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### Viewing cable 03BRASILIA2407, PENSION REFORM: GOB VEERS, TACKS, TAKES ON WATER

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
03BRASILIA2407 | 2003-07-31 10:25 | 2011-07-11 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Brasilia

`

    This record is a partial extract of the original cable. The full text of the original cable is not available.

` `

    UNCLAS SECTION 01 OF 04 BRASILIA 002407

    SIPDIS

    SENSITIVE

    NSC FOR WALLACE
    TREASURY FOR SSEGAL
    PLS PASS FED BOARD OF GOVERNORS FOR ROBATAILLE

    E.O. 12958: N/A
    TAGS: EFIN ECON EINV BR
    SUBJECT:  PENSION REFORM: GOB VEERS, TACKS, TAKES ON WATER

    Refs: A) Brasilia 1466, B) Brasilia 80

    SUMMARY
    -------
    ¶1. (U) Lula's crucial pension-reform bill was approved by the
    Chamber of Deputies special committee on July 23 -- but only
    after undergoing political buffets and a perhaps fateful
    overhaul.  In a fundamental about-face, the GoB has accepted
    that all current public-sector employees will remain eligible
    for pensions equal to their top salary (albeit with big
    improvements in minimum-age and time-worked eligibility
    criteria.)  Chief factor behind this concession was shameless
    lobbying by Brazil's judiciary, which enjoys unique pension
    benefits and will ultimately decide any reform's
    constitutionality.  There was also pressure from the GoB's
    base in Congress with its long ties to public-sector unions.

    ¶2. (U) Fiscally, the GoB claims the overall impact of its
    shift is negligible.  Federal savings over the next twenty
    years will still total 50.7 billion, vs. 52.4 billion under
    the GoB's original proposals, supposedly.  `The market' seems
    to take these numbers at face value, and has been placid.
    Politically, however, these early pension-bill concessions
    have seemed to pose doubts over the goals and resolve of
    Lula's team.  They may have opened the door to a snowball of
    public clamor, brinkmanship, and further changes that will
    gut the reform.  Lula's tax-reform bill, due for a committee
    vote soon, could get trapped in a similar cycle.  He and his
    team undoubtedly sense the danger and now are drumming the
    message that they have gone to the limit of their pension-
    reform horse-trading.  END SUMMARY.

    A Fortnight's Commotion in Review
    ---------------------------------
    ¶3. (SBU) The GoB's about-face began on July 9, following
    drawn-out dialogue with new Supreme Court Chief Justice
    Correa.  The latter evidently sees his job as embracing the
    duty to lobby for retention of the judiciary's uniquely
    generous pension privileges, of which "integral" (100% of
    final salary) pensions are the capstone.  The GoB in turn has
    to bear in mind that the Supreme Court can torpedo any
    pension reform by ruling it unconstitutional, as happened
    with Cardoso's 1998 proposal to tax pensions.  Correa, Social-
    Security Minister Berzoini, and lower-House Speaker Cunha,
    with Planalto's Dirceu in the wings, conferred secretively
    for two weeks.  Outcome:  while Lula was in Europe, on July
    10 local press headlined the administration's alleged
    surrender on the principle of "integral" pensions, not just
    for the judiciary but for the whole current public sector.
    Whether future public-sector workers, too, would get integral
    pensions was not made explicit.

    ¶4. (U) The news triggered consternation from media, Brazil's
    governors, and Finance Minister Palocci.  Former Social-
    Security Minister Brant, who now heads the Chamber of
    Deputies' special committee on the subject, was widely quoted
    as saying "the new reform is no reform."  Various PT
    politicians in and out of Congress lamented having stuck
    their necks out defending the GoB's original reform plan.
    Palocci by all accounts had not been kept current on the
    Cunha/Berzoini/Correa/Dirceu talks and wanted to cancel his
    European trip to join Lula, in favor of staying home to fight
    for the GoB's original reform guidelines.

