40 Million Workers Without Social Security
“The social security evasion rate increase from 53% in 1985 to 62% in 1999, implying fiscal inconsistency and social hazard.”
Of the 64 million workers in the private sector, 39.5 million (62%) do not contribute to social security. The social security evasion rate in the poorest 20% of the population is 96%, against 16% of the richest 20%, as shown on the table. In urban areas, in 1985, the evasion rate was 39%; in 1999 it had reached 53%. The consequences of an increasing evasion rate are not only fiscal inconsistency, but also social hazard. The group without social security is particularly vulnerable to changes associated to labor accidents, maternity, loss of a spouse and old age. In these cases, the individuals should brace themselves for these eventualities, which is not the case among poorer workers.
The main challenge that social security faces is its own increase in coverage. Apart from demographic changes and provided benefits, the social security system’s financial situation deteriorated as a result of the vicious cycle of evasion and tax rates. On one hand, the labor market’s growing informality resulted from increasing social security costs dissociated from the expected benefits. The result has been a reduction in the social security levy, which prompts new increases in tax rates and more informality.
In the last decades, we observed an increase in social security taxes from both companies and workers. The number of workers receiving between one and three minimum wages increased from 3% in the Thirties to the current 8%. During the same period, this inflation hit employers even more, because tax rates increased from 3% to 20%.
The labor market’s behavior markedly reveals an increasing informality in labor relations over the past few years. The proportion of self-employed in the workforce has presented an ascending trend since 1986, currently reaching 23%. Similarly, the number of unregistered employees has increased since 1989, presently reaching 11%.
It is possible to claim the existence of a causal relation between the two facts, that is, the observed increase in tax rates leading to an increased informalization of labor relations. The Laffer curve— a tool to analyze the interaction between of the collection of inflationary tax and the inflation level - captures the final impact of various tax rates on the tax collection.
The idea is that the higher the tax rate, the smaller the tax collection base.
In the social security Laffer curve, today we would be on the right hand side. In this case, as in the case of hyperinflation, we would have an explosive situation based on informality.
Changes are necessary to reverse the ascending spiral of evasion and tax rates. These changes may reduce contribution tax rates without harming tax collection.
Policies – The way out of the social security trap involves adopting operational and structural measures. In the latter, there are changes in the incentives for contribution, by altering the social security and labor legislations. We explore two structural issues: the first is connected to the pay as you go character —predominant in the Brazilian social security
system. The fact that the employee does not perceive a connection between the present contribution and the expected benefits inhibits his contribution. The recent introduction of the social security factor aims at gradually and partially correcting this distortion.
In the labor legislation, there are already many synergies to be explored with social security. For example, the labor relation status does not define labor rights . Informal employees may claim their rights before labor courts. As a result, companies pay in advance any labor fees, leading to the effectiveness of these legal precepts in the informal This situation creates the following cliché: “there is more between informal employees and the labor law (CLT) that the social security (INSS) suspects.”
The INSS is a significant agent, and contrary to Orwell’s Big Brother, does not have eyes everywhere. In the microeconomic anonymity, companies and employees reach mutually advantageous agreements at the public budget expense. It is up to the State to reduce this arbitration space through changes in incentives to contribution, and thus including rewards, penalties, and increase the quantity of information within the system.
Among the operational measures, there are actions in the enforcement and marketing areas (advertising, establishing offices, etc.). These measures are easier to implement than the structural ones, since they do not involve constitutional or even legal changes.
Recently, operational changes in the INSS were announced, approaching it to its clients. In the first place, these changes aim at improving contributions by sending messages with user-friendly explanations regarding the system’s functioning and social security accounts’
statements. These statements will improve of the capacity of employees to hold their employers accountable.
Another innovation was the creation of a prize draw through the Caixa Econômica Federal for the contributors who are not in debt. These changes are more suited to the needs of the INSS potential beneficiaries and more competitive before private pension funds.
Although the social security system has implemented measures to expand the system’s coverage, it is necessary to search for alternatives in order to provide more speed and sustainability to this process, which faces all sorts of resistance.
The study of measures to expand the coverage of the social security system is fundamental for social policies. Workers in informal jobs will not be able to face the social risks of labor in the future, due to unfortunate causes that may affect their work capacity, such as old age.
By not being affiliated to a system, today’s informal workers will generate high social costs in the future, as they will either depend on family members, and consequently will diminish their income and worsen their living conditions; or by relying upon governmental social safety nets, they will burden contributors for a reason that could be avoided today.
