This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 04 BRASILIA 002407 
 
SIPDIS 
 
SENSITIVE 
 
NSC FOR WALLACE 
TREASURY FOR SSEGAL 
PLS PASS FED BOARD OF GOVERNORS FOR ROBATAILLE 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV BR
SUBJECT:  PENSION REFORM: GOB VEERS, TACKS, TAKES ON WATER 
 
Refs: A) Brasilia 1466, B) Brasilia 80 
 
SUMMARY 
------- 
¶1. (U) Lula's crucial pension-reform bill was approved by the 
Chamber of Deputies special committee on July 23 -- but only 
after undergoing political buffets and a perhaps fateful 
overhaul.  In a fundamental about-face, the GoB has accepted 
that all current public-sector employees will remain eligible 
for pensions equal to their top salary (albeit with big 
improvements in minimum-age and time-worked eligibility 
criteria.)  Chief factor behind this concession was shameless 
lobbying by Brazil's judiciary, which enjoys unique pension 
benefits and will ultimately decide any reform's 
constitutionality.  There was also pressure from the GoB's 
base in Congress with its long ties to public-sector unions. 
 
¶2. (U) Fiscally, the GoB claims the overall impact of its 
shift is negligible.  Federal savings over the next twenty 
years will still total 50.7 billion, vs. 52.4 billion under 
the GoB's original proposals, supposedly.  `The market' seems 
to take these numbers at face value, and has been placid. 
Politically, however, these early pension-bill concessions 
have seemed to pose doubts over the goals and resolve of 
Lula's team.  They may have opened the door to a snowball of 
public clamor, brinkmanship, and further changes that will 
gut the reform.  Lula's tax-reform bill, due for a committee 
vote soon, could get trapped in a similar cycle.  He and his 
team undoubtedly sense the danger and now are drumming the 
message that they have gone to the limit of their pension- 
reform horse-trading.  END SUMMARY. 
 
A Fortnight's Commotion in Review 
--------------------------------- 
¶3. (SBU) The GoB's about-face began on July 9, following 
drawn-out dialogue with new Supreme Court Chief Justice 
Correa.  The latter evidently sees his job as embracing the 
duty to lobby for retention of the judiciary's uniquely 
generous pension privileges, of which "integral" (100% of 
final salary) pensions are the capstone.  The GoB in turn has 
to bear in mind that the Supreme Court can torpedo any 
pension reform by ruling it unconstitutional, as happened 
with Cardoso's 1998 proposal to tax pensions.  Correa, Social- 
Security Minister Berzoini, and lower-House Speaker Cunha, 
with Planalto's Dirceu in the wings, conferred secretively 
for two weeks.  Outcome:  while Lula was in Europe, on July 
10 local press headlined the administration's alleged 
surrender on the principle of "integral" pensions, not just 
for the judiciary but for the whole current public sector. 
Whether future public-sector workers, too, would get integral 
pensions was not made explicit. 
 
¶4. (U) The news triggered consternation from media, Brazil's 
governors, and Finance Minister Palocci.  Former Social- 
Security Minister Brant, who now heads the Chamber of 
Deputies' special committee on the subject, was widely quoted 
as saying "the new reform is no reform."  Various PT 
politicians in and out of Congress lamented having stuck 
their necks out defending the GoB's original reform plan. 
Palocci by all accounts had not been kept current on the 
Cunha/Berzoini/Correa/Dirceu talks and wanted to cancel his 
European trip to join Lula, in favor of staying home to fight 
for the GoB's original reform guidelines. 
 
¶5. (U) But the weightiest adverse reaction was from Brazil's 
governors.  Fiscal pressure on their own state budgets from 
the pension system is as acute as on the Union's; many can 
afford to pay "integral" pensions even less.  Lula made a 
point of forming and presenting his pension and tax reform 
plans to Congress with the governors' consensus in April. 
That the GoB now appeared to have negotiated so great a 
change in the pension-reform plan, leaving governors to learn 
about it in the papers, sat very badly.  Key Minas Gerais and 
Sao Paulo governors Neves and Alckmin voiced opposition in 
careful but ominous tones.  Temporizing, Dirceu convened a 
meeting July 16 with five representative governors, plus 
Cunha and Berzoini.  At that meeting, Berzoini gave figures 
purporting that the changes overall would be revenue-neutral 
for states as well as the Federal Treasury.  Governors seem 
to have warily gone along, but with the insistence that 
future public workers be ineligible for "integral" pensions. 
 
