IBRD • IDA SOCIAL PROTECTION FOR BRAZIL OF THE FUTURE PREPARING FOR CHANGE WITH INCLUSION AND RESILIENCE © 2022 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contribution. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness or currency of the data included in this work and does not assume responsibility for any errors, omissions or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. 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Foreword Dear readers, The World Bank Group and the United Nations Development Program have been in a long and fruitful partnership with the Brazilian Government in supporting the development and the reform of Social Protection and Labor Market Policies. These have been and remain central to Brazil’s development model and democracy. Several social protection programs received worldwide interest and contributed to Brazil’s poverty reduction, human capital formation and resilience in economic cycles. Despite this progress, Brazil continues to face high level of vulnerability and inequality, significant pockets of poverty. In addition, long term trends, including demographic change, technological progress, the new world of work and climate change will affect the efficacy and sustainability of the social protection system that Brazil has today. A central message of the study is that Brazil has already in place many of the instruments needed to face the future with confidence, but important institutional reforms, investments and reallocations are needed for social protection to remain relevant and become more efficient. Particular attention should be given to policies that serve the needs of Brazil’s future generation, today’s children, half of whom are growing up in poverty, and to large number of youth and adults already out of school who will need to navigate a sophisticated labor market and new environmental risks for many decades. The report offers ten policy reform proposals meant to stimulate this forward-looking debate, organized around a solid framework on equity, opportunity and resilience. Among these, readers will find the extension of coverage and consolidation of social assistance transfers, revamping labor market programs, taxation and benefits to support labor productivity, adapting safety nets to climate change and modernizing delivery systems for enhanced service delivery. These recommendations build on a compilation of recent knowledge pieces produced by the World Bank and by the UNDP, and benefited from a rich dialogue with authorities at different stages. We hope this work will prove an informative, enjoyable and stimulating read. Johannes Zutt, Katyna Argueta, Country Director for Brazil Representative for Brazil World Bank UNDP Acknowledgments This policy note was a joint effort of the World Bank Social Protection and Jobs (SPJ) Team for Brazil and the United Nations Development Program (UNDP) in Brazil, with the support of the UNDP Regional Hub for Latin America and the Caribbean and with analytical contributions from the Word Bank Poverty and Equity team for Brazil. The core team of the World Bank consists of Matteo Morgandi (Senior Economist and TTL), Raquel Tsukada Lehmann (Consultant), Malin Sofia Ed (Junior Professional Officer) and Asta Zviniene (Senior Economist), while important analytical contributions were made by Gabriel Ibarra (Senior Poverty Economist) and Ricardo Campante (Consultant) from the World Bank, and Luis Henrique Paiva (Social Protection Specialist) and Betina Barbosa (Human Development Coordinator, Brazil Country Office) from the UNDP. The team is grateful for inputs and comments from World Bank colleagues Tiago Falcão and Julieta Trias, and editorial support from Fiona Mackintosh and Tamires Amorim. The team is also grateful to SPREV/Ministry of Labor of Brazil staff Otávio José Guerci Sidone, Rogério Nagamine Costanzi, Geraldo Andrade da Silva Filho, Eduardo da Silva Pereira, and Alexandre Zioli Fernandes for providing analytical inputs on pensions statistics. The team would like to thank the peer reviewers who contributed with constructive comments and suggestions at different stages of the production of the note, including Pablo Acosta, Ugo Gentillini, Margaret Grosh, Robert Palacios, Josefina Posadas, Gabriel Squeff, and William Wiseman. Contents Executive Summary 8 Is Brazil’s social protection system ready for the future? 10 Paving the way: 10 policy reform proposals 14 1. Introduction 19 2. The Challenge: Recent social gains and remaining gaps 24 2.1 Evolution of Brazil’s social protection system 25 2.2 Brazil’s unresolved social challenges 28 3. Global megatrends call for the renewal of Brazil’s social protection system 34 3.1 Demographic change 35 3.2 Technological change and the new world of work 37 3.2 Climate change 39 4. Assessing the performance of social protection to enhance equity, opportunity and resilience 42 4.1 The Equity, Opportunity, Resilience, and Sustainability Framework for Social Protection 43 4.2 Equity: Is social protection supporting those most in need across the lifecycle? 44 4.3 Opportunity: Are resources promoting human capital accumulation? 51 4.4 Resilience: Is the social protection system insuring the population against different shocks? 56 4.5 Sustainability and Efficiency: Major opportunities and unresolved challenges 63 5. Paving the way: Reform options for the next two decades 69 5.1 Guiding principles 70 5.2 Ten policy reform proposals for a 2040 outlook 72 i. Consolidation of fragmented transfers for working families 72 ii. Minimum old age benefit reform and elimination of retirement age differences 75 iii. Reducing differentials in the taxation of different forms of working 76 iv. Unemployment protection programs for formal workers in the future labor market 78 v. Financial instruments for informal workers 79 vi. Revamping active labor market programs 81 vii. Economic inclusion for rural areas 83 viii. Adaptive and responsive safety nets to climate change 83 ix. Partially-digital delivery of Cadastro Único and the strengthening of CRAS network and services 84 x. Closing coverage gaps in early childhood development through new delivery modalities 85 xi Final remarks 86 References 88 Figures Figure 1. Overview of the major federal social protection programs in Brazil as percentage of GDP (2019) 21 Figure 2. Evolution of the social protection system and labor regulations in Brazil 25 Figure 3. Households with access to a protected source of income 26 Figure 4. Trends in poverty and in the growth of the middle class in Brazil over time 27 Figure 5. The geography of human capital in Brazil 29 Figure 6. Estimated impacts of COVID-19 pandemic on Brazil’s HCI score and the number of years n ecessary to recover to 2019 levels 30 Figure 7. Labor status of white adults (left) and non-white adults (right), by income deciles 32 Figure 8. Labor force status of women (left) and men (right), by per capita income deciles 32 Figure 9. Labor profile of adults in Cadastro Único and Bolsa Família, by gender 33 Figure 10. Reasons for being out of labor force among the poor, by gender 33 Figure 11. Population pyramids in 1991, 2010, 2020, and 2040 35 Figure 12. Estimates of population size by age group in Brazil 2020-2060 36 Figure 13. Education level of 70% of the labor force in 2040, already of working age today 37 Figure 14. Share of adults that ever received some form of training besides formal education 37 Figure 15. Changes in average task content of occupations, by education level (2012-2020) 38 Figure 16. Changes in average task content of occupations, by age group (2012-2020) 38 Figure 17. Contributors to social insurance, by type of plan (2008–2020) 39 Figure 18. Distribution of workers by forms of work and labor income deciles (2019) 39 Figure 19. Estimated impact of climate change on income for the bottom 40% and on extreme poverty in Brazil, high-impact scenario 40 Figure 21. Brazilian Social Protection and Labor policy interventions for human capital accumulation throughout the lifecycle 43 Figure 22. Social insurance, labor market, and social assistance expenditure throughout the lifecycle in Brazil (2019) 45 Figure 23. Distribution of population, by age groups and income quintiles 45 Figure 24. Simulated distribution of benefits, by family income deciles 46 Figure 25. Net total take-home income from transfers for a family of two adults and two children, with one adult working in the formal labor market 47 Figure 26. Benefit-cost ratio of the main social assistance, labor, and tax incentive programs in Brazil 48 Progressivity 49 Figure 27. Social protection benefits and direct taxes as a percentage of household income in each quintile 50 Figure 29. Net impact of direct taxes and benefits on households’ disposable income, by quintile 50 Figure 28. Simulated mean value of direct transfers and taxes on households, by per capita income quintiles (2019) 50 Figure 30. Social assistance expenditure in 2019, by type of program 51 Figure 31. Participation of municipalities in Criança Feliz, 2021 52 Figure 32. Participation tax rate for a family with two adults and two children, receiving only one income of 1 MW 53 Figure 33. Active and passive labor market expenditures (2018–2020) 55 Figure 34. Evolution of expenditure on labor market programs (2014-2019) 55 Figure 35. Access to social protection programs, by labor force status 57 Figure 36. Value of unemployment insurance pay-outs expressed in monthly wages after 24 months of employment 58 Figure 37. Brazil’s results on the Social Protection Stress Test 59 Figure 38. Internal rate of return by decile of contributions made, for urban retirees with a minimum pension benefit 62 Figure 39. Length of contribution periods of beneficiaries who retired with a minimum pension benefit in 2008 62 Figure 40. Number of disability pensions granted by year 63 Figure 41. Social insurance, labor market, and social assistance expenditures as a share of GDP (2004-2020) 64 Figure 42. Social assistance and labor market expenditures (2019-2022) 64 Figure 43. Urban (left) versus rural (right) RGPS revenues and benefits (2016-2020) 65 Figure 44. Average replacement rate of pension benefits gradually falling due to the progressive impact of the latest pension reform 65 Figure 45. Projected revenues, expenditures and deficits of RGPS 65 Figure 46. Projection of deficits of selected state civil servant pension programs (as a percentage of current revenues) 66 Figure 48. Share of the population in each decile, according to the number of benefits received by their households 66 Figure 47. Proportion of pensioners and survivors to active employees in subnational governments 66 Figure 49. Delivery chain of a social protection system 67 Figure 50. Direction of fiscal and poverty impacts of the proposed reforms to Brazil social protection system 70 Figure 51. Incidence of the proposed consolidated transfer for children and low-income families, compared to sum of all major fiscal transfers for families in 2019 74 Figure 52. Consolidating the components of old-age pensions (BPC and rural pension) and the prorated minimum contributory pension guarantee 76 Figure 53. Total tax wedge as a percentage of labor earnings for different forms of work in Brazil, current design and potential reform 77 Figure 54. Unemployment payouts if unemployment insurance (Seguro Desemprego) and individual savings accounts (FGTS) were coordinated 79 Figure 55. Complementary policies for early childhood development 86 Figure 56. Pillars for strengthening early childhood development interventions 87 List of Acronyms 6 SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL AB Auxílio Brasil AE Auxílio Emergencial AEPS Anuário Estatístico da Previdência Social (Social Insurance Statistical Yearbook) ALMP Active Labor Market Program AS Abono Salarial ASP Adaptive Social Protection BEm Benefício Emergencial de Manutenção do Emprego e da Renda (Emergency Employment and Income Maintenance Benefit) BEPS Boletim Estatístico da Previdência Social (Social Insurance Statistical Bulletin) BESE Benefício Emergencial de Suporte ao Emprego (Emergency Employment Support Benefit) BF Bolsa Família BPC Benefício de Prestação Continuada (Benefit of Continued Provision) BSM Brasil Sem Miséria (Brazil Without Misery) CAGED Cadastro Geral de Empregados e Desempregados (National Registry of Employed and Unemployed) CCA Climate Change Adaptation CCT Conditional Cash Transfer CLT Consolidação das Leis Trabalhistas (Consolidation of the Labor Laws) CNIS Cadastro Nacional de Informações Sociais (National Registry of Social Information) CPI Consumer Price Index CPP Contribuição Patronal Previdenciária (Employers’ Social Insurance Contribution) CRAS Centro de Referência em Assistência Social (Social Assistance Reference Center) DRM Disaster Risk Management ECD Early Child Development EWS Early Warning System FAT Fundo de Amparo ao Trabalhador (Worker Support Fund) FGTS Fundo de Garantia por Tempo de Serviço (Lenght of Service Guarantee Fund) GDP Gross Domestic Product GFIP Guia de Recolhimento do FGTS e de Informações à Previdência Social (oficial document that collects the worker’s employment and salary data) GVC Global Value Chain HIC High Income Countries ICT Information and Communication Technologies