Macro Vision

Friday, April 26, 2019

Social Security reform item by item: impacts and dilutions

 The pension reform, as proposed to the National Congress, implies savings of about BRL 1.25 trillion over
10 years between 2020 and 2029, or a primary result around 2.5 pp higher in 2027, compared with the
scenario without reforms. Even if approved without any changes, the reform is not enough for the public
sector to return to primary surpluses. Thus, eventual dilutions in its content imply the need for an even more
significant effort to rebalance the fiscal accounts, limiting economic growth and the maintenance of interest
rates at historically low levels.
 We estimated the impact item by item of the reform proposal and of eventual dilutions in the proposal,
particularly in the three transition rules for the minimum age of 65 for men and 62 for women, which is the
main measure in terms of savings generated by the reform.
 We expect that a reform will be approved with a fiscal impact of 50% to 75% relative to the proposal sent by
the government, i.e., with savings of BRL 670 -990 billion over 10 years and a primary result between 1.4 pp
and 1.9 pp of GDP higher in 2027, after the removal of changes in rural pensions, the welfare benefit
program ("BPC") and the minimum contribution time, in addition to changes in transition rules.

The New Social Security (PEC 06/2019)

The Pension reform (PEC 06/2019), as sent to the National Congress, implies savings for the federal
government of about BRL 1.25 trillion over the 10 years between 2020 and 2029, or a primary result around 2.5
pp higher in 2027, compared with the scenario without reforms. The impact is 20% higher than the version of the
reform originally sent by the previous government (BRL 1.05 trillion, 2.1% of GDP) and 80% higher than its modified
version (BRL 708 billion, 1.4% of GDP). The reform initially proposed by the current government had an impact of BRL
1.34 trillion (or 2.7% of GDP in 2027), but it was reduced after the inclusion of a career restructuring proposal for the
military. Also, recently government changed the 10 years used as reference to the calculation of the impact of the
reform from 10 years between 2019 and 2028 to 10 years between 2020 and 2029. In the previous metric, the reform
saved BRL 1.03 bln, versus BRL 570 bln and BRL 850 BRL in the modified and original versions of the Temer
administration, respectively.

We estimated the impact of the reform item by item. Savings in the general private sector pension regime
(RGPS/INSS) amount to 70% of the total, corresponding to BRL 866 billion over 10 years between 2020 and 2029
(1.9% of GDP in 2027). The changes for civil servants generate 15% of the total savings, or BRL 220 billion over 10
years (0.4% of GDP). The smaller scope proposed for the salary bonus corresponds to 14% of the total savings, or
BRL 157 billion over 10 years (0.2% of GDP in 2027). As for the military, the proposal initially envisaged savings of
BRL 92 billion over 10 years (0.2% of GDP), but it was complemented by a career restructuring program for the
segment, which reduced the savings to BRL 10 billion over 10 years (0.0% of GDP in 2027), or 1% of the total
savings.

Please refer to the last page of this report for important disclosures, analyst and additional information. Itaú Unibanco or its subsidiaries may do or seek to
do business with companies covered in this research report. As a result, investors should be aware that the firm may have a conflict of interest that could
affect the objectivity of this report. Investors should not consider this report as the single factor in making their investment decision.
Macro Vision | April 26, 2019

Impact for the federal government of Social Security reforms proposals

New Social Security
Original PEC 287/16 Modified PEC 287/16
(PEC 06/19)
Measures Accumulated Accumulated Accumulated Accumulated Accumulated Accumulated
% of GDP % of GDP in % of GDP
BRL bln (2019- BRL bln (2020- BRL bln (2019- BRL bln (2020- BRL bln (2019- BRL bln (2020-
in 2027 2027 in 2027
28) 29) 28) 29) 28) 29)
Total 850 1050 2.1% 573 708 1.4% 1025 1253 2.5%
Private Sector General Regime
780 965 2.0% 453 562 1.2% 700 866 1.9%
(RGPS/INSS)