    ¶5. (U) But the weightiest adverse reaction was from Brazil's
    governors.  Fiscal pressure on their own state budgets from
    the pension system is as acute as on the Union's; many can
    afford to pay "integral" pensions even less.  Lula made a
    point of forming and presenting his pension and tax reform
    plans to Congress with the governors' consensus in April.
    That the GoB now appeared to have negotiated so great a
    change in the pension-reform plan, leaving governors to learn
    about it in the papers, sat very badly.  Key Minas Gerais and
    Sao Paulo governors Neves and Alckmin voiced opposition in
    careful but ominous tones.  Temporizing, Dirceu convened a
    meeting July 16 with five representative governors, plus
    Cunha and Berzoini.  At that meeting, Berzoini gave figures
    purporting that the changes overall would be revenue-neutral
    for states as well as the Federal Treasury.  Governors seem
    to have warily gone along, but with the insistence that
    future public workers be ineligible for "integral" pensions.

    Lula Decides
    ------------
    ¶6. (U) Meanwhile, from Portugal, Lula asserted his authority
    to arbitrate.  At the tense inter-ministerial meeting which
    followed his return on Thursday July 17, according to an
    account in last week's "Epoca" financial weekly, Lula
    censured Berzoini and Cunha (but absolved Dirceu) for undue
    "precipitousness" in their political negotiations.  Yet at
    meeting's end, despite Palocci's and Communications advisor
    Gushiken's arguments against, Lula gave his imprimatur to
    Berzoini's advocacy of integral pensions.  Lula also endorsed
    the continuation of "parity," i.e., that retirees' pensions
    increase by the same factor as current workers' salaries.
    However, he ruled out letting future public-sector workers be
    eligible for integral pensions, and he reasserted the GoB's
    tough original guidelines in some other key respects.

    ¶7. (U) The next day, the bill's sponsor, Deputy Carlos
    Pimental (PT-Ceara) presented its adjusted version.  Salient
    features include the following.

    -- minimum conditions for integral pensions: (women) 55 years
    old with 30 years of INSS contributions and 20 years in the
    public sector, including 10 in present occupation ("cargo");
    (men) 60/35/20/10 years, respectively.

    -- for future public-sector employees, a monthly pension cap
    of BRL 2,400, with the option of a complementary pension fund
    contributed to by government (same as the initial GoB
    proposal).

    -- pensions to be taxed at 11%, starting at the present
    personal-income tax floor of 1,058 Reals/month.  The earlier
    agreement had been for a floor of 2,400/month.

    -- salary and hence pension sub-ceilings for state and
    municipal judiciary employees of 75% the salaries of Supreme
    Court judges.  The Berzoini/Cunha agreement had been 90.25%.

    -- survivor's benefit (currently 100% of the pension without
    limit) to remain 100% only up to 1,058 Reals/month, with a
    30% discount on anything above that level.

    -- "parity" (cf. above) to be preserved for existing pensions
    of current and currently-eligible pensioners, and for other
    current public sector, but with definition of parity for the
    latter category left to a future complementary law.

    GoB Spin, Market's Placidity
    ----------------------------
    ¶8. (U) The acceptance of "integral" pensions represents an
    abandonment of the GoB's original goal of early transition
    towards a unified social-security system with an eventual
    common ceiling for public- and private-sector pensions so as
    to curtail the grossly inequitable privileges enjoyed by
    Brazil's high-paid civil servants (Ref B).  Defenders see it
    as a vital, if ugly, GoB compromise to gain legislative and
    Supreme Court approval of a pension reform that will bring
    Brazil at least the minimum fiscal benefits needed to keep
    the markets sunny.  Grandfathering all current workers'
    benefits could save the final reform from judicial challenges
    based on loose interpretation of the Constitutional principle
    of "acquired rights" that cannot be withdrawn.  Politically,
    the primary gain of the last fortnight's bargaining is that
    the governors seem warily back on board.  In Congress, there
    is grumbling that the GoB walked back too much at the
    governors' behest, but no sign of major mutiny.

    ¶9. (U) Fiscally, the GoB claims its shift preserves the
    reform's "spinal cord" by improving the pension system's mid-
    to-long term financial viability.  The GoB's prime assertion
    is that, thanks to the major increases in mimimum-age and
    length-of-work requirements, federal savings will not be
    meaningfully reduced by the extension of integral pensions.
    Under the original design, those savings were supposed to
    total 52.4 billion Reals through 2023.  With the changes,
    they will be 50.7 billion.  (Note:  no methodology details
    available; these figures refer to federal civil servants
    only, excluding state and local public sectors, the military,
    firemen, and others.  End Note.)