INCRA Instituto Nacional de Colonização e Reforma Agrária (Brazil’s land reform national institute) INSS Instituto Nacional de Seguridade Social (Brazilian Social Security Institute) IoT Internet of Things IRPF Imposto de Renda da Pessoa Física (Personal Income Tax) LM Labor Market LMP Labor Market Policy 7 MEI Microeempreendedor Individual (social insurance category for microentrepreneurs) SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL MIC Middle Income Countries MW Minimum wage OECD Organisation for Economic Co-operation and Development PCF Programa Criança Feliz PEI Programs for Economic Inclusion PJ Pessoa Jurídica PIT Personal Income Tax PLMP Passive Labor Market Policies PNADC Pesquisa Nacional por Amostra de Domicílio Contínua (National Household Sample Survey) PPP Purchase Power Parity RGPS Regime Geral de Previdência Social (Brazil’s general social security system) ROE Resilience, Opportunity and Equity RP Regra de Permanência (Bolsa Família’s transition rule) RPPS Regime Próprio de Previdência Social SA Social Assistance SD Seguro Desemprego (unemployment insurance) SF Salário Família (Family Allowance) SI Social Insurance SIMPLES Simples Nacional (simplified tax regime) SINE Sistema Nacional de Emprego (national public employment services) SP Social Protection SPJ Social Protection and Jobs SPL Social Protection and Labor SUAS Sistema Único de Assistência Social (Unified Social Assistance System) TA Trabalhadores Autônomos (own account workers) UBI Universal Basic Income UI Unemployment Insurance Executive The challenge Summary T his policy note assesses how Brazil’s social protection and labor systems can be reformed most effectively to meet the challenges that the country will face in the next two decades while also fostering social inclusion and shared prosperity. This discussion is timely as Brazil is slowly recovering from the global COVID-19 crisis, which brought new challenges as well as accelerating existing socioeconomic transformations. Despite the fact that labor markets are slow to recover after economic crises in Brazil, implementing the right set of policies could enable the country to take advantage of changes in the world of work, new opportunities for human capital formation, and recent developments in technology and delivery systems to build back better than in the past. Serving as a companion piece on social protection and labor policies for the Flagship Report Alternative Futures for Brazil: Inclusion, Productivity, Sustainability (World Bank, Forthcoming), this note draws from a large body of recent analytical work by the World Bank team in Brazil. The vision of the flagship report is for Brazil to reach 2040, two decades from now, with a more productive and resilient and less unequal society. Brazil has made significant advances in terms of reducing poverty and inequality since its return to democracy in the late 1980s. The expansion of social protection policies played an important role in increasing inclusion, getting closer to universal access to education, and increasing the use of preventive health services (figure i). Brazil developed Cadastro Único, a single registry of beneficiaries, whose unique hybrid targeting technology (using self-declarations plus administrative data) is considered a global best practice. Brazil’s decentralized social assistance delivery model comprises local social assistance offices (CRAS) in almost all of the country’s 5,570 municipalities. In the wake of the COVID-19 pandemic, the country demonstrated its ability to implement efficient mass registration and the fast deployment of Auxílio Emergencial (AE), the largest temporary transfer program in the world (Morgandi et al, 2021a).   Figure i. Evolution of the social protection system and labor regulations in Brazil 9 1980s & 1988 SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL 1920s 1930s 1940s 1950s 1960s 1970s Constitution 1990s 2000s 2010s 2020s Social Insurance System for Formal-Sector Workers 1920s-50s: Initial 1960s: 1970s: 1998: 2003: 2019: public pension Core Expansion RGPS RPPS Pension schemes for workers pension to domestic Pension Pension Reform in specific industries, legislation workers, Reform Reform civil service, military adopted Self-employed, rural pensions Labor Regulations, Benefits for Formal-Sector Workers 1936: 1940: 1970s: 1986: UI 2017: 2020: Salário Minimum Abono 1988: Labor BeM Familia Wage Salarial, Labor and Reform 1943: PIS/PASEP benefits CLT SINE rights in Constitution Social Assistance for the Poor 1955: 1988: 1995: first 2001: 2011: 2020: intro of Rights to SA municipal Federal Brasil Auxílio school in constitution CCTs CCTs, Sem Emergencial feeding for all those 1993: Cadastro Miséria 2021: program who need it Organic SA Único 2016: Auxílio Law, BPC 2003: Criança Brasil Bolsa Familia Feliz 2023: New Bolsa Família Source: Authors’ elaboration, based on World Bank (2018). Despite this progress, the recent COVID-19 crisis Moreover, several worldwide trends including highlighted the constraints that prevent many of the demographic aging, global warming, and new forms population from benefiting from economic growth. of work will highlight new needs and challenges Poverty reduction has stalled over the last decade, to achieving shared prosperity for all Brazilians and poverty rates are higher among Afrodescendent in the future.1 By 2040, the majority of the Brazilian families, children, and residents of the North and population will be of working age but no longer young, Northeast regions. The human capital levels of Brazilian and many will need to navigate the labor market children, as proxied by the World Bank’s Human Capital with low levels of education (figure ii). The number of Index (HCI), vary widely and nationwide are lower than children will decrease, but in the meantime, nearly in other upper-middle income countries in the Latin half of today’s children (Brazil’s future workforce) are America and the Caribbean (LAC) region. The variations being raised in poverty. The number of adults aged over in children’s human capital levels across Brazil can be 65 is projected to double, making current retirement explained by differential learning outcomes between promises fiscally unsustainable, even after the recent municipalities and as well as by differences in race, pension reform. A second major trend is climate gender, and family income. This inequality in capabilities change, which is no longer a distant threat but an and assets translates into strong differentials in immediate one. The effects of global warming in Brazil employment rates and earnings, with girls and children are expected to include more frequent natural disasters from ethnic minorities and deprived areas being more and lower agriculture productivity. Meanwhile, the likely to end up in informal work. Social protection and declining competitiveness of carbon-intensive industry labor systems have a crucial role to play in overcoming will accelerate a structural shift of the economy toward all such structural barriers to benefiting from economic services. Third, technological change and automation is growth. set to change production and the way in which firms source and use labor. There will be more opportunities 1  These trends are explored in greater detail in Alternative Futures for Brazil (World Bank, Forthcoming). 10 to tap into global trade-in services but also a greater (iv) further efficiency and sustainability by ensuring the risk of displacement for workers without the necessary effective and efficient delivery of services and benefits SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL skills to use new technologies. Brazil’s ability to navigate (World Bank, 2022a). these structural shifts will depend on its ability to adapt its mix of institutions, programs, and expenditures, not Brazil’s social protection and labor programs least in the area of social protection and labor policies. already are aimed at achieving many of the desirable outcomes described in this framework. Major   Figure ii. Estimates of population size by age programs and benefits include (figure iii): group in Brazil 2020-2060 • With regard to increasing equity, several programs 80 augment household incomes including Brazil’s flagship conditional cash transfer (CCT) program Bolsa Familia, targeted to the poor and the two wage supplements Salário Família and Abono Salarial 60 targeted to low-income formal workers. These Pop (millions) programs all have different levels of generosity, target populations, and methods for determining 40 eligibility. • Programs to promote opportunity are mainly 20 provided in-kind or as services. For children, these 2020 2030 2040 2050 2060 include (although not yet implemented in full 0-20 years 20-39 years 40-64 years 65 + years scale) Criança Feliz or other parenting programs on early childhood stimulation, and school feeding, but children also benefit from the implementation Source: United Nations Statistics for Brazil. of conditionalities in CCT program. For adults of working age, there are a range of interventions (in most cases not at scale), including adult training Is Brazil’s social protection system programs, a national labor intermediation system ready for the future? (Sistema Nacional de Emprego - SINE), and economic inclusion interventions such as sheltered markets The renewal of Brazil’s Social Protection (SP) system for small farmers and entrepreneurship promotion. will be critical to enabling the country to transition to a more inclusive and prosperous and less unequal • The system also provides a wide range of benefits to society. This note adopts a four-pronged framework, foster household resilience in the face of major risks. inspired by the recent World Bank Social Protection These include the public and private contributory and Jobs Compass (World Bank, 2022a), to assess the pension regimes (the Regime Geral de Previdência extent to which Brazil’s social protection system is Social or RGPS and the Regime Próprio de Previdência prepared for the coming decades. In this note, we define Social or RPPS) and social pension programs for social protection system as the set of federal programs, urban and rural workers and the disabled (Benefício institutional arrangements and delivery mechanisms de Prestação Continuada or BPC and Aposentadorial to provide cash and in-kind social assistance, pensions Rural). Seguro Desemprego (unemployment and labor market programs to the population. In this insurance) and Fundo de Garantia por Tempo de framework, SP system needs to be designed so as to: (i) Serviço (unemployment savings accounts) aim to promote equity by helping the poor to rise out of poverty mitigate economic losses from unemployment. and protect their accumulated human capital from With the exception of the BPC, all such benefits depletion in the event of shocks; (ii) boost opportunity are contributory and are reserved for former by promoting human capital accumulation and enable contributors in the formal sector. productive work; (iii) foster resilience by insuring the vulnerable against impacts of different shocks, including those due to unemployment or old age; and   Figure iii. Brazilian Social Protection and Labor policy interventions for human capital accumulation 11 throughout the lifecycle SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL Early childhood Childhood, adolescence Adulthood Old Age and youth EQUITY Child allowances: Child allowances: Cash & in-kind for the poor transfers: Social pensions: Salário Família Salário Família Bolsa Família, BPC-old age Disability-related Fee waivers: Utilities’ Abono Salarial, Care services: n.a. Protecting against transfers: Tarifa Social based Salário Família dire poverty and loss BPC-disability on CadUnico Public works: n.a. of human capital OPORTUNITY LM services: SINE CCTs for education: Economic inclusion: for all Nutrition/ECD: Bolsa Família ACESSUAS Trabalho, Life-long learning: Primeira Infância Youth employment: facilitated access no SUAS ATER, PAA, Economia to higher education ACESSUAS Trabalho CCTs for pre-school: Solidaria, Fomento (Estatuto do Idoso) Promoting human Nutrition: PNAE capital and access to Bolsa Família à producao; Cisternas. Skill: training productive work Re-skilling: programs training programs Emergency cash: AE*, Bolsa Família, Defesa Civil. RESILIENCE Emergency cash: AE*, Emergency cash: AE*, In-kind transfers: Old age pensions: Bolsa Família, Defesa Bolsa Família, for the Civil; DefesaCivil; SISAN, Cestas alimentos. RGPS (rural/urban), Services: SUAS. RPPS vulnerable In-kind transfers: In-kind transfers: Unemployment and Disability insurance: SISAN, Cestas SISAN, Cestas disability insurance: BPC-disability alimentos; alimentos; SD, Auxílios INSS. Insuring against Services: SUAS Services: SUAS Subsidized insurance: impacts of Garantia Safra. different shocks Matching savings: n.a. 0-5 years old 6-29 years old 30-65 years old 65 or older Accumulation of Use and Human Capital protection of HC Protection of HC Source: Adapted from Resilience, Equity, and Opportunity: The World Bank Social Protection and Labor Strategy 2012–2022. Note: *Auxílio Emergencial (AE) was a temporary response to the COVID-19 crisis; the program was discontinued in 