Civil Servants Regime (RPPS) 70 85 0.1% 120 146 0.2% 177 220 0.4%

Private Sector - Wage Bonus - - - - - - 140 157 0.2%

Military regime - - - - - - 8 10 0.0%
Source: Itaú

Even if approved without any changes, the reform does not guarantee the return to primary surpluses (see
chart). Without reforms, the primary result worsens by 0.3% of GDP (BRL 20 billion) per year, reflecting the
unfavorable demographic dynamics of an aging population, which is exacerbated by the indexation of 70% of social
security benefits to the minimum wage and its above-inflation readjustments rules. Thus, from 2018 to 2027, even
considering a cyclical return in government revenues of 1.1% of GDP (assuming that the economy in the long run
would not continue to operate with spare capacity), under the current rules the primary result would deteriorate from a
deficit of 1.6% of GDP to a deficit of 3.2% of GDP in 2027. With a reform of BRL 1 trillion over 10 years, the equivalent
improvement in the primary result in 2027 would add to 2.5 p.p. of GDP, so the primary result would still yield a deficit
of 0.5% of GDP, when a surplus between 1.0 pp and 1.5 pp of GDP would be needed to stabilize the debt. The fiscal
challenge, i.e., the difference between the expected primary result and that required to stabilize the debt, would be
between 4.2 pp and 4.7 pp of GDP in the absence of reforms and between 1.5 pp and 2.0 pp in the case of full
approval.

Pension reform alone is not enough to lead the

primary result back to surplus levels
4%
% of GDP
3%
New Social Security
Without reforms
2%

1%

0%

-1%

-2%

-3% Avg GDP: 2,4%

Avg real (implicit) interest: 3,7%
-4%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027

Source: BCB, Itaú

Thus, eventual dilutions in its content imply the need for an even greater effort to rebalance the fiscal
accounts, which will limit the resumption of stronger economic growth and the maintenance of interest rates
at historically low levels. Other particularly important measures, as proposed by the government in the 2020 Budget
Guidelines Law, are the maintenance of a constant minimum wage in real terms and the control of nominal
readjustments for public servants, which would improve the primary result in 2027 by 1.4 pp and 1.1 pp of GDP,
respectively.

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Macro Vision | April 26, 2019

Proposals for the private sector and the general pension system (RGPS/INSS)

The 14-year transition to the minimum retirement ages of 65 for men and 62 for women is the measure that
provides the greatest savings in the entire reform: BRL 527 billion over the 10 years between 2020 and 2029
(1.20% of GDP in 2027). The measure mainly affects retirement by contribution time, which currently allows higher-
income urban workers to retire earlier, with relatively higher pensions compared with the rest of the population. In the
case of retirement by age, where the minimum ages are already 65 and 60, with pension benefits close to one
minimum wage, the impact of the increase in the minimum age for women from 60 to 62 in four years is only BRL 43
billion (0.1% of GDP). In this modality, another BRL 88 billion (0.2% of GDP in 2027) would be obtained by increasing
the minimum contribution time from 15 to 20 years, over a 10-year transition. Another change in pensions involve the
change in the rule that calculates the value of the benefits , which will use the simple average of the entire contribution
history (previously: 80% of the largest contributions), generating an impact of BRL 44 billion (or 0.10% of the GDP in
2027).

The changes in rural pensions lead to savings of BRL 149 billion over 10 years (0.3% of GDP in 2027). First, the
reform envisions an increase in the minimum retirement age for rural women, from 55 years to 60 years, matching the
current rule for rural men1, with an impact of BRL 66 billion over 10 years (or 0.15% of GDP). Secondly, the reform sets
a minimum annual contribution of BRL 600 per family group, with the goal of fighting benefit fraud, generating BRL 23
billion over 10 years (0.05% of GDP). Incidentally, according to the Social Security statistical yearbook, the rural
population older than 55 totals approximately 6 million people, while there are 9.5 million rural pensioners. Thirdly, the
reform foresees the re-taxation of social security contributions on rural exports, with an impact of BRL 60 billion (or
0.1% of GDP).

