Largesse and waste in the Brazilian public sector

This is Part III of a five-part series entitled What now? The trade-offs and budget cuts needed to fix Brazil’s financesPart III examines inefficient and wasteful spending in Brazil's massive government bureaucracy, particularly with regard to public sector pensions, salaries, and other benefits.

As Brazil’s government works to balance its books, an obvious but politically difficult place with much room for budget cuts is the large and expensive government bureaucracy. This is not to say that there is anything inherently wrong with having a large government per se. But it is clear that in the case of Brazil, where public spending accounts for 40% of GDP (double the rate of the United States), the size of the government apparatus is entirely disproportional. This creates distortions and inefficiencies that need to be remedied.

In this regard, the interim government of Michel Temer is already off to a bad start. Despite calls for sacrifice and austerity as the government works to close a record R$ 170 billion deficit, yesterday, instead of cutting such already bloated expenses, the Brazilian Congress ridiculously raised the salaries of several (elite) categories of civil servants (including themselves). The total impact of this on the budget will be some R$ 64 billion over the next three years, hardly the cuts and sacrifice that regular Brazilians will be expected to make in the name of righting the ship. Particularly cynical is the salary increase for judges, including those on the Supreme Court, who are responsible for overseeing investigations into corruption by high-ranking government officials. Here, it is notable to mention that 60% of Brazil’s Congress is currently facing charges for some crime or another, ranging from money laundering to homicide. Due to Brazilian law, which grants such officials the legal privileges known as “foro privilegiado”, they can be tried only by the Supreme Court. This tends to lead to impunity as the court is a notoriously overburdened and slow body of just 11 people facing tens of thousands of new cases every year.

What cuts will be made to compensate for this increased expense remains to be seen. However, there is one clear candidate: the Brazilian pension system. This overcommitted and underfunded system has been in desperate need of reform for years, and Temer has requested that a proposal for reforms be delivered as a priority in the early days of his interim government. The pension system currently accounts for more than half of primary public expenditures each year. A recent Wall Street Journal article explains the problem:

Over the past 15 years, public pensions have increased from 3% to 7% of GDP. Brazilian men typically retire at age 54 and women at 52, earlier than in any major European country, drawn into the golden years by generous benefits. On average Brazil pays pensioners 90% of their final salary, compared with an average of 60% in developed countries.

If this is allowed to continue unchecked, it is estimated that pensions will cost 20% of GDP in 25 years.  For comparison, the OECD average is 7.9%, while the countries that currently spend the most are Italy and Greece, with respective expenditures of 15.8% and 14%.  Meanwhile, the average retirement ages in OECD countries are 64 for men and 63 for women. Clearly, Brazil is way off the mark here. The country’s changing demographics, with lower fertility rates and longer life expectancy, along with the economic crisis that is strangling government tax revenues, only compound the problem. Raul Velloso, a specialist on public finances, put it bluntly: “Public pensions in Brazil have long been a slow-motion disaster.”

It may seem that average Brazilian workers benefit disproportionately from all this largesse, but the fact is that pension generosity is unevenly distributed, with private-sector workers often receiving less than their public-sector counterparts. The overall average pension numbers are highly skewed by some outrageous outliers: for example, former president Fernando Henrique Cardoso has received a generous monthly pension (over R$ 22,000 per month as of 2014, which was greater than even the Sao Paulo state governor’s monthly salary at the time) since he “retired” from his job as a professor at the public University of Sao Paulo in 1968, at the age of 37. He is hardly the only one to receive this type of benefit: in 2014, there were almost 2,000 other retired people in the state of Sao Paulo alone who received more than the governor’s salary as their monthly pensions. Such disproportional largesse skews the figures and conceals the inequality present in the system. For every beneficiary of a disproportionally generous civil servant pension, there are countless low-level civil servants and private sector workers who retire much later and receive much less.

There are only three ways to solve this problem: cut overall pension benefits, increase overall contributions, or raise the retirement age. All are unpopular and politically difficult measures to implement. Since these reforms will have to be passed by politicians, many worry that the private sector will disproportionally bear the brunt of the changes while the public sector will remain as cushy as ever, further skewing the inequality between them.

Excessively generous benefits to the public sector have long been a point of contention in Brazil, and this is illustrated not only by differences in pensions but also in salaries. Indeed, although inequality has decreased in the past 15 years among those working in the private sector, it remains stagnant in the public sector. This means that some public sector salaries are disproportionally high. A recent New York Times article highlights these so-called “super salaries:” a parking valet at the Sao Paulo city council building who earned over US$ 11,000 a month, a Minas Gerais librarian who earned USD $24,000 in one month, and a Sao Paulo state judge who earned more than USD$ 360,000 in one month are just some egregious examples. In the Chamber of Deputies (the lower house of Congress) alone, 1,500 employees were previously found to earn more than the constitutionally mandated ceiling for public sector workers. The problem is only exacerbated by the growth in public sector employment, which has increased by 30% in the past decade. Meanwhile, school teachers and police officers can earn less than USD $1,000 per month. Cutting the outrageous salaries reserved for some public workers is an obvious way to save money without affecting the poor.

