Fiscal Challenges of Population Aging in Brazil

Brazil’s population is aging. Declining fertility rates and increasing life expectancy are important drivers of demographic changes in Brazil and Latin America, contributing to slowing population growth and a rising share of the elderly in the population.

Over the past half a century, the fertility rate in Brazil has halved and is now in line with that of more advanced economies. Annual population growth has declined sharply. Meanwhile, thanks to income growth, redistribution policies, and health reforms, life expectancy has increased in Brazil, increasing the dependency ratio. Those aged 65 and above constitute now about 7½ percent of the total population, two percentage points more than a decade ago.

These demographic trends are set to continue over the long run, raising the old-age dependency ratio. Because of falling fertility, the population will start declining in absolute terms in Brazil by mid-century. According to the UN, by 2050 Brazil’s old-age dependency ratio—the ratio of people aged 65 and above to the population aged 15 to 64—will reach close to 37 percent, and surpass that of more advanced economies by 2100. Brazil’s statistical institute (IBGE) projects a similar trend, with old age dependency reaching 36 percent by 2050.

An aging population will soon pose fiscal challenges in Brazil, however—in fact, much earlier than 2050. Unlike in other countries, where demographic disequilibria point to difficult times down the road, the Brazilian pension system is already in deficit, which is projected to reach 3.2 percent of GDP in 2016 (Tesouro Nacional, 2015), reflecting structurally high spending that has been exacerbated by the drop in contribution revenues caused by the recession.

Public agerelated spending (on retirement and other pensions and health) is projected to reach levels incompatible with fiscal sustainability already within the next decade. Pension and health expenditures already represent half of total public spending in 2015 (16 percent of GDP) and, in the absence of reforms, are projected to increase to 21 percent of GDP in 2025. Beyond that, these spending needs would continue to rise, reaching 40 percent of GDP by 2050 as the elderly share of population more than triples from today.

Past reforms moderated pension deficits for a time, but urgent attention to aging-related spending is needed once again. The 1998 pension reform had a limited impact on deficits, and in 2003 parametric changes were introduced in the mandatory public sector pension regime. In 2012, a defined contribution pillar for the public regime was established which reduced replacement rates for higher earners and enhanced progressivity and equity with respect to private pensions at a relatively low transition cost.

The macroeconomic impact of the reform was expected to be positive for Brazil (IMF, 2012). However, these reforms were insufficient, and will not contain the growth of pension spending ahead. In the area of health, limited consideration was given to efficiency and cost control until recently, although spending had increased massively over the last few decades to fill the gap in coverage and health outcomes with respect to advanced economies.

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