The proposal calls for progressive pension contribution rates that reduce pension revenues by BRL 30 billion
over 10 years (or -0.07% of GDP in 2027). Current contribution rates of 8% to 11% (varying according to salaries)
would be changed to progressive rates of 7.5% to 14%, using a mechanism similar to the progressive income tax
rates. The loss of revenue stems from the fact that approximately 70% of pension contributors earn between 1 and 2
minimum wages and would have an effective contribution rate lower than the current one. However, it is worth noting
that this loss of revenue in the private sector would be offset by an increase in revenue in the public sector (see below).

In the case of survivor’s pension, the reform saves BRL 101 billion over 10 years (0.23% of GDP in 2027). Sixty
percent of the impact comes from the proportionality of the benefit value for the number of dependents (50% of the
reference value + 10 pp per dependent) and 40% from the restrictions on the accumulation of social security benefits.
Regarding the sensitivity related to possible changes, each 10-pp increase in this reference value would reduce gains
by BRL 14 billion (0.03% of GDP in 2027).

Regarding the “BPC” welfare benefit, a phased benefit payment is proposed for low-income elderly people,
with a negative impact of BRL 13 billion (or -0.03% of GDP in 2027). Elderly people with per capita family income
up to ¼ of a minimum wage will receive BRL 400, adjusted for inflation over time, starting at age 60, with this amount
increasing to one minimum wage by age 70. Currently, this group receives one minimum wage from the age of 65
onwards.

Finally, the reform proposes a smaller scope for the salary bonus, saving BRL 157 billion (0.2% of GDP in
2027). The salary bonus is a social benefit of one minimum wage for formal private sector workers who earn up to two
minimum wages per month. The reform proposes to restrict the benefit to those who earn up to one minimum wage per
month. However, since this benefit is paid to 22 million beneficiaries, the proposal could be modulated so that its
applicability is postponed and/or extended to, for example, those who earn up to 1.5 minimum wages. With each year
of postponement, the impact would be reduced by BRL 18 billion over 10 years , without reducing the primary result in
2027, whereas the extension to those earning up to 1.5 minimum wages would reduce the impact to BRL 70 billion (or
0.12% of GDP in 2027).

1
In addition to workers in the rural sector, the reform also foresees differentiated retirement ages for teachers, civil police,
correctional and socio-educational agents, disabled people and individuals subject to conditions that are harmful to health. These
exceptions are more sensitive to states and municipalities than to the federal government. The Ministry of Economy estimated the
impact of the reform for the states at BRL 350 billion over 10 years and for municipalities at BRL 150 billion over 10 years.

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Macro Vision | April 26, 2019

New Social Security (PEC 06/19): Measures on the Private sector

Accumulated Accumulated
% of GDP in
Measures BRL bln BRL bln
2027
(2019-28) (2020-29)
Private Sector Total 840 1023 2.09%
Private Sector General Regime (RGPS/INSS) 700 866 1.89%
Transition rules for retirement 419 527 1.18%
Increase in minimum contribution period to 20 from 15 years to
70 88 0.18%
retirement by age
Change of rule and calculation base of pensions' value 35 44 0.10%
Rural Pensions 128 149 0.30%
Increase in minimum retirement age for women from 55 to 60 years 50 66 0.15%
Re-taxation of social security contributions on rural exports 54 60 0.10%
BRL 600 annual contribution per family group 23 23 0.05%
Survivors Pensions 82 101 0.23%
Restrictions on accumulation 35 44 0.10%
Proportionality according to number of dependents 46 57 0.13%
Phased BPC payment: BRL 400 at age 60, 1 minimum wage at 70 -10 -13 -0.03%
Progressive pension contribution rates -25 -30 -0.07%
Wage bonus - Restriction to those who earn up to 1 minimum wage 140 157 0.20%
Source: Itaú

Proposals for the civil servants’ pension system (RPPS)

In the case of the civil public sector, the reform generates gains of BRL 220 billion over the 10 years between
2020 and 2029 (or 0.40% of GDP in 2027).