But high salaries are not the only problem. Notorious are the excessive perks enjoyed by some public employees. The recent suspension of controversial Chamber of Deputies president Eduardo Cunha, who is facing various corruption-related charges, highlights just how generous the government is to some officials. In light of his indefinite suspension, outrage has emerged as he continues to retain not just the typical trappings of a high political office (such as an official vehicle and security detail), but also an official residence, the use of planes owned by the Brazilian Air Force and a staff of 64 people (23 at his Chamber offices and 41 at his official residence).

For comparison, in the US, the maximum number of staffers any member of Congress can employ is 18 full-time and four part-time workers. The Speaker of the US House of Representatives, Paul Ryan, who holds the job analogous to that of Cunha, has 17 staffers. American congressional leaders don’t get official residences. In fact, when in Washington, Paul Ryan prefers to sleep on a cot in his office, as do about 50 other members of the US Congress. Even President Obama is responsible for his family’s personal expenses at the White House. Meanwhile, the Brazilian taxpayer foots the bill for Cunha’s chef, three cooks, three kitchen assistants, four waiters, two housekeepers, four drivers and eight private security guards (in addition to the 16-person legislative police detail), for a total cost of over R$ 500,000 per month. This would be absurd under the best of circumstances, but the picture deteriorates even further when we consider that Cunha has been found hiding millions stolen from the state-owned oil company Petrobras in Swiss bank accounts. In the meanwhile, millions of ordinary Brazilians lack access to even basic sanitation and drinking water.

Perks of high office aside, politicians in Brazil have become experts at milking the system for as much as possible, and nothing exemplifies this better than the abuse of the fractured party system. Indeed, many political parties exist for no purpose other than to gain access to funding reserved for political parties. This is why, among the whopping 28 parties currently represented in Congress, there are, for example, the Workers’ Party, the Democratic Labor Party, the Brazilian Labor Party, the Christian Labor Party, the Labor Party of Brazil, the National Labor Party and the Brazilian Labor Renewal Party. Small new parties are springing up all the time simply to capture funds. Their proliferation, aside from being expensive, only helps to further congressional gridlock as it can be extremely difficult to get anything done with so many different interests and parties involved. The cost of the fragmentation is therefore doubled: it absorbs a huge amount of funds and leads to excessive inefficiency.

One sensible reform to address this would be to create a minimum threshold for congressional party representation. Indeed, a proposal to limit such representation to only parties which had received at least 5% of the vote in a national election was defeated a few years ago but could be brought back now. Nevertheless, it will be very difficult politically to achieve this.

It is important to note that the government’s expansion in recent years has not only been limited to the domestic sphere. Another area in which public spending has risen dramatically over the past decade relates to the increase in Brazil’s foreign embassies. Between them, former president Luiz Inacio Lula da Silva and suspended president Dilma Rousseff opened 48 new embassies, mostly in the Caribbean and Africa, in an attempt to gain votes at the UN, with the ultimate goal of securing a highly coveted permanent seat at the UN Security Council. The investment did not pay off, however. The permanent seat never materialized, and Brazil is now in arrears with the UN and other multilateral organizations by over USD$ 800 million, potentially affecting its right to vote. A cost-cutting initiative would therefore be to close any of Brazil’s 139 embassies that are not necessary. Perhaps this would be easier, politically, than some of the previously mentioned reforms, although the ultimate financial impact is unclear. Still, every bit helps.

Another limited result is likely to be achieved through a reduction in the large number of government ministries and cabinet-level positions. Although Temer flip-flopped on this issue considerably, weighing the savings from streamlining the ministries and cabinet appointments against the benefits of distributing as many such posts as possible to cement allegiances and strengthen his tenuous and unpopular government, he ultimately did reduce the number of ministries from 32 to 23. In any case, the actual impact of these ministerial reductions on the government’s finances remains to be seen, but it nevertheless represents an important symbolic gesture.

In any case, given the political difficulty involved in making the most impactful cuts, especially in terms of public sector pensions, it is clear that other measures that address waste must also be implemented to cover the government’s shortfall. As demonstrated by the far-reaching Car Wash investigation into state-owned oil company Petrobras, an egregious source of fiscal hemorrhaging in Brazil is corruption. Although corruption and impunity have long been a part of Brazilian politics, if the recent success of the Car Wash investigation is any indication, there is reason to be hopeful that this can change and that it will be possible to root out malfeasance, send those responsible to prison, and recover stolen funds.

The next section of this series will examine the cost of corruption in Brazil and what can be done to alleviate it.

  <<< Part II: Subsidies | Part III: Public Sector Spending | Part IV: Corruption >>>