A new scandal over a pension fraud scheme has added to President Luiz Inacio Lula da Silva’s mounting difficulties
Social Security Minister Carlos Lupi resigned on May 2 after Federal Police investigations revealed a years-long, USD1.1bn pension fraud scheme. Low popularity levels, a major scandal involving the diversion of resources from public pensioners, mistrust among cabinet members and a long-term erosion of the executive’s power vis-a-vis Congress are combining to undermine the efficacy of the government of centre-left President Luiz Inacio Lula da Silva.
What’s next
Subsidiary Impacts
- The pensions scandal could derail the incipient recovery in Lula’s popularity.
- Repayment of illegally diverted funds will likely worsen the fiscal situation.
- The passage of secondary legislation supporting the recent tax reform could be delayed, but is still likely.
Analysis
In late April, the Federal Police launched the “No Discount Operation”, which led to six officials from the National Institute of Social Security (INSS) — including its then president, Alessandro Stefanutto — being removed from their positions. This brought to light a fraudulent scheme involving unauthorised “associative discounts” to payments made to pensioners.
Pensioners can choose to make these payments as contributions to their unions or other associations in exchange for benefits such as cheaper prices for pharmacy products, health insurance and others.
However, the scheme involved the unauthorised diversion of funds to organisations over several years. It went undetected by 97% of INSS pensioners affected, according to the Comptroller-General (CGU), which conducted audits of 29 entities.
The illegal discounts reportedly started in 2019, the first year of the term of far-right President Jair Bolsonaro, but increased significantly under the current Lula administration.
USD 1.1bn
Total calculated to have been illegally diverted from payments to pensioners
Overall, the INSS estimates that 4.1 million pensioners have been affected — with BRL6.3bn (USD1.1bn) diverted from payments to them, according to the CGU. The need to repay the victims will further complicate the government’s efforts to address the country’s difficult fiscal position (see BRAZIL: Fiscal position may improve gradually – December 16, 2024).
While Lula has publicly stated he would order the associations to return the money, in practice this will require lengthy processes. The most likely outcome is that the state will have to cover the cost and be reimbursed by the organisations involved in the scheme at a later point. Currently, no decision has been made on a specific repayment plan.
Political impact
Politically, the scandal rekindles public memories of previous corruption scandals associated with Lula and his Workers’ Party (PT):
- In the 2000s, Lula’s first term was marked by the ‘Mensalao’ scandal, in which it was revealed that his government paid Congress members monthly stipends to pass legislation.
- In the 2010s, during the presidency of his successor, Dilma Rousseff, a sprawling corruption scandal centred on oil giant Petrobras sent scores of politicians from across the spectrum and businesspeople to jail.
Wrongdoing by Lula and Rousseff has never been proved — Lula was convicted and spent 580 days in jail, but the Supreme Court annulled his sentence on procedural grounds and after evidence emerged that the judge had been biased (see BRAZIL: Lula’s ‘return’ will upend politics – March 12, 2021).
However, the narrative of an association between Lula’s Workers’ Party (PT) and corruption remains an important feature of political disputes in Brazil, and is often used by right-of-centre leaders and militants to attack the party and the governments it leads.
With the opposition pushing for the installation of a parliamentary commission to investigate the INSS scandal, the political damage for the government could continue for several months — both because it would keep the issue in the news and on social media, and because it might potentially reveal more details about the irregularities.
Government fragilities
Although it would want to avoid the establishment of such a commission, the government has tacitly acknowledged it lacks the strength in Congress to impose its will. Instead, it has begun to:
- move to obtain key positions on the commission for its supporters; and
- argue that the scheme began under Bolsonaro’s government but that it was the Lula administration that gave the Federal Police — an organ of the Justice Ministry — the leeway to investigate it.
In reality, the fact that the investigations started early in Lula’s current term — which began in January 2023 — has compounded the government’s troubles.
This is because the then social security minister, Lupi, was reportedly warned of the illegal discounts as early as June 2023 but was slow to take any action — he only discussed it again in April 2024, after the first media articles about the case had been published.
Lupi’s situation became untenable after the Federal Police’s operation in April, especially after he “assumed full responsibility” for promoting his protege Stefanutto as INSS president. However, Lupi only resigned after several days of significant political pressure on both him and Lula. The president sought to keep the minister in the cabinet to avoid creating a conflict with Lupi’s party, the left-wing Democratic Labour Party (PDT).
Lupi was replaced by his deputy, Wolney Queiroz, also from the PDT. However, this did not prevent the party’s caucus in the Lower House from officially breaking with the government — the new minister was seen as Lula’s choice, rather than a party representative.
Executive angst
The INSS scandal adds to a long list of difficulties faced by the executive, including instances of mistrust within its inner circle.
The pensions scandal further erodes the government’s power
For example, Lula expressed irritation to the ministers who accompanied him on a recent visit to Beijing over the leaking of a private conversation he and the first lady had with Chinese President Xi Jinping — in which she expressed concern over the “harmful” effects on children of TikTok, which belongs to ByteDance, a privately held company launched by Chinese entrepreneurs.
Such an environment does not help a government that has already struggled to steer legislation through a highly conservative Congress (see BRAZIL: Party changes will strengthen conservatives – May 8, 2025). The appointment of ministers from a wide range of parties, including some hailing from the right, has not guaranteed their congressional support.
One of the clearest indications of the government’s waning influence came in late April, when Pedro Lucas Fernandes, the leader of the right-wing Brazil Union caucus in the Lower House, backtracked after accepting an invitation from Lula to replace Juscelino Filho, from the same party, as communications minister.
That move illustrated both the current administration’s difficulties and a more structural loss of power by the executive vis-a-vis Congress with respect to control over the budget — which is enhanced in the case of party caucus leaders (see BRAZIL: Congress leadership will cement the “Centrao” – February 10, 2025).
Difficulties in Congress are fuelled by both the series of political developments that have often put the government on the defensive and by its low popularity. This in turn has been worsened by the administration’s struggle to deliver on its agenda, notably Lula’s key campaign promise to abolish income tax on workers earning less than BRL5,000 per month (see BRAZIL: Growing middle class will not boost Lula – February 21, 2025).
