 2009 2010 2011 2012 2013
RPPS - balance - Municipalites excl. state capitals - % of GDPRPPS - balance - States - % of GDPRPPS - balance - State capitals - % of GDPRPPS - balance - total - % of GDP
Balance of municipalities
(excluding state capitals) state capitals
and states and total RPPS as a percentage
of GDP
To sum up, the sustainability of Brazil’s pension system is facing severe challenges in the medium and long term. It is particularly worth noting that the amount of funds currently expended on the aged is higher than in many other countries. As can be seen in the graph below, which compares countries with a similar ratio of over-65s to up-to-14s, we spend much more on the aged than on children, relatively speaking. The Brazilian expenditure on the aged to expenditure on children ratio is similar to that of countries like Japan, Russia and Poland, which have a much higher proportion of
over-65s.
In addition, if we compare the emerging and developed countries, we can see that the first group appears to spend relatively more on their aged than on their children in comparison with the second group. In fact, given the need to improve the country’s productivity, one of the most important measures is to increase investments in the next generation. In any event, as the aging of Brazil’s population accelerates, spending on the aged will almost certainly increase further.
France
Sweden
Australia
United States of America
Canada
Hungary
Poland
Spain
United Kingdom
Japan
Argentina
India
China
Chile
South Africa
Indonesia
Brazil
Colombia
Republic of Korea
Russian Federation
0,0
2,0
4,0
6,0
8,0
10,0
12,0
14,0
16,0
18,0
0,0 0,2 0,4 0,6 0,8 1,0 1,2 1,4 1,6 1,8Rat
io b
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publ
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ose
aged
65
or m
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and
thos
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14
Ratio between those aged 65 or more and those aged up to 14
Emerging countries
Developed countries
Ratio between those aged 65 or more and those aged up to 14 and ratio between public expenditure on those aged 65 or more and those aged up to 14. last available year (2009 – 2011)
Source: MPS, IBGEProduction: BRADESCO
Relatively speaking, Brazil’s spending on its aging population is substantial and demographic trends, which are virtually immutable, point to the accelerated growth of this population. In addition, the same trends indicate a deceleration in the number of pension system contributors. The possible changes to expand the system’s sustainability include the introduction of greater late retirement incentives by increasing the average age for entering the RGPS system. It is vital to adopt policies as soon as possible that will resolve this
situation, given that it is highly likely they will be valid for new entrants to the job market only and the fact that the pension system is already beginning to feel the effects of the end of the so-called demographic dividend.
Several researchers have been looking into possible changes that would enable the system to confront these challenges, In this context, it is particularly worth noting certain ideas proposed by Fábio Giambiagi involving raising the age of retirement, extending
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Octavio de Barros - Macroeconomic Research DirectorMarcelo Cirne de Toledo
Global economics: Fabiana D’Atri / Felipe Wajskop França / Thomas Henrique Schreurs PiresBrazil: Robson Rodrigues Pereira / Andréa Bastos Damico / Igor Velecico / Ellen Regina Steter / Leandro de Oliveira Almeida / Myriã Tatiany Neves BastBrazilian sectors: Regina Helena Couto Silva / Priscila Pacheco Trigo Proprietary survey: Fernando Freitas / Leandro Câmara Negrão / Ana Maria Bonomi BarufiInternships: Ariana Stephanie Zerbinatti / Thomaz Lopes Macetti / Victor Hugo Carvalho Alexandrino da Silva / Davi Sacomani Beganskas / Ives Leonardo Dias Fernandes
/ Henrique Neves Plens / Mizael Silva Alves
Team
DEPEC - BRADESCO does not accept responsibility for any actions/decisions that may be taken based on the information provided in its publications and projections. All the data and opinions contained in these information bulletins is carefully checked and drawn up by fully qualified professionals, but it should not be used, under any hypothesis, as the basis, support, guidance or norm for any document, valuations, judgments or decision taking, whether of a formal or informal nature. Therefore, we emphasize that all the consequences and responsibility for using any data or analysis contained in this publication is assumed exclusively by the user, exempting BRADESCO from all responsibility for any actions resulting from the usage of this material. We all point out that access to this information implies acceptance in full of this term of responsibility and usage.
the contribution period and increasing the minimum retirement age for new entrants (with a transition rule for those already contributing), a gradual reduction in existing differences in the system in relation to rural retirement and the retirement of teachers, and the unpegging of retirement benefits from the minimum wage (defining a floor below this indicator). This is not the place to discuss the merits of each measure but merely to emphasize that the retirement rules must adapt to rapidly increasing life expectancy, and that the increase in the real amount of the minimum wage
must not impose an even higher cost on an account that is running a deficit. The system’s sustainability is already at risk and it is essential to rapidly adopt measures that will resolve the problem.
The Presidential Decrees currently in the congressional pipeline is intended to reduce the pension account deficit and pave the way for a wider discussion of the system. In this context, the Forum for Debate proposed by the government may make a significant contribution to its restructuring.