The FINANCIAL — The eyes of the world are currently on Brazil. June 12 will see the world's most successful footballing nation open the World Cup on its own soil with a match against Croatia.
The FINANCIAL — The eyes of the world are currently on Brazil. June 12 will see the world's most successful footballing nation open the World Cup on its own soil with a match against Croatia. Brazil has taken five titles and produced some of the greatest stars in international football, including Pelé, Ronaldo and Kaká. Brazilian players can be found in the most prestigious clubs in the world, like Dante, who plays for FC Bayern München, according to Allianz, a German multinational financial services company. A sixth World Cup is not unlikely, with Felipe Scolari's team said to have a good chance of taking the title.
Besides great soccer players, Brazil has another strong feature: the possibility of early retirement. If Pelé were an average Brazilian, he would have retired at the age of only 55 – ten years before reaching the statutory retirement age of 65. By way of comparison: the European early retirement champion is Austria. Although the statutory retirement age in Austria is 65, people tend to retire aged only just under 59 on average. Germans work until the age of 63, with retirement commencing successively at 67 by law.
Another feature of the system is a special rule for the support of widows. While bereaved partners in most countries receive only a fraction of the deceased’s public pension, in Brazil they are entitled to almost the full sum for the rest of their lives. Sounds good?
Only at first sight. If we take a closer look, we can see that the country is ageing very quickly and that this situation will not be sustainable for much longer. The challenges for the Brazilian state coffers recently became apparent when the country was for the first time included in the Allianz Pension Sustainability Index. This indicator evaluates the long-term sustainability of pension systems in 50 countries – and it places Brazil in 49th place, according to Allianz.
There are many reasons for this disconcerting outlook. In theory, Brazil has the same legal retirement age as many countries: 65 years. But special rules allow men to sidestep this arrangement and to obtain their full pension after 35 years of contributions and women after 30 years. So in reality, the effective retirement age can be much lower. Furthermore the size of the payments is considerable by international standards: Start with survivors’ pensions: In the OECD, members on average spend less than one percent of GDP on widows’ entitlements – Brazil spends an unequalled three percent on them.
Finally, several groups receive special perks: Almost all civil servants can retire on full pay. Teachers are allowed to retire five years earlier than other workers, on the same terms. As a result of all these generous rules, average Brazilians receive a pension of 70 percent of final pay.
This leads to a federal budget that is increasingly used to pay for pensions. Currently, Brazil can still cope with its high expenses, but the government is relying on a favorable demographic situation – and this is changing fast. At the moment Brazil’s population is very young with a media age of 31 years – eight years younger than the US and 16 years younger than Germans (12 years younger than Austrians). That is because around 1970 Brazilian women on average had 5.8 children. Today these children are of prime working age. However, average women today only have 1.8 children – a threefold decrease over four decades. Therefore Brazil is experiencing a short-lived, golden moment with a very low old-age dependency (OAD) ratio: According to UN calculations, those aged 65 and over number only about ten percent of those of working age (15–64 years). In Germany the corresponding ratio already now is almost 32 percent (Austria: 27 percent). However, Brazil already spends almost twelve percent of GDP on public pensions. In comparison Germany uses about eleven percent (Austria 14.1 percent). And by 2050 there will be 52 million Brazilians aged 65 and over supported by only 144 million people of working age. Thus Brazil’s OAD ratio will more than triple to 36 percent.
Therefore Brazilians should prepare for necessary adjustments: The government won’t be able to avoid to cut services or limit early retirement options. It will make sense for each Brazilian to increase the private old age provision in order to live well in retirement.
So Brazil might well be holding the World Cup in its hands for the sixth time in a few weeks' time. It should not be starting necessary pension system reforms in the 90th minute though, according to Allianz.
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