Lula Decides 
------------ 
¶6. (U) Meanwhile, from Portugal, Lula asserted his authority 
to arbitrate.  At the tense inter-ministerial meeting which 
followed his return on Thursday July 17, according to an 
account in last week's "Epoca" financial weekly, Lula 
censured Berzoini and Cunha (but absolved Dirceu) for undue 
"precipitousness" in their political negotiations.  Yet at 
meeting's end, despite Palocci's and Communications advisor 
Gushiken's arguments against, Lula gave his imprimatur to 
Berzoini's advocacy of integral pensions.  Lula also endorsed 
the continuation of "parity," i.e., that retirees' pensions 
increase by the same factor as current workers' salaries. 
However, he ruled out letting future public-sector workers be 
eligible for integral pensions, and he reasserted the GoB's 
tough original guidelines in some other key respects. 
 
¶7. (U) The next day, the bill's sponsor, Deputy Carlos 
Pimental (PT-Ceara) presented its adjusted version.  Salient 
features include the following. 
 
-- minimum conditions for integral pensions: (women) 55 years 
old with 30 years of INSS contributions and 20 years in the 
public sector, including 10 in present occupation ("cargo"); 
(men) 60/35/20/10 years, respectively. 
 
-- for future public-sector employees, a monthly pension cap 
of BRL 2,400, with the option of a complementary pension fund 
contributed to by government (same as the initial GoB 
proposal). 
 
-- pensions to be taxed at 11%, starting at the present 
personal-income tax floor of 1,058 Reals/month.  The earlier 
agreement had been for a floor of 2,400/month. 
 
-- salary and hence pension sub-ceilings for state and 
municipal judiciary employees of 75% the salaries of Supreme 
Court judges.  The Berzoini/Cunha agreement had been 90.25%. 
 
-- survivor's benefit (currently 100% of the pension without 
limit) to remain 100% only up to 1,058 Reals/month, with a 
30% discount on anything above that level. 
 
-- "parity" (cf. above) to be preserved for existing pensions 
of current and currently-eligible pensioners, and for other 
current public sector, but with definition of parity for the 
latter category left to a future complementary law. 
 
GoB Spin, Market's Placidity 
---------------------------- 
¶8. (U) The acceptance of "integral" pensions represents an 
abandonment of the GoB's original goal of early transition 
towards a unified social-security system with an eventual 
common ceiling for public- and private-sector pensions so as 
to curtail the grossly inequitable privileges enjoyed by 
Brazil's high-paid civil servants (Ref B).  Defenders see it 
as a vital, if ugly, GoB compromise to gain legislative and 
Supreme Court approval of a pension reform that will bring 
Brazil at least the minimum fiscal benefits needed to keep 
the markets sunny.  Grandfathering all current workers' 
benefits could save the final reform from judicial challenges 
based on loose interpretation of the Constitutional principle 
of "acquired rights" that cannot be withdrawn.  Politically, 
the primary gain of the last fortnight's bargaining is that 
the governors seem warily back on board.  In Congress, there 
is grumbling that the GoB walked back too much at the 
governors' behest, but no sign of major mutiny. 
 
¶9. (U) Fiscally, the GoB claims its shift preserves the 
reform's "spinal cord" by improving the pension system's mid- 
to-long term financial viability.  The GoB's prime assertion 
is that, thanks to the major increases in mimimum-age and 
length-of-work requirements, federal savings will not be 
meaningfully reduced by the extension of integral pensions. 
Under the original design, those savings were supposed to 
total 52.4 billion Reals through 2023.  With the changes, 
they will be 50.7 billion.  (Note:  no methodology details 
available; these figures refer to federal civil servants 
only, excluding state and local public sectors, the military, 
firemen, and others.  End Note.) 
 
