This paper studies how Brazil's high real interest rate is related to the country's pay-as-you-go (PAYG) pension system, which features exceptionally large expenses. We use a standard version of the overlapping generations model, with a mixed pension system (part PAYG part fully funded). We calibrate the model to the Brazilian economy between 2000 and 2014. We consider a steady state which reproduces the average real interest rate in this period, with a PAYG system. We then simulate a pension reform to replicate Chile's pension expenses. Like Brazil, Chile is a Latin American middle income country, but its pension system is mostly of the fully-funded type. In our preferred specification, the model predicts a 1 percentage point decrease in the long-run annual real interest rate. This corresponds to 18% of the average interest differencial between Brazil and Chile during the 2000-2014 period.