The transition rule for public servants implies savings of BRL 89 billion over 10 years (0.13% of GDP).
According to the proposal, the sum of age and contribution time increases from 96 for men and 86 for women to 105
and 100, respectively, within a maximum period of 14 years, similar to one of the schemes for private sector workers.
Moreover, in order to retire, public servants will have to be at least 62 years old if men and 57 years old if women,
compared with 60 and 55 currently, in addition to a minimum of 20 years in public service, compared with the current
period of 10 years.

Restrictions to parity and integrality rights save BRL 102 billion over 10 years (0.15% of GDP in 2027). The
measure reaches only those who entered public service as of 2003 , who would only retain the right to a pension
benefit equal to the last salary earned (integrality), and to the parity of readjustments with active workers, in case of
retirement at the age of 65 if men and 62 if women, after the approval of the reform. A transition rule for this restriction
could significantly reduce this impact, depending on its format. For example, setting a “toll” of 50% for the remainder
contributions for all public servants would lead to a reduction in the impact of BRL 64 billion (0.15% of GDP in 2027).
However, if this toll were limited only to public servants retiring in the first two years following the reform, the impact
would be smaller, at BRL 7 billion over 10 years (0.02% of GDP in 2027).

The progressive pension contribution rates according to income levels would add BRL 29 billion over 10
years (0.08% of GDP in 2027). The current contribution of 11% on the total salary (or limited to the RGPS ceiling, for
those with complementary pensions) would change to progressive rates ranging from 7.5% to 22% on salary ranges,
similar to the progressive income tax mechanism. The measure, as explained above, offsets the loss of revenue in the
general private sector system.

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Macro Vision | April 26, 2019

Proposals for the military

The bill (PL 1645/19) for the military, sent separately from reform and career restructuring measures, saves
BRL 10 billion over 10 years (0.03% of GDP in 2027).

The reform measures generate savings of BRL 97 billion over 10 years (0.28% of GDP in 2027). The main
measure is the increase in the pension contribution rate from 7.5% to 10.5%, staggered over three years, with an
impact of BRL 59 billion (0.17% of GDP in 2027). In addition, a 10% reduction in the military workforce, about 36
thousand people, generates BRL 34 billion (0.10% of GDP) over 10 years, while the increase in service time from 30
to 35 years yields BRL 5 billion (0.01% of GDP).

The career restructuring measures imply a cost of BRL 87 billion over 10 years (-0.25% of GDP in 2027). The
creation of the additional qualification benefit (to cover the cost of courses and specializations) costs BRL 57 billion
over 10 years (-0.16% of GDP in 2027), while the additional benefit due to permanent availability of the Armed Forces
members costs BRL 24 billion (-0.07 % of GDP), and the transfer bonus to inactivity status costs BRL 6 billion in
allowances (-0.02% of GDP).

New Social Security (PEC 06/19): Measures on the Public sector

Accumulated Accumulated
% of GDP in
Measures BRL bln BRL bln
2027
(2019-28) (2020-29)
Public Sector Total 185 230 0.41%
Civil Servants Total (RPPS) 177 220 0.38%
Restriction to integrality and parity 80 102 0.17%
Transition rules for retirement 70 89 0.13%
Progressive pension contribution rates 27 29 0.08%
Military regime 8 10 0.03%
Increase in contribution tax to 10.5% from 7.5% 47 59 0.17%
10% reduction in the workforce in 10 years 27 34 0.10%
Increase in service time to 35 from 30 years 4 5 0.01%
Transfer bonus to inactivity and wage increases -5 -6 -0.02%
Creation of additional benefit due to permanent availability -19 -24 -0.07%
Creation of additional benefit due to qualification -45 -57 -0.16%
Source: Itaú, Ministry of Defense and Ministry of the Economy

Sensitivity of the economy to retirement age and the private sector transition rule (RGPS/INSS)

The transition rule for people who currently retire by contribution time has three modalities. As explained
above, it is the measure that provides the largest savings in the entire reform: BRL 527 billion over 10 years
(1.20% of GDP in 2027). Thus, we detail below the transition formats and impacts of eventual changes.