¶10. (U) For now, financial markets evidently take the GoB 
case at face value.  Global-bank analyses we read all treat 
the revised pension-reform bill as being acceptable, as does 
the IMF, to judge from its indirect commentary.  The recent 
uncertainties have had next to no effect on the exchange 
rate, while Brazil's country risk resumed its decline in July 
and is now at its lowest level since March 2002. 
 
Fiscally Okay, but Politically Damaging? 
---------------------------------------- 
¶11. (SBU) Fair enough, perhaps, in a green-eyeshade way.  Yet 
the risk of collateral political damage to Lula seems high. 
There isn't even much assurance that the pension bill will 
pass Congress in its new form.  By ceding so much when the 
bill was at merely the second of seven legislative voting 
stages, the government may appear to have encouraged every 
interest group to stonewall for extra concessions.  The GoB's 
intent to start taxing retirees' pensions is the most obvious 
likely target.  Raising the survivor's-benefit ceiling is 
another.  State and municipal judiciary employees demand that 
their salary sub-ceiling go back up to 90.25% of Supreme 
Court Justices', not the 75% demanded by the governors, and 
have declared they will strike August 5-12. 
 
¶12. (SBU) More generally, the back-and-forth over pensions 
has let doubt be posed as to how clear, set and stable in its 
reform course the GoB really is.  We believe such doubts are 
misplaced.  But it is a fact that Lula's team has accepted a 
succession of major alterations to the design that it 
initially was adamant be taken as a whole.  And their 
statements on pension issues - including Lula's own -- have 
often contradicted or reversed themselves.  Hitherto, as a 
veteran interlocutor recently put it to us, most of Brazil's 
body politic seemed ready to board Lula's reform train, as 
long as he was driving it and taking the heat.  Now, they can 
feel there is a political premium, and no penalty, in 
opposing his measures. 
 
¶13. (U) Most immediately, this could affect Lula's tax-reform 
bill.  Since the pension-bill's re-working, governors have 
been holding out for three compensatory alterations in the 
GoB's tax-reform bill:  for states to share both the CPMF and 
CIDE taxes (each of which currently accrues 100% to the 
Union); for extra funds to compensate states for revenue 
losses stemming from the federal Kandir Law (which exempts 
exports from major taxes); and for lesser earmarking 
requirements on transfers from the federal treasury.  If 
pension and tax reform bog down in a cycle of demands and 
concessions, Brazil's fiscal future and Lula's political 
stature will both be hard-hit. 
 
Stiffened GoB Stance 
-------------------- 
¶14. (U) The GoB is well aware of these considerations.  Lula, 
Berzoini and Dirceu as well as Palocci all are loudly warning 
that the government has reached the limit of its concessions 
vis-a-vis pension reform.  In a personal meeting, Lula told 
the CUT (largest labor federation) leader that the GoB would 
introduce no further changes to its proposals.  The 
administration responded to the state judges' strike threat 
with a refusal to entertain any negotiations, and Lula in a 
July 24 speech blasted their demands.  And in its strongest 
show of renewed force, the administration on July 23 rammed 
the reform bill through the Chamber's special committee 
without further change by a 30-8 vote. 
 
¶15. (U) The bill must now pass two Chamber floor votes, of 
which the first is expected in early August and the second 
probably not before September, with 60% majorities (Ref A). 
It would then go to the Senate's Justice Committee for a 
ruling on constitutionality and thence to the Senate floor 
for a further two votes, also requiring 60% majorities, the 
second of which is not generally expected before January.  By 
all media accounts, Lula and Planalto are determined to take 
over direct management of the bills' legislative advance. 
 
¶16. (SBU) Such signs of fresh resolve offer hope that Lula 
and team have absorbed lessons from the latest rough-and- 
tumble of the pension-reform process.  Should they hold their 
re-configured line, the result will probably deserve to be 
deemed a success.  But the prospect now looks more unsure. 
HRINAK