2021. Despite their breadth, Brazil’s social protection Also, few social protection programs are promoting expenditures are limited in terms of their human capital and opportunity. Total labor market progressivity, incidence, generosity, and inter- spending in Brazil is at a similar level as in high-income generational fairness (figure iv). Four-fifths of the economies, but active labor market programs such country’s social protection expenditures are allocated as skills development programs and intermediation to programs that mainly target the elderly, as in many services receive only a minimal share of this spending OECD countries. In terms of incidence, the federal CCT and largely serve formal workers (figure vi). Moreover, program remains the most pro-poor program in Brazil’s the share devoted to services has been falling over time constellation of benefits, and, after recent temporary since the 2014 crisis and fiscal adjustment. As new increases in the generosity of its benefits, its impact forms of work emerge, it will be essential to develop in terms of alleviating poverty was strengthened. ways for workers to continue to learn and retrain while However, other contributory programs, including formal still working full-time, as well as to facilitate low-cost sector pensions, disproportionally benefit households in job-to-job transitions. Despite Brazil’s high spending on upper income quintiles even though they are subsidized elderly income programs, it has no national strategy to differing degrees from general revenue (figure v). for reducing the burden on households providing elder Thus, taken all together, Brazil’s tax-benefit system is care, which is projected to increase significantly as only mildly redistributive. dependency ratios rise. 12   Figure iv. Social insurance, labor market, and   Figure v. Distribution of population, by age social assistance expenditure throughout the groups and income quintiles SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL lifecycle in Brazil (2019) 3% 700,000 100% 100% 8% 14% 83% 90% 17% 17% 90% 600,000 80% 80% 500,000 70% 70% 56% 60% 62% 400,000 60% 62% 70% 70% 50% 50% 300,000 40% 40% 200,000 30% 30% 12% 20% 20% 41% 100,000 5% 30% 1% 10% 10% 21% 16% 13% 0 0% 0% Not age Child Adult Elderly Q1 Q2 Q3 Q4 Q5 specific Social Insurance Social Assistance % of total 0-17 18-63 64 or more Labor Market Total Source: The World Bank using expenditure data from Portal da Source: PNADC 2019. Transparência, 2019. Note: Includes SA, SI, and LM programs, classified by the authors according to main target-age groups. Bolsa Família is classified as SA-child, SUAS and housing policies are classified as SA-all, Salário Família is LM-child.   Figure vi. Social assistance expenditure in 2019, by type of program 1% 4% 4% 4% elderly benefits (BPC) 24% disability benefits (BPC) 32% 31% Bolsa Familia 31% SUAS and Criança Feliz 4% 24% school feeding 4% subsidies (Cisternas, Água Doce, Minha Casa Minha Vida, others) 4% unconditional cash transfer (Defesal civil, fomento à produção) 1% food and in-kind transfer (PAA, Restaurantes) 0% 32% fee waiver and subsidies 0% Source: The World Bank using data from Portal da Transparência, 2019. Note: Programs are categorized according to the World Bank ASPIRE methodology In addition, the current design and spending incentives for many individuals to contribute or they trajectory of the pension system are unsustainable, undercompensate those who contribute the most. A despite the recent reform. While Brazil’s contributory second major issue is the proliferation of subsidized pensions are central to the country’s social contract, pension schemes for the self-employed, most of in their current design, they are projected to require which yield benefits at a fraction of the cost of wage unsustainable levels of spending before 2040. employees and are increasingly coopted by higher Obsolete assumptions about the length and nature earners. Finally, there are thousands of pension of working lives are compounding the problem. regimes offered by subnational governments that Contributory and noncontributory pensions operate in provide privileged retirement benefits and represent isolation from each other, but jointly they undermine a high share of their total expenditures. Unless these schemes are reformed, they will crowd out subnational take up the bulk of resources of labor programs and 13 spending on other key social priorities in the future. target only formal employees. Currently, the only SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL program available to support self-employed and The changing nature of work further challenges the informal workers during periods of unemployment relevance and effectiveness of current instruments and transition is the CCT program (if they meet the to cope with short-term shocks. The transformation eligibility criteria). Even for those who are eligible for of work relationships due to technology, outsourcing, unemployment insurance, the benefits are generous and preferential taxation for self-employed will but short-lived and thus not helpful for supporting the likely increase the share of formal workers who are unemployed while they undergo training and reskilling. self-employed and, therefore, are not covered by Thus, Brazil’s income protection programs will need to instruments to mitigate volatility of labor income be adapted in order to support future generations of (figure vii). Yet, Passive Labor Market Policies (PLMPs) workers, and to be more equitable (figure viii).   Figure vii. Contributors to social insurance, by type of plan (2008–2020) 60 Average number of monthly contributors 50 40 (millions) 30 20 10 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Formal employee Ind - Plano Simplificado (TA) Individual - all Ind - MEI Ind - Plano Completo (PJ/TA Ocasional) Domestic worker Source: Statistical Yearbook of Social Security, Ministry of Labor (several years). Note: Annual formal pension contributors, according to the pension regime. "Ind" = Individual plans for non-wage workers. These include: Individual contractors (Trabalhador Autonomo, TA). Firm owner (Pessoa Juridica, PJ), Micro Entrepreneurs (MEI).   Figure viii. Simulated mean value of direct transfers and taxes on households, by per capita income quintiles (2019) 1000 800 600 400 BR R$ 200 0 -200 -400 -600 288 501 839 1356 3766 Poorest 2 quintile 3 quintile 4 quintile Richest Noncontributory Rural Pensions IRPF deductions INSS contributions Abono salarial Unemployment benefit Contributory Pensions IRPF (PIT) Bolsa Família BPC Salário Família Source: BraSim microsimulation tool developed by the World Bank Poverty and Equity team, based on PNAD Continua 2019. Note: Quintiles are computed as per capita disposable income (after tax income) in the BraSim methodology. IRPF refers to personal income tax - Imposto de Renda da Pessoa Física. BPC is a noncontributory means tested pension. INSS is the national social security institute. 14 Finally, Brazil will need to increase its capacity to revenue capacity, the proposed reforms could make the deliver social protection services as cash alone cannot system more efficient and equitable, without necessarily SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL tackle multidimensional vulnerabilities. Brazil‘s social increasing structural expenditures, provided that reforms protection system is currently over-dominated by cash are implemented in mutually-reinforcing packages. expenditures, which can only solve part of the structural To increase the resilience of the future workforce challenges described above. Although Brazil has been and households, the note proposes (see figure ix): (i) successful in developing a decentralized structure for enhancing the efficiency of unemployment programs; (ii) service delivery, funding for in-kind programs has been expanding financial instruments available to households falling over time, probably driven by the bias in favor to manage income volatility; and (iii) integrating climate- of cash benefits. Examples include the deficient active responsive features into social assistance programs. labor market policies, the phasing out if most productive To increase the opportunities available to all Brazilians, inclusion programs, the insufficient funding provided for the government could: (iv) find more and better ways scaling up childcare, and the lack of policies to address to deliver early childhood development programs and the long-term care needs of an aging population. In all (v) develop new policies aimed at supporting workers in such cases, the country’s complex political economy job to job transitions or first labor market entrants. To and weak capacity for inter-governmental coordination strengthen the impact of the social protection system undermined change. in reducing poverty, the government could consider: (vi) consolidating the various targeted transfers for working Paving the way: 10 policy reform families into a single program and (vii) investing in proposals building the capacity of the Reference Centers for Social Assistance (CRAS) to deliver social services. To be able To meet the challenges of the future, Brazil’s social to finance these ambitious changes, it will be necessary protection and labor system will need to enhance its to increase the efficiency and equity of spending, traditional income support by adding design features particularly of spending on children and youths as that promote economic opportunity for and foster the follows: (viii) coordinating explicitly non-contributory resilience of Brazilians at all different stages of the pensions with the design of the contributory minimum lifecycle. This policy note recommends 10 key reforms pension; (ix) add innovations to the SA delivery system gleaned from recent analytical work that would deepen based on lessons learned from the experience of the capacity of the social protection system to continue implementing the AE program during the pandemic; fostering inclusion, growth, and resilience. While and (x) reducing differentials in contributions and taxes Brazil’s social protection and labor (SPL) expenditures paid on earnings across different legal forms of working, are already at the same level as countries with similar whether dependent or autonomous.   Figure ix. Direction of fiscal and poverty impacts of the proposed reforms to Brazil social protection system Close gaps, Positive Innovative delivery of short term impacts Climate-responsive Early Childhood medium term impact safety nets Development programs Consolidation of Impact on poverty Economic inclution transfers for for rural areas working families Reform of Active labor market Financial instruments unemployment policies for XXI century for informal workers cash programs Digital reforms of Minimun Neutral Cadastro Único, new Reduce differentials in pension benefit functions for CRAS labor taxation reform Fiscal impact Moderate fiscal cost Low fiscal cost Neutral fiscal impact Low savings Moderate savings Source: Authors. The 10 policy reforms proposed in this policy note are as follows: 15 SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL 1 2 Reforming the minimum old age Consolidating fragmented transfer benefit and eliminating retirement programs for working families age differences Several cash benefits that are supposed to be targeting The 2019 pension reform, which raised contribution poor workers are in practice benefiting families with rates, raised retirement age parameters and reduced higher incomes. Therefore, it is suggested to introduce benefits, slowed down the growth of the pension deficit, a universal transfer for each child, combined with a but concerns about the sustainability of the pension means-tested benefit targeted to poor households. system remain. The level of the minimum old age The child benefit would consolidate existing transfers, pension in Brazil is higher than international standards which are currently scattered across different fiscal and is resulting in an imbalance of support and policies (the child and youth benefits provided by protection across different generations in favor of older the CCT program, the Salário Família credit to social people. To make the system fairer and to free up fiscal insurance contributions, and child-related deductions space for other important investments, pro-rating the to personal income-tax). The means-tested component contributory pension according to the number of years would be uniquely targeted to the poor, and consolidate of contributions can be considered (see figure xi), which the family-level benefit in the CCT program, with the would then be complemented by a social assistance wage supplement provided by Abono Salarial; the value transfer for eligible poor elders (or even by a universal of this means tested benefit would taper off above old-age benefit) up to a minimum benefit guarantee. The the eligibility poverty line in order to give recipients an non-contributory pension would remain an important incentive to participate in the formal labor market. The guarantee for the elderly, while at the same time the reform would make the system more equitable (figure new program would restore the right incentives to x), largely