The first modality is the so-called "toll" of 50% for those retiring in the first two years after the approval of the
reform. In this period, it will be possible to retire by means of an additional contribution time of 50% of the time that
would be required for retirement by contribution time under the current rules. For example, if a person has to work for
another two years in order to retire by contribution time, that person would have to work for three years after the
approval of the reform.

A reduction in the “toll” from 50% to 25% would imply a loss of BRL 5 billion over 10 years, while the loss
resulting from the extension of the applicability of this rule increases over time (see table), everything else
remaining constant. Extending, for example, the applicability of the toll rule to the first five years after the approval of
the reform, the loss of savings would reach BRL 27-32 billion (0.1% of GDP).

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Macro Vision | April 26, 2019

Transition: Grace period and toll

(Loss in BRL bln between 2020 and 2029 ; % of GDP in 2027)

years / % 25% 50%

5 (-32 ; -0.06%) (-27 ; -0.05%)
4 (-14 ; -0.03%) (-10 ; -0.02%)
3 (-7 ; -0.02%) (-4 ; -0.01%)
2 (-2 ; -0.01%) (0 ; 0.00%)
Source: Itaú

The second transition rule is a point system in which the sum of the age and contribution time, initially at 96
for men and 86 for women, is increased by one point each year until it reaches 105 and 100 in 14 years. This
point system rule is slightly less rigid for the average individual (see chart) because it does not require a minimum
retirement age, enabling people who started working earlier and contributed for longer to retire relatively earlier. The
average individual, who currently retires with 90 points (55 years of age and 35 years of contribution) if a man and 83
points (53 years of age and 30 of contribution) if a woman, will retire with 105 (62.5 years of age and 42.5 years of
contribution) and 100 (61.5 years of age and 38.5 years of contribution), and therefore below the minimum retirement
age of 65/62 (see chart).

A reduction in the initial levels of 96/86 of the point system generates a greater impact than a reduction in the
final levels of 105/100. For example, a reduction of two points in the initial levels to 94/84 generates a loss of BRL
125 billion (0.26% of GDP), while a reduction of two points in the final levels to 103/98 reduces the gains by BRL 20
billion (0.05% of GDP).

Transition: change in initial points

(Loss in BRL bln between 2020 and 2029 ; % of GDP in 2027)

M/W 82 84 86

90 (-193 ; -0.41%) (-177 ; -0.38%) (-121 ; -0.26%)

92 (-160 ; -0.34%) (-142 ; -0.30%) (-86 ; -0.19%)

94 (-140 ; -0.30%) (-125 ; -0.26%) (-68 ; -0.15%)

96 (-70 ; -0.15%) (-53 ; -0.11%) (0 ; 0.00%)

Source: Itaú

Transition: change in final points

(Loss in BRL bln between 2020 and 2029 ; % of GDP in 2027)

M/W 92 94 96 98 100

97 (-223 ; -0.47%) (-197 ; -0.41%) (-170 ; -0.36%) (-159 ; -0.34%) (-155 ; -0.33%)

99 (-185 ; -0.39%) (-158 ; -0.34%) (-132 ; -0.28%) (-122 ; -0.26%) (-117 ; -0.25%)

101 (-115 ; -0.25%) (-90 ; -0.19%) (-62 ; -0.14%) (-53 ; -0.12%) (-48 ; -0.11%)

103 (-82 ; -0.18%) (-55 ; -0.12%) (-30 ; -0.07%) (-20 ; -0.05%) (-15 ; -0.04%)

105 (-65 ; -0.14%) (-38 ; -0.08%) (-11 ; -0.03%) (-5 ; -0.01%) (0 ; 0.00%)
Source: Itaú

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Macro Vision | April 26, 2019

The third transition rule is an initial minimum age of 61 years for men and 56 years for women, increased by
six months each year, until the ages of 65 and 62 over 12 years. The power of the rule comes mainly from the fact
that the average retirement age by contribution time is 55 years for men and 53 for women, so there is a discontinuity
in the transition after the years of eligibility of the toll rule (see chart).

