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Improving Fiscal Space through Administrative Reforms: State Pension Reform in Brazil

April 3, 2013


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Constitutional amendments in 1998 and 2003 reformed significant elements of the public pension system, such as minimum retirement ages, wage and benefit caps on current pensioners.

José Cruz / ABr.

Building on past Government reforms and Bank-supported projects, upgrades to state public employee pension registers, public servant censuses and the integration of state-level information with national registers were extended to additional states and Government branches in Brazil. At least US$26.2 million in annual potential savings were identified through the detection of incorrect or fraudulent pension claims.

Challenge

In the early 2000s, the fiscal burden associated with publicly funded pensions was one of the key macroeconomic challenges facing Brazilian federal and state Governments. Expenditures within the public sector workers’ pension system often reached 30 percent of the total payroll, and between 2000 and 2004, the deficit of Brazil’s public pensions totaled at least 5 percent of gross domestic product (GDP). 

While constitutional amendments in 1998 and 2003 reformed significant elements of the public pension system, such as minimum retirement ages, wage and benefit caps on current pensioners, pension deficits were still expected to grow in the following years. Additional changes were needed to improve the fiscal situation, but political conditions were not suitable for another major reform of the pension system. Thus, the Government decided to reduce pension deficits through improvements in the administration of public pension systems.

Solution

The project was designed to extend upgrades of states’ executive branch pension registries—funded by the first State Pension Modernization Project—to additional states and Government branches. Implementation required significant coordination efforts between the Social Security Ministry, states’ authorities, and the firms hired to carry out the public servant and pensioners censuses and the cadastre upgrade process.  The information obtained through the states’ cadastre upgrades made it possible to verify databases and design processes to cross-check with the federal Government’s pension database, to identify several types of irregular claimants, including individuals who were reported to have died, or who were actively linked to multiple positions. 

Results

The project resulted in important developments. By December 2011, pension registries in various branches of 15 states were upgraded, 43 institutions or branches of state Government were involved across these states, and  325,884 public servants’ records were updated. For the four states reporting results at project completion, by December 2011, annual potential savings are estimated at US$26.2 million. In addition, 89 percent of the public servants whose records were updated, are in these four states. Management of public sector pensions is more transparent. The completion of the cadastre upgrade exercise included publicity and required all public servants and retirees to re-register and present their records. This contributed to sending a clear signal to all stakeholders that the states were active in the fight against corruption.

Bank Group Contribution

The Bank contributed US$4.71 million through a technical assistance loan to the project, matched by Brazilian Government funding of approximately US$7.0 million.  The project built upon a series of past projects supporting pension reforms.  Among others, these projects included the State Pension Systems Reform Technical Assistance Project and the Municipal Pension Reform Project, each for US$5.0 million. 

Partners

The project was entirely funded by Bank and Government funds.

Moving Forward

The realization of potential savings will require states to implement corrective measures to remove the irregular claimants identified in the cadastre upgrade, which may include judicial processes.  The Government has informally expressed an interest in expanding the pension registry upgrade to the executive branches of states not covered in the project.  While the Bank will not participate in a follow-up operation, it believes that the Government now has the resources and expertise necessary to undertake such work independently. 

Beneficiaries

State Governments that participated in the program and were able to validate their pension data for public workers benefited significantly from the project, creating much needed fiscal space through reduction of fraud and corruption. Public officials enrolled in the public employee pension system also benefited from having pension funds analyzed and actuarial problems delineated. The eventual removal of irregular claimants identified through this project from the pension database will benefit residents and taxpayers from participating states by reducing unwarranted pension payments and enabling resources to be channeled into other activities.

US$26.2 million
These are the annual potential savings for the four states reporting results at project completion, by December 2011.