address exclusion errors, and would foster encourage working-age adults to contribute as anyone human capital accumulation in children, the future with a contribution history will be entitled to accrue workforce of Brazil. pension benefits. Reforming the current high minimum pension would yield substantial fiscal savings. Over time the benefit value could be indexed to cost-of-living   Figure x. Simulated incidence of the proposed indexes rather than the minimum wage, as the latter is consolidated transfer for children and low-income meant to serve labor market policy objectives. families, compared to sum of all major fiscal transfers for families in 2019 3 45% Reducing the differentials in the tax 40% and contribution rates for workers in different legal forms of working 35% Percentage of resources 30% The tax wedge on formal dependent employees in 25% Brazil is one of the highest in LAC because of high non- 20% wage costs, especially for low-productivity (minimum 15% wage) workers. In contrast, non-dependent workers 10% are subject to special tax regimes and reduced social 5% insurance contributions, which makes employers 0% unwilling to hire them. To eliminate these distinctions 1 2 3 4 5 between different forms of work, it is suggested: (i) Quintiles of per capita income reducing the difference in taxation and contributions PBF+AS+SF+TD Consolidated SA benefit levels from a dependent wage employee and a self- Source: Authors’ simulations based on the 2019 BraSIM employed worker; (ii) aligning taxes across different Microsimulation Tool. Note: The figure shows the incidence of types of incomes (such as dividends/profits, pensions, the proposed consolidated transfer, compared to the incidence of all family-focused transfers (Bolsa Familia, Abono Salarial, wages, and rents) to achieve tax neutrality; and (iii) Salario Familia and the Child deduction to income tax). increasing the progressivity of personal income 16   Figure xi. Consolidating the components of old-age pensions (BPC and rural pension) and the prorated minimum contributory pension guarantee SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL a) Current rules b) Proposed rules 100% 100% 80% 80% 60% 60% % of MW % of MW BPC Minimun BPC Minimun 40% or nothing pension 40% pension 20% 20% 0% 0% 0 5 10 15 20 25 30 35 0 5 10 15 20 25 30 35 Years of contribution Years of contribution Non-contributory Contributory Non-contributory Contributory Source: Authors. tax system.These would be obtained by applying a but without incentivizing informality or unnecessary maximum to the salary base of the employer’s social long unemployment spells. Sequencing and integrating security contributions, equalizing the contribution severance pay, social assistance, and social insurance rates of Consolidação das Leis Trabalhistas (CLT) would also make the unemployment insurance program workers2 and self-employed workers, and by increasing better suited to long-term unemployment and would the contribution rate of individuals under the micro- address the incentive issues caused by the current entrepreneurs and SIMPLES regimes. benefit. 4 5 Reforming unemployment protection Introducing complementary income programs for formal workers in the volatility management programs for current and future labor markets informal workers The way in which unemployment insurance is currently Informal workers remain ineligible for social insurance, designed in Brazil is flawed as it provides perverse even though many can be defined as poor and vulnerable. incentives that dissuade workers from seeking Financial inclusion policies that stimulate the creation of employment because of frequent dismissals and long precautionary saving schemes are needed to strengthen job searches. To increase the efficiency of unemployment the income resilience and financial literacy of the protection programs, policymakers could consider the poor and vulnerable. The Cadastro Único and the CCT Brazil’s Seguro Desemprego can implement parametric program can be used to provide saving products to this changes regarding access conditions, reducing the vast population, particularly those who come under the generosity of the benefit, as well as redistributing co- Emancipation Rule (Regra de Emancipação) formalized responsibilities. Following international best practices, in Bolsa Família, according to which recipients of the individual savings accumulated in the Fundo de Garantia program can try out a formal job without fear of losing por Tempo de Serviço (FGTS) should be used as the the benefits for up to two years even if their income rises first line of financing for unemployment claims, while above the eligibility threshold. International experience subsidized funds from the risk pool would be accessed shows that saving products bundled with insurance only after the worker’s FGTS savings are exhausted reduce the chances of families relapsing into poverty (figure xii). This may make payouts last longer in case by providing them with the tools to manage the cost the individual needs time to find a better job match, of shocks. However, Brazil has yet to pursue this policy. 2  Dependent formal sector workers.   Figure xii. Unemployment payouts if unemployment insurance (Seguro Desemprego) and individual 17 savings accounts (FGTS) were coordinated SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL 1,400 100% 1,200 Unemployment Benefit in BRL 80% 1,000 80% 80% 80% 80% Replacement Rate 75% 70% 60% 800 65% 60% 55% 600 40% 400 20% 200 0 0% 1 2 3 4 5 6 7 8 9 Months of Unemployment FGTS + Multa Financing Public Financing Benefit Replacement Rate Source: Morgandi et al (2021). Note: Unemployment benefit for dismissed worker with a pre-unemployment wage equal to 1.5 of the minimum wage and job tenure of 24 months. 6 Expanding, revamping, and retargeting active labor market programs 7 Extending economic inclusion to cover rural areas Brazil’s active labor market programs (ALMPs) are Productive economic inclusion (PEI) programs around limited to providing training, which is quite widespread the world have yielded positive results in terms of but is not coordinated. The delivery of ALMPs in Brazil protecting and increasing the income, assets, and needs to follow a structure that starts with a profiling savings of the marginalized if the programs are well- stage (during which a professional assesses the coordinated geographically. Brazil has a tradition worker’s ability and work history) and continues with of experimentation in economic inclusion policies, the provision of such services as career counselling, especially in the rural sphere, that yielded positive jobseeking support, structured skills development, results, but most programs succumbed under fiscal socioemotional skills development, and/or the provision adjustment. The main challenge for the future will be to of a temporary wage subsidy to enable an individual identify the most appropriate and effective institutional to accumulate work experience. The main challenge arrangements to deliver such programs at the local level, to implementing such a structure is likely to be in with steering, quality control and financing by federal coordinating actions and institutions rather than any and state governments. Cadastro Único and SUAS, the financing constraint. Expenditures in the Fundo de United Social Assistance System, will be central in these Amparo ao Trabalhador (FAT) should be reallocated away coordinating efforts across the country, especially to from regressive supplements to formal workers and support the critical phase of identification of potential used in greater share to invest in intermediation and beneficiaries, profiling and diagnostic of needs. More ALMPs available to all workers. The public employment integrated use of existing data and improvement of service at the local level (Sistema Nacional de Emprego Cadastro’s intake questionnaire can support such or SINE) should be revamped in terms of quality of effort. SUAS could then provide these households with services, protocols and coordination to other public referrals to a set of coordinated interventions to meet policies. Also, job seekers should be allowed to continue their needs, including to whatever PEI programs might receiving unemployment insurance while they are using be available locally. ALMP services. 18 8 10 Extending coverage of early Developing an adaptive and responsive childhood development services by strategy to deal with climate change SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL adopting new ways to deliver them The resilience of the population in the face of Early childhood development interventions, climate change will be critical to support Brazil’s coordinated with the social assistance and health competitiveness and productivity going forward. systems, are a cost-effective instrument to support Adaptive social protection (ASP) can enhance the home-based integral development of children. A set capacity of families and communities to prepare for, of improvements to the existing efforts by federal cope with, and adapt to covariate shocks flexibly and and state governments could support the scaling up rapidly. Although Brazil has a well-established social to all Brazilian municipalities. The introduction of new protection system, it currently lacks the readiness delivery modalities, for example, using technology to and ability to mount timely and appropriate response deliver services (e.g. mobile app, whatsapp, etc), would to emergencies. Some of the best practices developed reduce costs for municipalities. The development of during the pandemic and with Auxilio Emergencial protocols for interacting with specific groups (such as could be mainstreamed for future disaster response. indigenous people and quilombolas) would improve the Therefore, it is recommended the development of an quality of interventions. Home visits remain an effective integrated ASP strategy with a fiscal commitment way to support households most in need in a range of that could devise a way to react to the country’s most psychosocial needs, including parenting practices. recurrent and disruptive climate-related shocks (such These should be coordinated with other municipal as excess rainfall and droughts) in a faster and stronger activities of SUAS and integrated with the family case manner than at present. Household and community- management protocols. level data from the Cadastro Único could be used to identify their ex ante risk and the likelihood of ex post damage from disasters. 9 Strengthening CRAS network and services In-person social assistance networks will continue to be fundamental to the delivery of social protection services even with the increasing digitalization of access. Active search function makes it possible to find extremely poor families wherever they may be located, including those in rural areas, and these data could be used to inform labor policies and the design of economic inclusion programs. It is suggested strengthening the CRAS as the center for referrals and for the coordination of social protection policies in each municipality, including referrals to economic inclusion policies for the poor and vulnerable. The functions of the CRAS offices should be extended to encompass monitoring machine-induced errors, implementing a more systematic and integrated needs assessment that can then trigger intensified case management and referrals, developing effective approaches to complex problems (such as gender- based violence) and to serving vulnerable groups such as refugees and migrants, and teaching beneficiaries how to access digital services, which will be a necessary condition for social inclusion in the future. CHAPTER 1 Introduction T his policy note assesses how Brazil’s social protection and labor systems can be reformed most effectively to meet the challenges that the country will face in the next two decades while fostering social inclusion and shared prosperity. The note draws on a large body of recent analytical work on Brazil’s social assistance, labor market policies, and social insurance carried out by the World Bank team in Brazil during the past couple of years (see table 1), while its recommendations are built on information contained in official databases and on administrative data. The team also consulted with government officials at several points in the process and elicited their feedback on its findings and results. The methodology used in this note consisted of microsimulation models developed by the World Bank specifically for the analysis of social protection and calibrated to Brazil’s circumstances. We used ASPIRE to classify social spending, BOOST to simulate pension scenarios, and BraSim and BraSim de jure tax benefit models to simulate parametric policy changes and to suggest ways to redesign the programs accordingly. The note focuses on the design and structure of the social protection and labor systems as a whole and thus concentrates on federal-level policies. For a more detailed discussion of the diagnosis of each sector, we refer the reader to the original papers as listed in table 1. However, we recognize that regional differences and the territorial dynamics of the labor market may play an important role