Transitions and expected retirement age

66

Expected retirement age to man that started 65

64
63
working at 20 years

62
61
60
59
Original PEC 287/16
58
Modified PEC 287/16
57 New Social Security
(increasing minimum age)
56 New Social Security
(points system)
55
55 54 53 52 51 50 49 48 47 46 45 44 43 42 41 40
Age in 2019
Source: Itaú

Each one-year reduction in the initial minimum age for men and women, decreases the savings by BRL 42
billion (0.1% of GDP) on average, everything else remaining constant. For example, if the initial minimum age
were reduced from 61/56 to 57/54, the loss in savings would be around BRL 111 billion (0.25% of GDP), maintaining
the increase of those ages by six months every year and the final ages at 65/62.

Transition: change in initial minimum age (Loss in BRL bln between 2020 and 2029 ; % of GDP in 2027)
M/W 50 51 52 53 54 55 56

55 (-250 ; -0.53%) (-230 ; -0.47%) (-208 ; -0.44%) (-192 ; -0.41%) (-165 ; -0.36%) (-150 ; -0.33%) (-120 ; -0.26%)

56 (-215 ; -0.45%) (-195 ; -0.40%) (-172 ; -0.36%) (-158 ; -0.34%) (-131 ; -0.28%) (-116 ; -0.25%) (-85 ; -0.19%)

57 (-195 ; -0.41%) (-176 ; -0.36%) (-153 ; -0.33%) (-139 ; -0.30%) (-111 ; -0.25%) (-97 ; -0.21%) (-67 ; -0.15%)

58 (-177 ; -0.38%) (-158 ; -0.32%) (-135 ; -0.29%) (-120 ; -0.26%) (-93 ; -0.21%) (-78 ; -0.18%) (-49 ; -0.11%)

59 (-143 ; -0.30%) (-124 ; -0.25%) (-101 ; -0.21%) (-87 ; -0.19%) (-60 ; -0.13%) (-45 ; -0.10%) (-15 ; -0.04%)

60 (-128 ; -0.28%) (-110 ; -0.22%) (-86 ; -0.19%) (-72 ; -0.16%) (-50 ; -0.11%) (-35 ; -0.08%) (-5 ; -0.01%)

61 (-123 ; -0.26%) (-105 ; -0.21%) (-81 ; -0.18%) (-67 ; -0.15%) (-45 ; -0.10%) (-30 ; -0.06%) (0 ; 0.00%)
Source: Itaú

The impact of the reduction in the final minimum age is accentuated if the retirement age drops below 62
years for men and 61 years for women. Initially, the minimum age reduction generates smaller impacts, given that
by the transition rule of the point system, it is possible to retire without reaching a minimum age (see above).
Therefore, age reductions to levels below 62/61 lead to ever greater losses in savings. For example, while a three-
year reduction in the ages, to 62/59, would reduce the impact by BRL 73 billion (0.16% of GDP), a reduction of
another three years, to 59/56, would reduce savings by BRL 245 billion (0.52% of GDP), which means an additional
loss of BRL 182 billion. It is also worth noting that the already debated reduction of the minimum age for women
from 62 to 60 years would generate a negative impact of BRL 60 billion (0.10% of GDP).

