Brazil's Temer warns of economic fallout if pension reform fails

With little over a week left before Congress packs up for its Christmas break, the unpopular pension reform bill vote risks being postponed until next year, when lawmakers facing re-election will be even more reluctant to back the austerity measure.

The Brazilian Social Democratic Party (PSDB), Brazil's third largest, announced its support for the pension reform plan at the urging of the governor of Sao Paulo, Geraldo Alckmin, picked on Saturday to lead the party into the 2018 election year.

The PSDB decision to instruct its 46 congressmen to back the pension overhaul was a welcome development for Temer, who has been scrambling for votes to pass the bill in the lower house, even though PSDB whip Ricardo Tripoli said only 20 had committed themselves so far.

Temer said streamlining the bloated pension system will be harder and more painful to do if left to the next president who takes office Jan. 1, 2019.

"If we do not reform pensions now, in two years time it will have to be done more radically," he said in a speech to hundreds of mayors, seeking their support for the bill.

"The economy could react negatively if we do not succeed in passing pension reform," he said.

Investors fear failure to pass the bill could weaken the real currency and the stock market, while boosting interest rates and possibly fueling new credit rating downgrades for Brazil next year.

Lower house Speaker Rodrigo Maia, who has refused to call a vote until the government secured the necessary three-fifths super majority of 308 votes, said back-bench support for the bill had improved.

Maia told reporters that he will decide by Thursday whether to call a vote next week, most likely on Tuesday.

The bill proposes increasing the age at which Brazilians can retire and collect social security. It would also make pension payouts in Brazil, among the most generous in the world, more modest, particularly for public-sector employees.

The bill must be approved twice in both chambers. Its approval in the Senate is expected to be easier.

(This story corrects year next president takes office to 2019, not 2018, in fifth paragraph.)

(Reporting by Maria Carolina Marcello, Mateus Maia and Anthony Boadle; editing by Chizu Nomiyama and Jeffrey Benkoe)