US embassy cable - 03BRASILIA2500

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