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IBGE Data to Exert Downward Pressure on Retirement Benefits

Life expectancy influences calculations in the initial payment; cuts could reach 13.5%

By Paulo Pinheiro (With help from Karine Rodrigues)

Starting this month, the increase in the average Brazilian's life expectancy, announced yesterday by the Brazilian Institute of Geography and Statistics [Instituto Brasileiro de Geografia e Estatística (IBGE)], is going to provoke strong downward pressure on initial benefits for those who retire into the Brazilian social security system, Previdência. Payment cuts could reach 13.5% or more.

This is happening because life expectancy is one of the variables that get plugged into the calculation of the actuarial factor. When applied to the average salary for contribution (basis for collections), these calculations will define the initial payment to the covered beneficiary.

“The higher the figure for life expectancy, the lower the retirement benefit, because it is presumed that the benefit will be paid out over more time,” said Newton César Conde, actuary and director for specialized consulting at Watson Wyatt Worldwide.

According to IBGE's new actuary tables, life expectancy at the moment of birth has now reached 71 years. This is the first time that these estimates have surpassed the 70-year mark. This marks an 8.5-year increase over 1980 levels.

Jump – According to Conde, life expectancy has made a sudden, one-time jump of 2 years and 8 months, on average. This is in relation to the actuarial tables used until just last month by the Ministry for Social Security (Previdência) to calculate the actuarial factor.

“Until 2002, life expectancy for the average Brazilian has risen 2-3 months, adjusted by age range. This is because IBGE was updating a table published in 1991.” This time, Conde said, IBGE based the actuarial tables for life expectancy on the 2000 census, which saw substantial increases in life expectancy for all age ranges.

Also in keeping with these actuarial facts, the average increase in Brazilian's life expectancy of 2 years and 8 months is going to exert a downward pressure on initial retirement benefits for the covered beneficiary, no matter his or her age or the basis for calculating total contributions.

“The older the covered beneficiary, the greater the cut in the initial payment will be.”

To further clarify, Newton cites an example.

“Let's take a 48-year-old woman with 30 years of contributions, who always maxed out her contributions to Previdência. Suppose she submitted her request for retirement benefits in November. At the end of last month, her actuarial factor would have been 0.622, applied to her highest contribution salary level (basis for monthly collections) of R$ 1,869.34, would provide an initial payment of R$ 1,162.73. With the new life expectancy figures, her actuarial factor in December is 0.586, which will provide an initial payment of R$ 1,095.43, a cut of R$ 67.29 or 6% of her benefits.”

If the reforms at Previdência are approved by the Senate and the new R$ 2,400.00 cap on benefits becomes effective this month, a 65-year-old man with 35 years of contributions, with the actuarial factor in place before (1.264) applied to his peak contribution (R$ 1,869.34), would have gotten an initial payment of R$ 2,362.84. With the change in life expectancy, his actuarial factor this month will be 1.093, which will provide a payment of R$ 2,043.18 – or a cut of 13.5%.

Two more years – According to the Ministry of Social Security (Previdência), with the increase in life expectancy recorded by IBGE, each Brazilian will be required to contribute, on average, two more years [of work] in order to receive a retirement benefit at today's levels.