in shaping the demand for social protection programs. So we discuss the relevance of context in the local implementation of specific policies such as employment services and the early childhood programs and in the need for coordination among local CRAS offices in the delivery of social assistance. CHAPTER 1 20   Table 1. Latest World Bank publications on social protection and labor in Brazil SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL Topic Title Publication Year Brazilian tax and benefits BraSim Microsimulation Tool: Technical Document 2020 model Enhancing Coverage and Cost-effectiveness of Brazil’s Reform of unemployment Unemployment Protection System: Insights from 2020 programs International Experience Bolsa Família’s Regra de Balancing Stability and Transition: A First Assessment of 2021 Permanência Regra de Permanência in Bolsa Família Financial instruments for Enhancing Resilience of Low-Income Workers in Brazil: 2021 low-income workers Financial Instruments and Innovations Economic and Fiscal Impacts of Venezuelan Refugees and Studies of the integration of 2021 Migrants in Brazil Venezuelan migrants in Brazil Integration of Venezuelan Refugees and Migrants in Brazil 2021 Brazil’s Human Capital Brazilian Human Capital Review - Invest in People 2022 Review Auxílio Emergencial: Lições da experiência brasileira em resposta à 2021 COVID-19 – Summary Note Sharing Lessons Learned from Brazil's Social Protection 2021 Response to COVID-19: The Auxílio Emergencial Program Lessons learned from Auxílio Coverage Profile of Brazil’s Auxílio Emergencial and Special Emergencial Design Features for Protecting Women and Other Vulnerable 2022 Groups: Lessons from Brazil’s Auxílio Emergencial. Sharing Lessons Learned from Brazil's Social Protection Response to COVID-19: Auxílio Emergencial Digital Accounts 2022 and Innovations in Payment Systems Subnational Civil Servant Pension Schemes in Brazil: Context, Subnational pension regimes 2022 History, and Lessons of Reform Addressing gender-based Projeto Piloto Salvador: Prevenção à Violência de Gênero por meio 2022 violence through SUAS do Sistema Único de Assistência Social A Fair Adjustment: Efficiency and Equity of Public Spending in Brazil Expenditure Review 2017 Brazil A Profile of the Poor in Brazil's Labor Market and Economic Economic Inclusion Strategy 2023 (forthcoming) Inclusion Policies Towards Shock Responsive Social Protection in Brazil: Adaptive Social Protection in Assessing the Adaptiveness of Brazil’s Social Protection 2023 (forthcoming) Brazil System. A key message that arises from the analysis is program with capillarity, an extensive network of that the social protection system has been central social assistance offices covering almost all of the to Brazil’s social progress, particularly after the 5,570 municipalities in the country, and a large single establishment of the democratic constitution. Brazil beneficiary registry (Cadastro Único). The country is has made important advancements in the provision of also well prepared to deploy fast, extensive, and agile social protection in the recent past. It has the largest responses in times of emergency. This was particularly conditional cash transfer (CCT) program in the world evident in the case of the policies implemented by (Bolsa Família), an early childhood development (ECD) the federal government during the COVID-19 crisis, including labor packages and the largest temporary breadth and reach of these programs is unbalanced. 21 social assistance transfer in the world (Auxílio Structural spending analysis for 2019 shows that the SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL Emergencial). However, the important supportive role elderly are the most well-protected against the risk played by the social protection system during the of poverty, children and some working adults remain COVID period had implications for the tax system and more vulnerable. Pensions represent a large share (8.2 the government’s macro development strategy. This percent) of GDP spending, social assistance and labor note is a companion piece of the Alternative Futures for market policies account for only 2.1 percent of GDP in Brazil: Inclusion, Productivity, Sustainability Report, that 2019 (figure 1)4. discusses these abovementioned areas, and presents recommendations regarding tax reform and the need To achieve sustainable growth that leads to shared to review Brazil’s growth model. prosperity, it is essential to foster the accumulation of human capital and to protect it in times of shocks. Despite these impressive advances and significant Brazil has used CCTs to support the achievement of spending, Brazil’s social protection programs have universal coverage in basic education, which accelerated had only mixed results in terms of reducing inequality human capital accumulation prior to the COVID-19 and overcoming the structural determinants of crisis. This accumulation was also fostered albeit more poverty that limit increases in productivity. Although modestly by efforts to support productivity growth Brazil has developed social protection policies in almost and the economic inclusion of the poor. In this note, we all possible areas (in line with the World Bank’s ASPIRE highlight the fact that few of these initiatives have been classification of social protection programs),3 the implemented at scale to address multidimensional “Social protection spending is dominated by contributory and noncontributory pension programs.” Figure 1. Overview of the major federal social protection programs in Brazil as percentage of GDP (2019) 7% 6.5% 6% 5% 4% 3% 2% 1.7% 1% 0.5% 0.4% 0.4% 0.2% 0.3% 0% LM-Abono Salarial SI-Urban pensions SI-Rural pensions LM- Unemployment Insurance LM-Fundo Garantia-Safra LM All other programs SA-BPC disability SA-Bolsa Família SA-BPC- old age SA-Minha Casa Minha Vida SA-SUAS SA All other programs Source: Based on data from Portal da Transparência of the Government of Brazil for 2019. Excludes spending for pension schemes for civil servants. Note: Expenditure classified according to WB ASPIRE methodology: SI=Social Insurance, SA= Social Assistance, and LM=Labor Market. 3  The Atlas of Social Protection Indicators of Resilience and Equity. 4  Figures 42-43 discuss trends in 2020-2021, which saw rise a rise in social assistance and labor expenditures. CHAPTER 1 22 vulnerabilities. For example, providing transfers to low- • Technological change and changes in the world income households does little to address the structural of work will reshape both the production and SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL problems that limit the economic participation of consumption of goods and will increase the risk of household members. These structural weaknesses, unemployment among workers who are unable to particularly those that prevent human capital acquire the skills needed to work with (or compete accumulation, reduce the resilience of households, who with) the newer technologies. It can be anticipated have to draw down their limited physical and human that as the number of stable and dependent jobs capital assets in the event of shocks. decrease, there is a risk of many workers losing access to social insurance. Several global changes in the coming decades will make it necessary for governments to adapt their Rethinking Brazil’s SP system will be critical to social protection and labor (SPL) systems so that enabling the country to become more inclusive, new opportunities can be seized and new risks can be prosperous, and equal society. Brazil already spends mitigated. In the period between now and 2040, Brazil an adequate amount on SPL programs compared will undergo a few key transitions that will challenge to countries with a similar revenue capacity, but in the sustainability of several of its social protection this note we argue that what is needed in order to programs as a result of three global “megatrends:”5 educate and prepare productive workers for the future is to reassess today’s social protection investments, • Demographic change characterized by an aging particularly in terms of redistributing protection across population will put unsustainable pressure on the age groups. system, particularly on pensions. By 2040, the bulk of the Brazilian population will be of working age The note also makes the case that several reforms but no longer young, and many will need to navigate could make the system more efficient and equitable the labor market with low levels of education. The without necessarily increasing fiscal costs. We number of children – Brazil’s future workforce – present various reform options aimed at increasing: will decrease, and in the meantime, nearly half (i) resilience by making unemployment programs of today’s children live in poverty. The number of more efficient and by creating more instruments to adults aged over 65 is projected to double, making enable households to manage income volatility; (ii) current retirement promises difficult to sustain, opportunity by expanding the ways in which early even after the recent pension reform. Also, the childhood development (ECD) programs are delivered COVID-19 pandemic resulted in immense setbacks and by supporting vulnerable workers to transition in human capital accumulation, which will have between jobs; and (iii) equity by consolidating targeted a lasting negative impact on the labor force of transfers to working families and by widening the the future and on their need for social protection. social assistance services provided by the Reference The challenge that countries around the world are Centers for Social Assistance (CRAS). We also grappling with is how to recoup these losses and to suggest another set of reforms to financing and recover the pace of human capital accumulation to delivery systems, such as reducing pension privileges, accelerate economic growth. consolidating non-contributory old age pensions or introducing a minimum pension reform, permanently • Climate change will make the population more incorporating innovations from the COVID-19 Auxílio vulnerable to shocks and will accelerate the Emergencial program into delivery systems, and structural transformation of the economy. The revisiting financing/taxation. effects of global warming in Brazil are expected to include more frequent natural disasters and lower The note is structured as follows: agriculture productivity. Meanwhile, the declining competitiveness of carbon-intensive industry will • Section 2 presents a brief overview of the Brazilian accelerate a structural shift in the economy toward social protection system and its evolution since the services​. country’s redemocratization in the late 1980s. 5  These trends are explored in greater detail in Alternative futures for Brazil (World Bank, forthcoming), the companion publication to this note. • Section 3 dives deeper into the three megatrends 23 (demographics, climate and technological changes) SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL that will affect Brazil over the next two decades and that will make it necessary to prepare and adapt the current social protection and labor systems. • Section 4 provides a diagnosis of the current social protection, social insurance, and labor market systems through a resilience, opportunity, equity, and sustainability conceptual framework. • Section 5 presents a vision of how a revamped SPL system would be able to address both the historical and forthcoming issues that the Brazilians of the future will face and presents 10 proposals for reforms that would yield a system capable of meeting the challenge. CHAPTER 2 The Challenge: Recent social gains and remaining gaps KEY MESSAGES • Brazil is world-renowned for the progress that it has made in increasing the coverage of social protection through its social assistance programs and its delivery system, including one of the largest CCT programs in the world. • The 2014 crisis halted gains in poverty reduction. However, when faced with COVID-19, the Brazilian social protection system responded promptly with various measures on a massive scale. • Brazil also made significant progress in developing the human capital of the poor, but the pandemic reversed years of gains, and it will take more than a decade to get back to pre-pandemic levels of educational achievements. • Nearly half of today’s children, who constitute the workforce of the future, are raised in poor households. Poverty reduces their ability to take advantage of services and to prepare themselves for the sophisticated labor market of the future, which will require a range of cognitive, digital, and soft skills. • About 70 percent of Brazil’s projected workforce in 2040 is already older than 24 today and beyond the reach of traditional education, while 40 percent of them did not complete secondary education. Therefore, increasing labor productivity in the future will require immediate and sustained investments in lifelong learning programs. 