PENSION REFORM CLEARS HURDLE IN BRAZILIAN CHAMBER

UNCLAS SECTION 01 OF 02 BRASILIA 002500

SIPDIS

SENSITIVE

DEPARTMENT FOR WHA/BSC

E.O. 12958: N/A
TAGS: BR ECON ELAB PGOV PREL
SUBJECT: PENSION REFORM CLEARS HURDLE IN BRAZILIAN CHAMBER
OF DEPUTIES

REF: BRASILIA 2407


1. (U) Summary: Early on 6 August the Chamber of Deputies
(the lower house of Brazil's congress) passed a
constitutional amendment bill that, if it ultimately becomes
law, would radically change Brazil's public sector pension
system. Key features of the measure are analyzed in reftel
and para 4 below. Passage of the proposal has become a test
of the Lula government's will and capacity to make
fundamental reforms in Brazil. Possible "destaques"
("observations") on the text -- some of them controversial --
will be debated later in the plenary, but congressional
sources believe the government has the votes to defeat these
challenges, despite continuing protests by public sector
employees. The final text will be put to an obligatory
second vote in the plenary later this month, and if again
supported, will move to the Brazilian Senate. End Summary

The Process
--------------


2. (U) To carry the measure, the government needed a
three-fifths majority (308 votes). The amendment bill passed
by a 358-126 vote margin, with nine abstentions. About 100
"destaques" ("observations" or "highlights") to the text were
proposed throughout August 5, but only 14 reportedly survived
for debate later (time not yet set) in the plenary. These
"destaques" deal with controversial aspects of the amendment,
including contributions to the retirement system by
inactive/retired employees, and modifications to contribution
requirements for individuals with multiple income sources.
While these will be hotly debated, one congressional source
told poloffs the government coalition has sufficient votes to
defeat these challenges. Large-scale demonstrations occurred
around the congress in Brasilia throughout the day on 6
August, as different interest groups sought to put pressure
on legislators and the GOB.


3. (U) Constitutional amendments require two plenary votes,
separated in time by at least five plenary sessions, but the
second vote normally serves to formalize the text (plus
agreed-to "highlights") approved in the first round of
voting. A second and final vote could occur as early as next
week, or as late as the first week in September.


The Substance
--------------


4. (U) Reftel provides details of the bill voted this week.
Substantively, the bill's latest version incorporated GOB
concessions arising from negotiations with government allies.
The key change was GOB acceptance of a sub-ceiling for state
judiciary salaries (85.5 percent of federal salaries),
somewhat higher than what was originally offered (75
percent). The compromise came after Lula himself publicly
dug in his heels against the 90-plus percent demanded by the
state judges. Other eleventh-hour adjustments were: (1) more
generous guidelines for survivor benefits; (2) a higher floor
for taxation of pensions, now to begin at 1,200 rather than
the 1,058 reals per month that had been proposed; (3) an 11
percent pay premium for the 100,000-plus public sector
workers who already qualify for retirement under existing age
and time of service requirements (as an incentive for them
not to retire before they satisfy the bill's new minimum
limits).


5. (SBU) Comment: Further pitfalls remain. One
controversial point for debate, and a possible judicial
challenge later, will be the provision to begin taxing
pensions. Former President Cardoso's effort along those
lines were ruled unconstitutional by the Supreme Court.
Pension reform is a vital necessity for Brazil's long-term
economic health, since the country cannot sustain the huge
fiscal deficits due in considerable measure to paying highly
generous benefits to retired civil servants. In its eight
years in office, the Cardoso Administration was unable to
secure significant public sector pension change. The reform
measure passed Aug. 6 goes to the heart of long-standing
entitlements viewed as sacred by employees in Brazil's huge
public sector. If a meaningful bill survives the political
and judicial challenges that still loom, the Lula government
will deserve major credit for demonstrating both the
political courage to take on this critical issue and the
skill to see it through. The jury is still out on that latter
quality. End comment.

Hrinak