Social Security Coverage: diagnosis and proposals - Marcelo Neri

September, 2003


The book presents a broad evidence based view of the causes and consequences of social security evasion, highlighting the role of each individual attributes  (as gender, family status, age, race, migratory status, schooling, activity sector and working time). The analysis of the social security evasion is done for the total of the private sector employees as well as for other working classes (employers, domestic workers, etc). Furthermore, the book presents an analysis of the spatial distribution of evasion by macro-region, unit of federation, city size and mesoregions, including a multivariate analysis to the same problem using logistic regressions. A diagnosis of the low social security revenue observed in Brazil is undertaken to discuss the incentives within the regulatory framework of Brazilian Social Security and labor legislations. Last but not least, in the light of the empirical evidence raised, the author make prescriptions for an increase in the coverage of the National Institute of Social Security. It is interesting to notice that this book was released in 2003, year of reversal in the expansion trend of workers that do not contribute with Social Security. Between 2003 and 2014 there was a strong formalization process in Brazilian labor market, which unfortunately have been abandoned with the economic crises. This reflection may also be helpful to feed the lively debate on social security reforms.

Number of pages: 326

Index of the book

Cap. 1 – Causes and consequences of social security evasion 

Cap. 2 – Non-contributing workers profile

Cap. 3 – Multivariated analysis of the non-contribution determinants

Cap. 4 – Diagnosis of the Social Security evasion structural causes 

Cap. 5 – Proposals and Conclusions

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 of 96%, against 16% of the richest 20%, as shown by the table. In urban areas, in 1985, the evasion rate was of 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 work accidents, maternity, loss of a spouse, and old age. In these cases, the individuals should protect themselves for these eventualities, which is not the case among poorer workers.

The main challenge to social security faces is its own increase in breadth. Apart from demographic changes and provided benefits, the social security system’s financial situation aggravated itself in consequence of the vicious cycle between evasion and tax rates. On one hand, the labor market’s growing informality was instigated by increasing social burdens, but also by the dissociation of benefits to be granted. The result has been a reduction in the social security levy, which induces new increases in tax rates and more informality.

In the last decades, we have observed an increase in tax rates contributing to social security from firms as well from workers. The number of workers receiving between one and three minimum wages increased from 3% in the thirties to the current 8%. Employers felt this inflation even more, where tax rates went from 3% to 20%, during the same time interval.

The labor market’s behavior reveals as a distinct mark an increasing informality in work relation over the past few years. The proportion of self-employed in the work force has been presenting an increasing trend since 1986, currently reaching 23%. Similarly, the participation of employers without proper documentation has increased since 1989, presently reaching 11%.

It is possible to defend the existence of a causality relation between the two facts, that is, the observed increase in tax rates lead to an increasing informalization of labor relations. The Laffer curve—instrumental in the interaction analysis between the earning of inflationary tax and the inflation level, captures the final impact of various tax rates over the tributary collection. The idea is that the greater the tax rate, the smaller the tax collection base.

In the social security Laffer curve, we would today be on the right 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 between evasion and tax rates. These changes can allow the reduction of contribution tax rates without harming tax collection.

Policies – The way out of the social security trap involves the adoption of operational and structural measures. In the last group, there are changes in the incentives for contribution, through alterations in the social security and labor legislations. We explore two structural questions: the first is connected to the character of simple repartition—predominant in the Brazilian social security system: the fact that the employer does not receive a connection between the present contribution and granted benefits inhibits the contribution. The recent introduction of the social security factor aims at gradually and partially correcting this type of distortion.

In the labor legislation, there are already many synergies with social security to be explored. For example, labor rights are independent of the labor relation’s legal character. Informal employees have the prerogative of charging a posteriori their rights in the Labor Judiciary. As a result, firms honor the appropriate rights, bringing to the informal labor market a high effectiveness of these clauses. The cliché associated to this situation is the following: “there are more relations between informal employees and the CLT that the INSS expects.”

The INSS is a significant agent, and contrary to Orwell’s Big Brother, does not have eyes everywhere. In the microeconomic anonymity, firms and employees reach mutually advantageous agreements of the public money’s expenses. It is up to the state to reduce this arbitration space through changes in incentives to contribution, and thus concluding prizes, punishments, and the increase in the quantity of information within the system.

Among the operational measures, we find actions in the fiscalization area as well as in market areas (marketing, opening of fixed positions, etc.). These measures are easier to implement than the structural ones, since they do not involve constitutional changes, or even legal ones.

Recently, operational changes in the INSS were announced, which made it closer to its clientele. In the first place, these changes aim at improving contributions through the sending of messages with friendly explanations regarding the system’s functioning and with social security accounts’ statements. These statements will improve the fiscalization of employers in relation to their respective firms.

Another innovation in the creation of a lottery through the Caixa Econômica Federal among the contributors who are not in debt. These changes make turn the social security’s daily affairs better for the requisites of its potential clientele and more competitive in relation to private social security accounts.

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 in this process led by 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 functions will not have a way face the social risks of labor in the future, due to unfortunate causes that may affect their work capacity, such as old age itself. By not being affiliated to a system, today’s informal workers will generate high social costs in the future, as they will depend on family members, and consequently will diminish their increase and worsen their living conditions. By depending upon governmental social support services, they will harm contributors due to a reason that could be in part, avoided today.


* Extra Material - The Social Side of Reforms 

(The Book Download in Portuguese)