BRASILIA, June 16 (Reuters) - Brazilian President Dilma Rousseff will veto a hike in pension benefits she believes jeopardizes the long-term sustainability of one of the world's most generous welfare systems, two officials familiar with the decision told Reuters on Tuesday.
Rousseff will instead unveil an alternative proposal on Wednesday, aimed at easing tensions with labor unions and allied lawmakers who supported making the retirement age more flexible, the officials said. The government has yet to decide if the proposal will be presented via a temporary decree or an urgent bill.
"You need to give a signal that the government will protect its finances and the social security system," said one of the officials who is a senior member of Rousseff's ruling coalition said.
The changes, which were approved by Congress, would cost the government an extra 3.2 trillion reais ($1.04 trillion) or the equivalent of more than half of Brazil's gross domestic product over the next 45 years, according to projections by the social security ministry.
The surprise hike in pension benefits supported by ally lawmakers, including some of Rousseff's own Workers' Party, highlighted the strong resistance to the unpopular austerity push led by Finance Minister Joaquim Levy to shore up the government finances.
Since winning re-election in October, Rousseff has embraced a major shift in economic policy to recover the trust of investors in the once-booming economy. With the economy stumbling, inflation on the rise and public finances in a shambles, Rousseff has sought to get the country back on track with a mix of orthodox economic policies that she largely shunned in her first four years in office.
"It is positive for the market that Rousseff will veto the changes, but we need to analyze what she offers instead," said Flavio Serrano, an economist with Espírito Santo Investment Bank. "She needs to offer a lasting solution to what is probably one of the biggest risks to our economy."
Brazil has one of the world's most generous pension systems, spending over 10 percent of GDP on retirees in what economists and ratings agencies point to as one of the biggest future threats to its economy.
A spokesman in Rousseff's office declined to comment, saying the president has not made her decision public yet.
$1 = 3.0891 Brazilian reais Reporting by Alonso Soto; Editing by Ken Wills