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Macro Vision | April 26, 2019

Transition: change in final minimum age (Loss in BRL bln between 2020 and 2029 ; % of GDP in 2027)
M/W 54 55 56 57 58 59 60 61 62

57 (-378 ; -0.79%) (-350 ; -0.74%) (-322 ; -0.68%) (-293 ; -0.62%) (-266 ; -0.56%) (-238 ; -0.51%) (-227 ; -0.49%) (-206 ; -0.44%) (-184 ; -0.39%)

58 (-340 ; -0.72%) (-312 ; -0.66%) (-283 ; -0.60%) (-255 ; -0.54%) (-227 ; -0.48%) (-200 ; -0.43%) (-189 ; -0.41%) (-168 ; -0.36%) (-146 ; -0.31%)

59 (-301 ; -0.64%) (-273 ; -0.58%) (-245 ; -0.52%) (-216 ; -0.46%) (-189 ; -0.41%) (-162 ; -0.35%) (-151 ; -0.33%) (-130 ; -0.28%) (-108 ; -0.23%)

60 (-263 ; -0.56%) (-235 ; -0.50%) (-207 ; -0.44%) (-178 ; -0.38%) (-151 ; -0.33%) (-124 ; -0.27%) (-113 ; -0.25%) (-92 ; -0.20%) (-70 ; -0.15%)

61 (-226 ; -0.48%) (-198 ; -0.42%) (-169 ; -0.37%) (-140 ; -0.31%) (-113 ; -0.25%) (-86 ; -0.19%) (-75 ; -0.18%) (-54 ; -0.13%) (-32 ; -0.08%)

62 (-210 ; -0.45%) (-183 ; -0.39%) (-156 ; -0.33%) (-127 ; -0.28%) (-100 ; -0.22%) (-73 ; -0.16%) (-62 ; -0.14%) (-40 ; -0.09%) (-19 ; -0.04%)

63 (-194 ; -0.42%) (-168 ; -0.36%) (-142 ; -0.30%) (-113 ; -0.25%) (-86 ; -0.19%) (-59 ; -0.13%) (-48 ; -0.11%) (-27 ; -0.06%) (-5 ; -0.01%)

64 (-192 ; -0.41%) (-166 ; -0.35%) (-140 ; -0.30%) (-111 ; -0.24%) (-84 ; -0.18%) (-57 ; -0.12%) (-46 ; -0.11%) (-24 ; -0.06%) (-3 ; -0.01%)

65 (-189 ; -0.40%) (-163 ; -0.35%) (-137 ; -0.29%) (-108 ; -0.23%) (-81 ; -0.18%) (-54 ; -0.12%) (-43 ; -0.10%) (-22 ; -0.05%) (0 ; 0.00%)
Source: Itaú

The change in the pace of increases in the point system has greater effects than a change in the pace of
increases in the minimum age. This is because, for average individuals, the retirement age at the initial levels of the
point system rule is lower (58/54.5) than in the minimum age rule (61/56). Thus, if the initial and final levels of the point
system and the minimum age rules are kept unchanged, an increase of one point occurring every two years would
generate a loss of BRL 146 billion (0.3% of GDP), while a six-month increase in the minimum age every two years
would result in a loss of BRL 27 billion (0.06% of GDP).

Transition: pace of increase of 6

months on age and of 1 point
(Loss in BRL bln between 2020 and 2029 ; % of
GDP in 2027)
Years to
1 point 6 months on age
increase
3 (-217 ; -0.46%) (-54 ; -0.12%)
2 (-146 ; -0.31%) (-27 ; -0.06%)
1 (0 ; 0.00%)
Source: Itaú

Our expectation for the reform

We believe that the version of the reform to be approved by the Congress will have a fiscal impact of 50% to
75% relative to the original reform submitted by the government, meaning accumulated savings of between
BRL 670 billion and BRL 990 bln between 2020 and 2029 (and around BRL 540 billion and BRL 800 billion
between 2019 and 2028), or a result between 1.4 pp and 1.9 pp of GDP higher in 2027. Our confidence that the
reform will be approved derives from a notional majority in Congress that does not object conceptually or ideologically
to the proposal and that can be mobilized for voting, as well as consensus among opinion leaders on the need to
restore the financial sustainability of the pension system. It should also be noted that the approval is not only in the
interest of the federal government but also of regional governments, whose financial situations tend to be greatly
affected by the pressure of pension costs.

