AARP
“Older Brazilians, especially in the middle and upper middle classes, will rely more and more on private insurance and retirement income to pay for health care services.”
 

In Brazil, population aging has been particularly fast, although hardly noticed yet by most of the population. The speed of change is shown by the impressive drop of the fertility rate, from about 6.3 children per woman in the 1960s to its current value of 1.8—well below the replacement rate of 2.1. This sharp reduction happened twice as fast in Brazil as it did in Britain. At the same time, life expectancy at birth in Brazil rose from 55 years in 1960 to 73 years today.

On January 1, Dilma Rousseff began her term as Brazil’s first woman president and facing the challenges of an aging society should be among her highest priorities. The Brazilian Institute for Geography and Statistics discovered two years ago that the country had already reached the fertility rate of 1.8, previously projected not to happen until 2040. The implied acceleration of the demographic transition is remarkable. The Brazilian population will start to decline much earlier than previously envisaged—in 2040 instead of the early 2060s—and will reach a maximum of 219 million people, rather than over 260 million.

This dramatic change has not, unfortunately, drawn the attention of governments, in part because Brazil still has a relatively young population, with an average age of 27 years, a proportion of elderly people in the population just about 6.9 percent, and 13.2 million people aged 65 and over. Brazil is not yet a “gray society,” but it is graying quickly. In 2050 there will be 48.9 million people aged 65 and over, or 22.7 percent of the population. Even more impressive is the change in the old age dependency ratio (65 and over for each 100 persons aged 14 to 64)—from 10 today to 36 in 2050. Although acknowledged by analysts and government officials, this fact has not been sufficiently pondered. Even the successive pension reforms undertaken in Brazil in the 1990s and 2000s were driven by the built-in disequilibria in the architecture of the pension systems, rather than by the aging of the population. What drove the growing current account deficit of recent years was not the demographic transition but the possibility of retiring at very low and declining ages—average retirement age under the length-of-service scheme was as low as 49 in 1998! Unfortunately, the reforms were not sufficient to equilibrate current pension finances, and new rounds of reform are now necessary.

Increased longevity, while maintaining the same retirement age, means a longer period of life as a retiree. Presuming that people want to preserve their standard of living, a larger initial “stock of capital” is required in order to keep the same monthly pension for the longer period of retirement. There are three ways to achieve this result: increase the contribution rate, extend the contribution period, or improve returns on accumulated resources. This is the “trilemma” of every pension system, be it public or private.

It is also applicable to those individuals who decide not to participate in any social pension system, but form and manage their own “pension assets.” The longer the survival time, the larger the required stock of capital at the moment of retirement to sustain a decent monthly pension. This is at the root of the growing imbalances observed in pension systems around the world. It is also a big challenge for privately run defined benefit pension schemes. A lot remains to be done in this area in the great majority of countries, including Brazil. The later we recognize this need, the more painful the process will be.

Pensions are not the only area affected by increasing longevity. We all know that as we age, our physical and mental capabilities deteriorate and body and mind become much more exposed to chronic incurable diseases that must be treated throughout the remaining years of life. In a graying society we will spend ever-larger fractions of our income on health care, and society as a whole will spend a larger fraction of gross domestic product. Economies will become progressively health care centered. Currently in Brazil, about 14 percent of GDP is spent on health care (9 percent from government funds and 3 percent from private spending). Health care costs tend to increase year after year due to aging and to the advances in technology that are incorporated into medical procedures. So, since earnings fall at retirement, the extra earnings to finance the growing health care expenditures must come from accumulated assets from retirees themselves or from those responsible for financing health care services. What I mean explicitly is that the funds destined to finance health care services will have to be larger in per capita terms. While health care is guaranteed to all Brazilians by the Constitution, the reality is that public funding of health care, while high by developing country standards, is inadequate. Older Brazilians, especially in the middle and upper middle classes, will rely more and more on private insurance and retirement income to pay for health care services.

Another area that will have to go through important structural changes is in social investments. Fewer nurseries, primary schools, playgrounds, and the like will suffice to serve declining absolute numbers of children. But in Brazil, primary education is underfunded, so, even with declining numbers of children, the state will be compelled to increase investment in primary education in order to prepare a more educated and productive workforce appropriate for its increasingly sophisticated economy. The growing numbers of elderly people will demand new types of investment, and this will open up new opportunities in many different areas, the most obvious being hospitals and home care facilities. The average individual at any age tends to have a better health status compared to his or her predecessors. This is particularly true in Brazil. We are witnessing growing numbers of healthy Brazilians in their 80s and 90s. Quite a few of them will continue to work, but as employability falls sharply with old age, a growing number will be looking for new ways of spending their time. There will be ample room for investments in leisure facilities, social clubs, continuing education, volunteerism, tourism, and the like. A totally new world of opportunities emerges here.

Besides these changing needs of a graying society, I may point out a few other important opportunities opened up by the growing number of elderly—health care initiatives, disease prevention and health promotion, managed care, life insurance, reverse mortgages, cheaper medicines, loans to the elderly, and the like. What a great new and expanding market! It is there to be exploited by those who can appreciate these opportunities. In Brazil, they have been unexploited so far. The 13.2 million seniors of today already form an important market; the nearly 50 million seniors in 2050 will form one 3.8 times larger. Many Brazilian families are maintained by the income of their elders. Upon their shoulders lie important financial responsibilities and opportunities for economic growth for future generations.

 

José Cechin

José Cechin currently serves as Executive Superintendent of the Instituto de Estudos de Saúde Suplementar (lESS). Prior to joining the IESS, Mr. Chechin held positions within the Brazilian Government including Minister for Social Security and Social Assistance (2002); Executive Secretary of the Ministry of Social Security and Social Assistance (1995-2001); and Deputy Secretary of Economic Policy, Ministry of Finance (1993-1995).

 

 
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