Opinion – Pablo Acosta: Post-Covid, it is necessary to increase the resilience of the vulnerable population

Although the Brazilian social protection system contains instruments with broad coverage to reduce the risks of poverty, extreme poverty, age and disability, protection against labor and business income shocks in Brazil remains segmented and depends on the occupational situation and family composition. . If the system worked perfectly, it is estimated that 90% of Brazilian families would be covered by some social protection program. However, the system has implementation flaws and is unbalanced, favoring formal workers.

In 2019, nearly a third of Brazilian families lived below the poverty line established by the Cadastro Único of R$499 per capita, but many of them were above the Bolsa Família eligibility threshold (R$189 per capita). Furthermore, around 5 million families lived below the average family income and were beyond the reach of any form of “protected” income (social transfer, pension or unemployment insurance).

PNAD data show that workers with informal wage employment or self-employed experience a variation in income at least twice that of formal wage earners. Thus, a major challenge for vulnerable households is to deal with temporary income shocks without permanently affecting their stock of goods or human capital.

Access to credit, savings or insurance can be a way to deal with these income shocks. However, two-thirds of adults among the poorest 40% of the Brazilian population report that they would not be able to raise financial resources to face an emergency. Among those who think they could, resorting to informal credit is more common than formal credit, and both are more common than savings (Findex 2017).

In 2018, a quarter of households in the Cadastro Único used formal credit, most often through more expensive consumer credit instruments. Using “overdraft” checks and paying minimum credit card bills is the most common form of borrowing by the poor. Only a quarter of Oriented Productive Microcredit loans are actually offered to families in the Cadastro Único. Strict qualification requirements and lesser propensity to invest direct this subsidized resource to those with a more formal credit history.

There is a consensus that savings rates in Brazil are low. Data from the household budget survey (POF/IBGE) show that, among the poor population, the self-employed and formal wage earners on average save more and, in general, women save more than men. Compared to their international peers, Brazilians exhibit more intensely the behavioral biases associated with the reduction in savings: overoptimism, temporally inconsistent preferences and low confidence.

Additionally, specialized research reveals knowledge gaps in fundamental financial education concepts, such as probability, that limit the ability to make financial decisions.

Finally, few low-income families use private insurance: around 18% of Brazil’s total population, but 3% among Bolsa Família (BF) families. People generally tend to buy it only when it’s mandatory (vehicle or home insurance).

During the pandemic, Emergency Relief (AE) was an appropriate response to mitigate the systemic shock that affected these uninsured families. But the AE was not designed to be permanent and, in addition to being fiscally unsustainable, it has incompatible incentives in the medium term. However, the shock provoked by COVID-19 exacerbated the challenges faced by vulnerable families in managing the high volatility of income and brought opportunities to improve the social protection system.

The connection of the poor with financial institutions increased in 2020 with the opening of a free digital account by Caixa Econômica Federal for beneficiaries of social programs. This opens up a window of opportunity that must be seized.

A relevant question during Brazil’s recovery period will be how to increase the resilience of vulnerable and informal workers, especially those who stop receiving EC but are not eligible for traditional social assistance. The design of the new conditional cash transfer program (Auxílio Brasil) that will replace Bolsa Família is fundamental.

Maintaining the program’s dynamism and adapting its breadth and generosity are essential to strengthening the safety net. However, to provide a minimal form of ‘income insurance’ for families who remain at risk of falling into poverty after a shock, new financial inclusion policies can be implemented.

In recent years, countries with large informal economies have promoted financial risk management instruments tailored to people with low and unobservable incomes. Low-income households have some ability to save —but unevenly. These initiatives can serve as a reference for the national agenda. Social transfers could be complemented with a specific savings product.

Matching and other incentives can be a way to encourage savings for those who are about to exit the transfer program or close to the access line. The existing infrastructure of the Cadastro Único could be used by selected providers to reduce the costs of attracting customers to banks, with this savings being passed on to consumers.

Microinsurance and financial education can expand the tools available to households to diversify and manage risk. Financial education will be essential for advising families on the best use of savings accounts and on choosing products that best suit their profile. The adoption of financial education can also be encouraged in exchange for access to lower-cost credit, since customers with a better level of education present less risk to creditors.

These are some of the ideas presented in the study Increasing the Resilience of Low-Income Workers in Brazil – Financial Instruments and Innovations, launched by the World Bank. It is an important contribution to the debate on possible improvements in the Brazilian social protection system.

This column was written in collaboration with Tiago Falcão, World Bank consultant.