Given the news about the reform negotiation process and the historical pattern of related processes, we
believe that the proposals for changes in rural pensions, the BPC and the minimum contribution time will be
withdrawn and that the transition rule for the private sector will be softened. While the first three items would
represent a loss in savings of BRL 164 billion (0.40% of GDP in 2027), softening the transition rules would cost about
BRL 100 billion over 10 years (0.25% of GDP in 2027).

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Macro Vision | April 26, 2019

The lingering doubts pertain to the restriction of public servants’ parity and integrality rights, the smaller
scope for the salary bonus and the re-taxation of rural exports. In the case of public servants, it is possible that a
transition rule would be added, according to which full pension benefits and readjustment parity are still permitted at
ages less than 65/62 years. The salary bonus may be withdrawn, with the justification that it is not a typical Social
Security issue and that it constitutes a benefit paid to 22 million people, although there is evidence that its
redistributive impact is significantly lower than that of the “Bolsa Família” program. Finally, the re-taxation of rural
exports may be withdrawn because it involves an increase in sectoral taxation in a country with an already high tax
burden, given its per capita income. If altered or withdrawn, these items would lead to savings closer to BRL 670
billion (or 1.4% of GDP in 2027).

Despite noise in the initial stages of the process, we expect the pension reform to be approved in 3Q19 by the
Lower House and in 4Q19 by the Senate. The proposal has been approved by the Constitution and Justice
Commission (CCJ) and is now on a special commission of the Lower House, where it may undergo changes before
being put to a vote in the Lower House plenary.

New Social Security (PEC 06/19): our expectation of approved reform

Itaú Expectation Proposal Sent
Measures Accumulated Accumulated Accumulated BRL Accumulated BRL
% of GDP in 2027 % of GDP in 2027
BRL bln (2019-28) BRL bln (2020-29) bln (2019-28) bln (2020-29)

Total 537-811 670-990 1.4%-1.9% 1025 1253 2.50%

Private Sector General Regime (RGPS/INSS) 431-485 542-602 1.21% 700 866 1.89%
Transition rules for retirement 339 427 0.95% 419 527 1.18%
Increase in minimum contribution period to 20 from 15 years 0 0 0.00% 70 88 0.18%
Change of rule and calculation base of pensions' value 35 44 0.10% 35 44 0.10%
Rural Pensions 0-54 0-60 0-0.10% 128 149 0.30%
Increase in minimum retirement age for women from 55 to 60 years 0 0 0.00% 50 66 0.15%
Re-taxation of social security contributions on rural exports 0-54 0-60 0-0.10% 54 60 0.10%
BRL 600 annual contribution per family group 0 0 0.00% 23 23 0.05%
Survivors Pensions 82 101 0.23% 82 101 0.23%
Phased BPC payment: BRL 400 at age 60, 1 minimum wage at 70 0 0 0.00% -10 -13 -0.03%
Progressive pension contribution rates -25 -30 -0.07% -25 -30 -0.07%
Wage bonus - Restriction to those who earn up to 1 minimum wage 0-140 0-157 0-0.20% 140 157 0.20%
Civil Servants Total (RPPS) 97-177 118-220 0.21%-0.38% 177 220 0.38%
Restriction to integrality and parity 0-80 0-102 0-0.17% 80 102 0.17%
Transition rules for retirement 70 89 0.13% 70 89 0.13%
Progressive pension contribution rates 27 29 0.08% 27 29 0.08%
Military regime 8 10 0.03% 8 10 0.03%
Source: Itaú, Ministry of Defense and Ministry of the Economy

Pedro Schneider

Macro Research – Itaú

Mario Mesquita – Chief Economist

To access our reports and forecast visit our website:

https://www.itau.com.br/itaubba-en/economic-analysis/publications

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Macro Vision | April 26, 2019

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