2.1 Evolution of Brazil’s social corporatist past. It was not until the 2000s that an 25 protection system effective social assistance system was established, SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL through the creation of the single registry (Cadastro Since Brazil’s democratization in the late 1980s, Único), the consolidation of several state-level benefits the country has become world-renowned for its and in-kind transfers in the Bolsa Família program, policies aimed at including the poor and vulnerable and the institution of the national social assistance in the social protection system. The 1988 Federal network (Sistema Único de Assistência Social or SUAS). Constitution, also known as the Citizen Constitution, Unlike the labor and social insurance programs, none of was the catalyst for the expansion of social rights the new generation of social assistance programs was and of access to public services, including a public- enshrined in the Constitution. financed social protection system. This system was built on three pillars: (i) social insurance; (ii) health Social assistance, being the most recent branch care; and (iii) social assistance. During the 1990s, of Brazil’s social protection system, has a more the way in which public services were provided was innovative design than the country’s labor market substantially reorganized with the creation of 1,438 and pension programs. A vast literature has highlighted new municipalities, the expansion of the civil service the problems of design and sustainability that bedevil workforce, and the development of hundreds of new Brazil’s pensions and labor benefits, which have proven subnational pension schemes for local civil servants difficult to solve. Social assistance, particularly Bolsa (Zviniene et al., 2022). However, as shown in figure 2, Familia, from inception was developed according to labor and social insurance programs were far more technical and evidence-based design, with monitoring developed than non-contributory social protection, and evaluation systems that surpassed until recently reflecting the social contract that underlay Brazil’s the ones in place for contributory benefits.   Figure 2. Evolution of the social protection system and labor regulations in Brazil 1980s & 1988 1920s 1930s 1940s 1950s 1960s 1970s Constitution 1990s 2000s 2010s 2020s Social Insurance System for Formal-Sector Workers 1920s-50s: Initial 1960s: 1970s: 1998: 2003: 2019: public pension Core Expansion RGPS RPPS Pension schemes for workers pension to domestic Pension Pension Reform in specific industries, legislation workers, Reform Reform civil service, military adopted Self-employed, rural pensions Labor Regulations, Benefits for Formal-Sector Workers 1936: 1940: 1970s: 1986: UI 2017: 2020: Salário Minimum Abono 1988: Labor BeM Familia Wage Salarial, Labor and Reform 1943: PIS/PASEP benefits CLT SINE rights in Constitution Social Assistance for the Poor 1955: 1988: 1995: first 2001: 2011: 2020: intro of Rights to SA municipal Federal Brasil Auxílio school in constitution CCTs CCTs, Sem Emergencial feeding for all those 1993: Cadastro Miséria 2021: program who need it Organic SA Único 2016: Auxílio Law, BPC 2003: Criança Brasil Bolsa Familia Feliz 2023: New Bolsa Família Source: Authors’ elaboration, based on World Bank (2018). CHAPTER 2 26 “Assuming perfect program implementation, about 90 percent of Brazilian households SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL have at least one member eligible for a protected source of income through a formal labor contract (via social insurance), old age benefit, or social assistance cash transfer.” Figure 3. Households with access to a protected source of income 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 146 358 537 727 951 1,122 1,392 1,806 2,537 6,513 1 2 3 4 5 6 7 8 9 10 Per capita income decile, post transfer None of the above Bolsa Familia Seguro Desemprego Formal Private Employee BPC Pension Public Worker Source: BraSim microsimulation model developed by the World Bank Poverty and Equity team, based on PNADC 2019 dataset. Note: The model identifies receipt at the household level of at least one protected source of income through a transfer, a private formal job, or a government-provided job. Households that receive multiple benefits/protected incomes were assigned to the category with the most secure income, in this order: Public worker, Pensions, BPC, Formal Private Employee (CLT), Seguro Desemprego, Bolsa Família. The BraSim model theoretically applies benefits to all eligible families, assuming perfect implementation. While Brazil’s social protection system was almost all households some form of protected income. expanding, access to education and childcare was Simulations suggest that, until the recent pandemic, increasing. Between 2000 and 2019, net enrollment about 90 percent of households in theory had at least rates in preschool (5 to 6-year-olds) jumped from 66 one member eligible for a protected source of income percent to 94 percent and more than doubled in upper through their formal work status, old age, or their level secondary. Upper secondary school dropout rates of household income6 (figure 3). These simulations decreased from 10 percent in 2010 to 5 percent in 2019 assume the perfect implementation of each program. (INEP, 2021). In the same period, the total number of Despite this high percentage, the level of protection entrants into tertiary education courses rose from just and income security varies across the population, with over 2.5 million to around 3.6 million. Also, childcare informal workers in the middle income deciles, the self- coverage grew from 14 percent in 2001 to 37 percent employed, and young people with no children being in 2019. Nevertheless, these services are still largely the groups with the lowest coverage. Also, this broad inaccessible to poorer families and those who live in coverage does not translate into equality in terms of rural areas (OPNE, 2021). generosity. The far reach of the system also explains why it is so politically complex to alter its design, given As a result of the incremental expansion of benefits, that so many people might be afraid of losing out as a Brazil’s social protection and labor system offers result of the change. 6  It is important to highlight that 90 percent is the share only if the social protection system works perfectly, in other words, if all families claim the benefits to which they are entitled, all benefits are available, and there are no waiting lists or misinformation. 27   Figure 4. Trends in poverty and in the growth of the middle class in Brazil over time 27 SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL 50 45 40 35 $2.15 a day (2017 PPP) 30 Poor but not extreme poor 25 ($2.15-$6.85) 20 Vulnerable (6.85-14) 15 Middle Class ($14-$81) Upper class (>$81) 10 5 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021e Source: World Bank Poverty and Inequality Platform (https://pip.worldbank.org/home) and World Bank (2022) Brazil – Macro Poverty Outlook, October, based on Pnad Continua 2011-2021. Note: Poverty rates are computed using international poverty lines applied to Brazil in 2017 Purchasing Power Parity US$. The decade starting in 2010 was marked by economic framework for reforming subnational pension schemes. growth, the 2014 crisis, and a reversal in poverty However, fiscal retrenchment due to the recession reduction. Until the 2014 economic crisis, Brazil’s resulted in more than 1 million eligible families being on economy was characterized by remarkable GDP growth the waiting list for the Bolsa Família conditional cash and falling poverty rates (figure 4). This was aided by transfer (CCT) program between 2016 and 2020 and the pro-poor nature of economic growth and intentional cut the budget of many in-kind programs established policies, such as Brasil Sem Miséria (BSM), which helped in previous years, especially those aimed at furthering 14 million people overcome extreme poverty through economic inclusion. income guarantees, productive inclusion measures, and expanded access to utilities and housing. This process Brazil was severely hit by COVID-19, with over continued the steady expansion of the emerging middle 600,000 deaths in 2020-2021, a sharp fall in class. However, the 2014 crisis was a turning point employment rates, and losses of human capital. for inclusive growth. Extreme and moderate poverty Human capital losses were severe, and preexisting increased, and before Brazil had fully recovered, mostly inequalities in access to clean water, the internet, because of a persistently sluggish labor market, the private healthcare, and social protection meant that COVID-19 crisis hit in early 2020 (World Bank, 2021a). some households lost even more human capital than others from the pandemic. The high mortality of the The recession of 2015 created demand for pension younger population7 had negative social and productive and labor reforms to stimulate recovery and reduce implications for the country. The primary caregivers budget deficits. The resulting 2017 labor reform of about 2.4 per 1,000 children in Brazil died between liberalized several work relations in an attempt to March 2020 and April 2021 (Hillis et al, 2021), and increase formal employment opportunities and widened these children will remain exposed to a long-term risk the scope for collective bargaining on labor regulations, of poverty and deficient care. but it also reduced the mandatory financing of unions. This was followed in 2019 by a pension reform that Despite this bleak picture, Brazil’s social protection tightened some benefit eligibility conditions and response to the COVID-19 crisis was internationally somewhat reduced benefit generosity, bringing Brazil recognized as a model of robustness, coverage, and closer to global benchmarks. It also created a legal speed. To protect the most vulnerable population, the 7  People under the age of 65 represented only 11 percent of official COVID-19 death rates and excess mortality in developed countries, but in Brazil, the disease unexpectedly hit the young and working-age population, with 32 percent of deaths and 28 percent of the excess mortality of Brazilians in 2020 being among people aged under 59 years old (Demombynes et al, 2021). CHAPTER 2 28 government introduced a set of measures including:8 (i) of Auxílio Emergencial showed that there are potential expanding Bolsa Família; (ii) creating a temporary cash complementarities between the digital and in-person SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL transfer, Auxílio Emergencial; and (iii) providing subsidies delivery of some social assistance services.11 Digital to encourage the maintenance of formal labor contracts accounts remain a permanent legacy of the program; under the BEm (Benefício Emergencial de Manutenção do the other innovations have recently been studied in a Emprego e da Renda) and the BESE (Benefício Emergencial series of World Bank reports, have not yet been adopted de Suporte ao Emprego) programs.9 This constituted a but have the potential to increase the accuracy and much stronger social protection response than had ever efficiency of service delivery. been attempted in previous crises and was among the largest among middle-income countries (Gentilini et al, 2020). 2.2 Brazil’s unresolved social challenges Auxílio Emergencial reached more than half of the population as it was able to build on the strengths Brazil is entering the 2020s decade with unresolved of the existing delivery system. Initially planned to socioeconomic issues. Income poverty (along with last just a few months, it was extended for two years related malnutrition and restricted agency), fragile and reached 55.6 percent of the population. It targeted and diminishing human capital, vulnerability to shocks, three groups: (i) the pre-pandemic extreme poor and and social exclusion are limiting Brazil’s prospects for socially vulnerable (BF beneficiaries); (ii) poor families income growth, social cohesion, and labor productivity in the Cadastro Único; and (iii) families who had fallen (World Bank, 2022b). into poverty due to the pandemic (the “extra-cadastro”). The latter, about 32.8 million people, included informal Half of the workforce of 2040 is growing up in and self-employed workers who lost earnings during poverty today. Children’s human capital is important the social distancing measures and who were not for ensuring inclusion as well as for Brazil’s future existing beneficiaries of the social protection system prosperity. As Brazil’s demographic dividend is ending, (Morgandi et al, 2021a).10 The implementation of Auxílio the labor productivity of the future workforce needs Emergencial in Brazil was extensive enough to prevent to keep up with falling numbers of workers. However, 15 million people from falling into poverty. nearly half (48 percent) of today’s children between the ages of 0 and 18, who will enter the labor market in Auxílio Emergencial introduced many operational 2040, live below the Cadastro Único’s poverty line, which innovations that could be harnessed by the is similar to the international poverty line of US$5.5 permanent social assistance programs in Brazil. per day in PPP, even after receiving the Bolsa Família These include identifying beneficiaries who are not transfer (PNADC, 2019). in the Cadastro Único through a mobile application, verifying the eligibility of beneficiaries through big Individual and municipal poverty rates remain data crossing, paying transfers into social digital a strong predictor of lower human capital. Wide accounts, enabling an automatic dispute mechanism, disparities in human capital persist across regions, and collaboration between several branches of the race, and genders in Brazil (see box 1). The low quality federal government to deliver services. The experience of education and the high rate of secondary school 8  Other measures included the suspension of monitoring of conditionalities in Bolsa Família, the delivery of a wide range of social protection services remotely instead of face to face, including the process of applying for unemployment insurance, and the suspension of obligatory updating and verification of the Cadastro Único. 