    ¶10. (U) For now, financial markets evidently take the GoB
    case at face value.  Global-bank analyses we read all treat
    the revised pension-reform bill as being acceptable, as does
    the IMF, to judge from its indirect commentary.  The recent
    uncertainties have had next to no effect on the exchange
    rate, while Brazil's country risk resumed its decline in July
    and is now at its lowest level since March 2002.

    Fiscally Okay, but Politically Damaging?
    ----------------------------------------
    ¶11. (SBU) Fair enough, perhaps, in a green-eyeshade way.  Yet
    the risk of collateral political damage to Lula seems high.
    There isn't even much assurance that the pension bill will
    pass Congress in its new form.  By ceding so much when the
    bill was at merely the second of seven legislative voting
    stages, the government may appear to have encouraged every
    interest group to stonewall for extra concessions.  The GoB's
    intent to start taxing retirees' pensions is the most obvious
    likely target.  Raising the survivor's-benefit ceiling is
    another.  State and municipal judiciary employees demand that
    their salary sub-ceiling go back up to 90.25% of Supreme
    Court Justices', not the 75% demanded by the governors, and
    have declared they will strike August 5-12.

    ¶12. (SBU) More generally, the back-and-forth over pensions
    has let doubt be posed as to how clear, set and stable in its
    reform course the GoB really is.  We believe such doubts are
    misplaced.  But it is a fact that Lula's team has accepted a
    succession of major alterations to the design that it
    initially was adamant be taken as a whole.  And their
    statements on pension issues - including Lula's own -- have
    often contradicted or reversed themselves.  Hitherto, as a
    veteran interlocutor recently put it to us, most of Brazil's
    body politic seemed ready to board Lula's reform train, as
    long as he was driving it and taking the heat.  Now, they can
    feel there is a political premium, and no penalty, in
    opposing his measures.

    ¶13. (U) Most immediately, this could affect Lula's tax-reform
    bill.  Since the pension-bill's re-working, governors have
    been holding out for three compensatory alterations in the
    GoB's tax-reform bill:  for states to share both the CPMF and
    CIDE taxes (each of which currently accrues 100% to the
    Union); for extra funds to compensate states for revenue
    losses stemming from the federal Kandir Law (which exempts
    exports from major taxes); and for lesser earmarking
    requirements on transfers from the federal treasury.  If
    pension and tax reform bog down in a cycle of demands and
    concessions, Brazil's fiscal future and Lula's political
    stature will both be hard-hit.

    Stiffened GoB Stance
    --------------------
    ¶14. (U) The GoB is well aware of these considerations.  Lula,
    Berzoini and Dirceu as well as Palocci all are loudly warning
    that the government has reached the limit of its concessions
    vis-a-vis pension reform.  In a personal meeting, Lula told
    the CUT (largest labor federation) leader that the GoB would
    introduce no further changes to its proposals.  The
    administration responded to the state judges' strike threat
    with a refusal to entertain any negotiations, and Lula in a
    July 24 speech blasted their demands.  And in its strongest
    show of renewed force, the administration on July 23 rammed
    the reform bill through the Chamber's special committee
    without further change by a 30-8 vote.

    ¶15. (U) The bill must now pass two Chamber floor votes, of
    which the first is expected in early August and the second
    probably not before September, with 60% majorities (Ref A).
    It would then go to the Senate's Justice Committee for a
    ruling on constitutionality and thence to the Senate floor
    for a further two votes, also requiring 60% majorities, the
    second of which is not generally expected before January.  By
    all media accounts, Lula and Planalto are determined to take
    over direct management of the bills' legislative advance.

    ¶16. (SBU) Such signs of fresh resolve offer hope that Lula
    and team have absorbed lessons from the latest rough-and-
    tumble of the pension-reform process.  Should they hold their
    re-configured line, the result will probably deserve to be
    deemed a success.  But the prospect now looks more unsure.
    HRINAK

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