Opinion – Pablo Acosta: The Brazilian social security reform agenda has not yet been concluded

Pension coverage, equity and adequacy —three issues that have been widely discussed in past pension reforms—become even more relevant in the context of the new world of work.

About 1.5 million workers in the country are involved in the gig economy or platform work — a number that keeps growing and that raises several old concerns. Will these workers contribute to social security and be entitled to retirement? Will they be treated fairly compared to others? Will they be protected from poverty and will they have at least minimal protection against loss of income in old age?

To answer these questions, we have to understand the situation of the social security system in Brazil. Currently, although social security coverage of elderly Brazilians is high (85%), the share of the working-age population that contributes to the social security system is only 45%. This raises concerns: Will the revenue raised be enough to cover the costs of an ever-growing group of beneficiaries as the elderly population grows?

In addition, although some of the elderly without coverage are protected by their family, their own savings and the non-contributory BPC program (Benefit of Continuous Provision), around 4% to 5% of the elderly remain in poverty. In the absence of changes in public policy, urbanization, shrinking families, loosening of family ties and the proliferation of self-employment with sporadic contributions will lead to increased poverty among the elderly in the future.

To improve the equity of the system, it is necessary to seek a fair contribution balance considering income. Brazil has instituted multiple preferential contribution mechanisms with the aim of increasing contributory coverage among low-income workers.

These mechanisms offer self-employed workers, small entrepreneurs (Simples) and MEI (individual microentrepreneurs) the same social security benefits with significantly lower contribution rates. However, 20% to 30% of high-income workers take advantage of these schemes, while acceptance at lower income levels is minimal.

The national social security system loses 16% of its potential income through these mechanisms and contribution discounts for rural workers and employees of philanthropic entities. Revenue losses are likely to increase as more people opt for non-standard models of work, resulting in irregular contributions under preferential contribution schemes.

The adequacy of the benefit needs to be rethought as well. The value of pensions without contribution, or with a very low contribution —the BPC and the rural retirement by age— has a benefit equal to the minimum contributory pension, so that the incentives to stop contributing are high. It is no wonder that, after the complicated calculations of the social security benefit formula, 70% of women and 56% of men still qualify for the minimum social security benefit.

This means that only a small minority of higher-income workers can influence the value of their pensions (either by working harder or contributing more). Naturally, many people stop contributing after reaching the minimum contribution period of 15 years.

The administrative burden of non-contributory pension benefits is also high. Much time and energy is invested in verifying and documenting the income and residence of elderly applicants for BPC and rural benefits. When benefits are denied, a battle ensues in the court system. After analysis, 20% of denied BPC requests and 34% of denied rural pensions are restored by the court.

As a result of all this effort, only about 15% of the elderly do not receive pensions: some, because they contributed to the system for short periods of time; and others, for not knowing how and where to present the proper documents and how to challenge the denied benefits in court.

Current discounting on contributions, the comparative generosity of non-contributory benefits, and the arbitrariness of administrative procedures raise some important questions about how to strike the right balance between encouraging contributions and helping the underprivileged.

Should the elderly population that has never contributed receive double (BPC = R$ 1,212 per month) the amount granted to vulnerable young families (Auxílio Brasil = R$ 600 per month)? Should people who have contributed 14 years or less receive no compensation for their efforts and subsidize the pension benefits of the rest of the population? Shouldn’t there be a difference in benefits awarded to minimum wage workers whether they have contributed for 15 or 25 years?

Is there a better option that offers universal protection and fair and simple rules, with better incentives to contribute? A report to be published shortly by the World Bank analyzes a possible alternative: unifying and universalizing the non-contributory benefit, replacing the current BPC and rural benefits.

Eligibility for the program would not require proof of income, residency or widowhood. The value could be initially set at the same benefit level as the BPC and, subsequently, unlinked from the minimum wage. At the same time, the requirement of a minimum contribution period would be removed from the contributory pension system.

If a person contributed 5 of the 35 years that constitute a full career, he would receive 5/35 of the (highest) contributory benefit and 30/35 of the non-contributory. In addition to being fairer and simpler and encouraging additional contributions, it is estimated that the system could save 0.9% of GDP if the difference between contributory and non-contributory retirement over time reaches 20%.

An even greater amount could be saved if there were a cap on contribution allowances for higher-income workers. As the elderly population increases, these resources will be valuable for the system to provide fair benefits with coverage for all segments of the elderly population.

This column was written in collaboration with my World Bank colleagues Asta Zviniene, Senior Social Protection Specialist, Rovane Schwengber, Social Protection Specialist, and Raquel Tsukada, Consultant.