9  One of the first responses to the COVID-19 crisis was the horizontal expansion of Bolsa Família that brought 1.22 million families into the program. The BESE and BEm programs were in place during the height of the crisis and enabled about 12.6 million employees to keep their jobs between March 2020 and August 2021. https://www.gov.br/pt-br/noticias/trabalho-e-previdencia/2021/08/mais-de-tres- milhoes-de-acordos-entre-trabalhadores-e-empresas-foram-fechados-em-2021, accessed on October 29, 2021. 10  Individuals automatically considered eligible for Auxílio Emergencial included 19.5 million people enrolled in the Cadastro Único who were Bolsa Familia beneficiaries, 10.5 million individuals enrolled in the Cadastro Único who were not Bolsa Familia beneficiaries, and 32.8 million people (out of 57.2 million who registered via app) in the extra-cadastro group. The first phase of Auxílio Emergencial provided a benefit about three times larger than Bolsa Familia’s monthly benefit and about half of the minimum wage. The generosity of the benefit decreased, and the eligibility criteria became stricter from the first to the third phase. The number of beneficiaries fell by 40 percent between the first and the third waves of the pandemic, and the benefit value was reduced by 58 percent. 11  It was because of the country’s prior investments in the Cadastro Único, regularly updated through the widespread social services in the country, that Auxílio Emergencial was also able to capture traditionally vulnerable populations who are much less likely to have digital access (Lara De Arruda et al, 2022). dropouts remain key constraints to achieving better levels. The government adopted innovative policies to 29 and more equal human capital levels. Even before the support children’s cognitive and social development SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL pandemic, in 2019, only six out of ten 19-year-olds in their first 1,000 days, including the creation of the completed upper secondary (and even fewer completed Criança Feliz program (PLAN-UNDP, 2020), but its it before this age). This rate is closely correlated with coverage is spotty. Similarly, only 37 percent of children students’ socioeconomic origin. In urban areas, the aged between 0 and 3 years old were enrolled in creches completion rate of lower secondary education is 80 in 2019, and most of these being non-poor children. percent, but in rural areas, it is only 67 percent. Many Even preschool enrollment, despite being mandatory, factors explain these differences: school disengagement, was not yet universal in 2019 and dropped significantly long distances between dwellings and secondary during the pandemic period.12 schools, teenage pregnancy, financial pressure, and distorted information about the value of completing Brazilians suffered severe human capital losses education (Neri, 2009; BRAVA, 2017). The quality of after the COVID-19 crisis. Due to COVID-19, Brazil’s education is also a challenge, with nearly all secondary preliminary score on the World Bank’s Human Capital students graduating with little proficiency in math. As Index for 2020 dropped 5 points compared to 2019, can be seen in (figure 5) human capital outcomes are which is equivalent to nearly 10 years of progress lowest in the North and Northeast regions. (figure 6). This was largely due to education losses as Brazil’s schools, both public and private, have been A lack of access to and the poor quality of early closed longer than in any other country in the world education contribute to Brazil’s low human capital (Azevedo et al, 2020). Projections estimate that   Figure 5. The geography of human capital in Brazil Pará (State HCI: 0.54) Ceará (State HCI: 0.61) Bahia (State HCI: 0.55) Human Capital Index (Min = 0; Max = 1) 0.00 0.53 São Paulo (State HCI: 0.63) 0.57 0.60 0.64 Rio Grande do Sul 1.00 (State HCI: 0.61) Source: World Bank 2022c, Brazil Human Capital Review, Human Capital Index (HCI) Brazil 2020. 12  About 94.1 percent of children aged 4 to 5 years old were enrolled in preschool in 2019. https://www.observatoriodopne.org.br/ meta/educacao-infantil, accessed on October 29, 2021. CHAPTER 2 30 SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL “Due to learning and health losses, it will take at least 10 years for Brazil’s Human Capital Index to return to its pre-pandemic level.” Figure 6. Estimated impacts of COVID-19 pandemic on Brazil’s HCI score and the number of years necessary to recover to 2019 levels A Long Road to Recovery Years Necessary to Recover to 2019 Levels Using Average Growth Rate from 2007-2019 0.62 0.601 0.60 Human Capital Index 0.58 0.56 13 years 12.5 years 0.54 12 years 0.52 10 years 0.50 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 Calculated Optimistic Realistic Pessimistic Health and Child Survival Bounce Back Source: Brazil Human Capital Review, HCI Brazil 2020. Note: The estimation of number of years necessary to recover to 2019 levels used the average growth rates from 2007–2019. learning poverty13 in Latin America and the Caribbean with low education rates are overrepresented among (LAC) could still increase by between 51 and 67 percent, informal wage workers and the informal self-employed. adding 10.8 million more children to the “learning poor,” In addition to being deprived of access to unemployment, while dropout rates could increase by 15 percent. There accident, and disability insurance, informal workers are also other consequences of the pandemic that have to deal with greater income volatility from month are likely to have negatively affected learning but are to month (Fietz et al, 2021). Even when not living in less well-understood such as socioemotional impacts poverty, they face a high risk of falling into it with any and the long-lasting effects of having to use distance single shock. Moreover, the widespread existence of learning over a long period of time. Moreover, the extent informal employment means that new labor market of the long-term damage to children’s health due to entrants have fewer opportunities to develop skills, the underuse of health services during the pandemic, access training, and progress in stable careers in the including immunizations, also remains to be seen. formal sector. Having a low level of human capital also makes workers less resilient to crises. Recent research Workers with low levels of education have a much has also shown that, among laid-off formal workers, lower chance of getting a stable job that includes social those with lower education take six more years to regain protection and are more vulnerable to the impacts of their pre-dismissal earnings than those who have more labor market crises. Working-age adults in poverty and education (Silva et al, 2021). 13  Learning poverty is a combined measure of schooling deprivation and learning deprivation. https://www.worldbank.org/en/topic/ education/brief/what-is-learning-poverty   Box 1. Specific challenges faced by Afrodescendants in the labor market in Brazil 31 SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL A recent assessment financed by the World Bank investigated the difficulties that Afrodescendant youths in Brazil experience in accessing the labor market using data from recent household surveys, the 2010 Brazil census, and qualitative interviews with youths. The study identified three key factors that drive this inequality of access. First, from an early age, Afrodescendants are at a disadvantage in terms of access to education and the quality of the schooling that they receive. The longer-term consequences of this are that most Afrodescendants end up in low-skilled jobs with fragile employment ties and low pay. Second, occupational segregation seems to cause white men, black men, white women, and black women to occupy specific niches in the Brazilian labor market. For example, 60.0 percent of informal sector workers are black, and more than a third (35.0 percent) are black men, whereas 45.0 percent of employers are white men. Among the unemployed, the inequalities of race and gender overlap, with 47.3 percent of black women being inactive and 8.9 percent being unemployed. Finally, discrimination is present in society and is reflected in wage differences between equally educated individuals of different races or genders with similar occupations. Economic growth cycles can help to mitigate racial and gender inequalities in the labor market, but inequalities usually return in periods of economic stagnation, thus nullifying the gains made during years of economic growth. The study made some recommendations for making the labor market more inclusive and reducing inequalities: (i) recognizing the existence of inequalities as a first step towards building a more inclusive society; (ii) investing in research to identify the needs of minority groups, including Afrodescendants; (iii) equipping teachers with the skills to deal with racism and other forms of discrimination and reviewing school curriculum to build a safe environment in schools and promote inclusiveness among students; (iv) providing continuing education opportunities to youths and adults who were not able to access such opportunities in life; and (v) implementing affirmative action policies in schools and in the private sector and promoting mental health policies for Afrodescendants. Source: World Bank, Afro-Cebrap and Instituto Peregum de Referência Negra (2022). Labor market inequalities also have an important among those who are out of the labor force along racial dimension: Afrodescendants, who account the entire income distribution but particularly in the for more than half of the population in Brazil, are bottom five deciles (figure 8). The gender gap in labor overrepresented among the unemployed, those working force participation is as high as 20 percentage points informally, and those out of the labor force (figure 7). A among the poorest (those receiving Bolsa Família recent review conducted for the World Bank (see box 1) benefits) (figure 9). showed that these differences in labor market outcomes are not explained only by human capital attributes and Family caretaking duties fall heavily on poor women, that Brazilian jobseekers of color continue to be subject forcing them to stay out of the paid labor force to wage and hiring discrimination, which keeps them in (figure 10). The absence of a “laziness effect” among poverty, makes them feel discouraged, and prevents the Brazilian poor, particularly among Bolsa Família them from capitalizing on their investments in their beneficiaries, has been widely reported in the literature. education. Providing public or affordable childcare is key to enabling women to participate in the labor market and to take Gender gaps also remain wide with women in the advantage of training opportunities. When individuals bottom half of the income distribution constituting stay out of the labor force for long, their human capital the bulk of Brazil’s adults who are out of work. depreciates fast, and hence the ability of these women Despite girls having a higher level of human capital to engage in productive work after their children have than boys, women are disproportionately represented grown up also diminishes. CHAPTER 2 32 “Labor market inequality have a strong racial dimension, with adults of other races than SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL white overrepresented among the low-earners, the informal, the unemployed, and the out of labor force.” Figure 7. Labor status of white adults (left) and non-white adults (right), by income deciles 12 12 10 10 Million adults 8 8 6 6 4 4 2 2 0 0 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 Labor income deciles Labo Income deciles Formal Self Employed (TA) Microentrepreneur (MEI) Informal Unemployed Firm owner (SIMPLES) Public Employee Formal Private Employee (CLT) Out of labor force* Source: The World Bank, based on BraSim 2019 microsimulation tool. Note: Employment according to attributed formal and informal labor market status: Trabalhador Autônomo (TA)=formal self-employed; MEI=micro entrepreneur proprietor; SIMPLES=small firm proprietor; White race group is self-reported in PNAD Continua 2019. *Individuals ages 18–46, not disabled body or not in education.   Figure 8. Labor force status of women (left) and men (right), by per capita income deciles 12 12 10 10 8 8 Million adults 6 6 4 4 2 2 0 0 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 Labor income deciles Labor income deciles Formal Self Employed (TA) Microentrepreneur (MEI) Informal Unemployed Firm owner (SIMPLES) Public Employee Formal Private Employee (CLT) Out of labor force* Source: The World Bank based on BraSim 2019 microsimulation tool. Note: Employment according to attributed formal and informal labor market status: TA=formal self-employed (trabalhador autônomo); MEI=micro entrepreneur proprietor; SIMPLES=small firm proprietor; CLT=formal wage employee. *Individuals ages 18–46, not disabled body or not in education.   Figure 9. Labor profile of adults in Cadastro   Figure 10. Reasons for being out of labor force 33 Único and Bolsa Família, by gender among the poor, by gender SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL Cadastro Único Cadastro Único Male 53% 47% Male Female 39% 61% Female 54% 46% Bolsa Familia Male Male Bolsa Familia Female 36% 64% Female 0% 50% 100% Worked last week Did not work last week Home and Caretaking duties Other reasons Does not want to work Studying but not Too young/ too old enrolled in school Source: Fietz and Lyrio 2021, based on Cadastro Único data. Source: Fietz and Lyrio 2021, based on PNAD Continua 2019. Note: Individuals ages 18–46, not disabled body or not in education. Note: Individuals ages 18–46, not disabled body or not in education. CHAPTER 3 Global 34 SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL megatrends call for the renewal of Brazil’s social protection system KEY MESSAGES • Technological change, climate change, and demographic change will yield new ways of working and earning, while profoundly changing the ways in which we produce and consume. • The fourth industrial revolution will change the geography of global manufacturing activity and reshape the nature of work and work relations. On the one hand, robotics and 3D printing may allow production to shift closer to the final consumer. On the other hand, high-skilled labor will be available globally through digital labor marketplaces, which will lead to new work relations that will be much shorter-lived (the taskification of work) and will be more complex with regard to taxation and social insurance coverage. Meanwhile, routine and manual work will become less in demand, which is likely to exacerbate existing inequalities in earnings and in the quality of jobs. • Climate change will increase the risk and intensity of water scarcity and droughts in Brazil. Deforestation and rising temperatures alongside changing precipitation patterns will increase Brazil’s energy demand and impact negatively its supply capacity (hydroelectric sector) and increase physical and human capital losses during natural disasters, such as landslides and floods. • Decreasing fertility rates will reshape Brazil’s labor market in the 2040s from a “youth bulge” to a “prime age bulge,” which will constitute either an opportunity or a threat to increasing productivity. The outcome will depend on how prepared the labor force and the social protection system are. As most of the future workforce is being raised in poor families with limited human capital investments, Brazil will need to strengthen its adult education system. It will also need to prepare for increased pension spending and rising demand for old-age social assistance. The increasing old-age dependency ratio will also put more pressure on public elder care services. Brazil is destined to undergo several important 3.1 Demographic change 35 transitions in the next two decades, which will SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL reshape its population, the means of production, Brazil’s declining fertility rate will change its labor and, ultimately, consumption.14 Technological change, market demographics by reducing the number of climate change, and demographic change will affect young and prime age workers. The number of births most of the population and, accelerated by the changes has been sharply decreasing since the 2010s, and brought by the COVID-19 pandemic, will interact the national demography of the last decade has been with new ways of working and earning. The profound marked by a disproportionate share of young adults changes in the way in which we produce will mean that followed by a much smaller cohort of children. This Brazil’s social protection will need to be adapted to oversized youth cohort will be entering prime age in address the vulnerabilities arising from these new types the next two decades, while, because of the increase of work relations and the greater volatility of income in life expectancy, there will be a concomitant rise in associated with them. the numbers of elderly, especially women (figure 11). By   Figure 11. Population pyramids in 1991, 2010, 2020, and 2040 1991 2010 80+ 80+ Male 75−79 Female Male 75−79 Female 70−74 70−74 65−69 65−69 60−64 60−64 55−59 55−59 50−54 50−54 45−49 45−49 40−44 40−44 35−39 35−39 30−34 30−34 25−29 25−29 20−24 20−24 15−19 15−19 10−14 10−14 05−09 05−09 00−04 00−04 −10 −5 0 5 10 −10 −5 0 5 10 Population in Million Population in Million 2020 2040 80+ 80+ Male 75−79 Female Male 75−79 Female 70−74 70−74 65−69 65−69 60−64 60−64 55−59 55−59 50−54 50−54 45−49 45−49 40−44 40−44 35−39 35−39 30−34 30−34 25−29 25−29 20−24 20−24 15−19 15−19 10−14 10−14 05−09 05−09 00−04 00−04 −10 −5 0 5 10 −10 −5 0 5 10 Population in Million Population in Million Source: Staff estimations using Census and IBGE population projections. 14  This chapter draws from the World Bank’s flagship report “Alternative futures for Brazil” (World Bank, Forthcoming). CHAPTER 3 36 2040, the young cohort is projected to represent just 12 course of their working lives. It will also be essential to percent of the population, but the prime age cohort (those offer them some sort of incentives, as the propensity SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL aged 40 to 65) should be close to 34 percent (figure 12). to participate in training is currently very low among workers with less than a secondary education (figure 14).   Figure 12. Estimates of population size by age Overall, the school age population will decrease, group in Brazil 2020-2060 though not necessarily the number of students. With the demographic transition, the number of children will Population size-selected grups continue to fall, and available spending per child is likely 80 to increase. This increase in resources would be a golden opportunity to expand the coverage of early childhood education and upper secondary school and to increase 60 access to tertiary degrees. Specific policies, including Pop (millions) social protection policies, will be essential to stimulate the demand for educational and ensure effective 40 provision to the poor. Imbalances in adult populations across states may draw more workers from poorer to wealthier states. 20 2020 2030 2040 2050 2060 There are wide disparities in demographics between states in Brazil, with significantly more children living 0-20 years 40-64 years 20-39 years 65+ years in the north and northeast regions than elsewhere. Dependency ratios are projected to increase at an Source: United Nations Statistics for Brazil. unequal pace by 2040, with states in the south and southeast reaching above 0.7, the 2020 average for high-income countries (HICs), while in the northern Young adults who are already in today’s labor force region, dependency ratios are likely to fall. In states will constitute most of the workers in 2040, and with high dependency ratios, the time that working- 40 percent of them have not completed secondary age adults will have to spend on taking care of children education (see figure 13). Many of these older workers and the elderly will increase. A higher proportion of will need to navigate an increasingly sophisticated national pension spending will also shift to the south labor market with no secondary education and limited and southeast, thus creating a regressive redistribution foundational skills. Young adults who are poor have of national resources from poorer to richer states. This even lower educational attainment than their peers, set of factors is likely to give workers an incentive to with one-third of them having failed to complete move to more labor-constrained but wealthier regions. primary education. Finally, aging will put additional pressures on several Public education and training policies will need to areas of public spending, especially on pensions, cater to the large cohort of prime age workers who which will necessitate a renegotiation of benefit lack the foundational and technical skills that will be rules and eligibility criteria. As the proportion of needed in a more sophisticated labor market. Skills- older people grows, government spending on pensions biased inequality in employment and wages will likely and other public services, such as health care and widen in the future as demand for routine and manual elder care, is expected to increase as a share of GDP. tasks falls and demand for cognitive and abstract Social assistance expenditures may also increase to skills increases. Recent reviews have shown that this protect those older people who are unable to access is also happening in developing countries, just at a social insurance pensions, particularly given the slower pace. However, most Brazilian workers in 2040 stricter rules brought by the 2019 pension reform. are already in school now so would not be affected by Further pension reforms and improvements in health any reforms that might take place in the traditional care administration may reduce the pace at which educational system in the next few years. Therefore, expenditures in these areas will increase over the next it will be necessary to establish institutions designed decades, but in the most likely scenarios, spending will to help the adult workforce learn new skills during the continue to increase.   Figure 13. Education level of 70% of the labor   Figure 14. Share of adults that ever received 37 force in 2040, already of working age today some form of training besides formal education SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL 1.6 No institution or up to 1 year Bolsa Família 40.5 11.5 10.2 32.1 Incomplete 3.4 0.8 primary Complete 3.9 primary Cadastro Único, Incomplete 29 10.5 9.9 43.3 secondary not in BF 2.1 1.3 Complete secondary Incomplete superior Population 20.1 8.3 7.5 41.9 17.8 Complete 1.3 3.1 superior 0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100% No instruction Complete Superior Enrolled & took Enrolled before or up to 1 year Incomplete primary course before Never enrolled Complete primary Incomplete secondary Currently enrolled Complete secondary Incomplete superior Source: PNADC 2019. Source: PNADC 2019. Note: Sample of individuals ages 18–46 in 2019, who are projected Note: Individuals ages 18-46, with no disabilities and not in to constitute 70% of the working age population in 2040. education. 3.2 Technological change and the concern given the lack of skills possessed by so many new world of work in Brazil’s labor force. Past studies of the effects of Brazil’s adoption of digital technology have found that Technological progress will change the geography of it has had a range of different impacts on employment. global manufacturing activity as well as the nature In general, low-skilled workers may benefit from the of work for many Brazilians. The Internet of Things expansion of firms via internet services (e.g. platforms (IoT), robotics, and 3-D printing will reduce the costs for simple tasks) but are more likely to lose their of coordinating the globally fragmented production of jobs.15 Higher-skilled workers tend to benefit from the manufactured goods and make it easier to track and introduction of new technology that complements their monitor components as they move through the supply skills. In fact, survey data show that Brazilians perceive chain. Advanced robotics will reduce labor-intensive automation as both a risk and an opportunity, with manufacturing and potentially bring production closer much more negative perceptions being held by those to the final consumer. 3-D printing can meet the with lower education levels (IPSOS, 2019). demand for customized, quickly delivered goods with minimal input of manual labor (Nayyar et al, 2021a and Workers in occupations that mostly involve routine ILO, 2019). Brazil will need to accelerate the adoption of and manual tasks in Brazil are more likely than others these technologies to catch up with the living standards to be negatively affected by changes induced by in other parts of the world. automation. These negative effects typically include reduced labor demand and subdued wage growth. Data The global literature has warned about the negative for Brazil have shown a steep decline in the availability of effects of automation on employment and wage routine work in Brazil and an upward trend in the growth inequality. Over the last two decades, in developed of non-routine analytical type of jobs (figure 15 and countries, employment and wages in occupations with figure 16). Also, recent causal evidence shows that, even high content of routine tasks fell markedly, probably when controlling for education and age, after a company due to technological substitution. These trends are a closes, displaced workers in occupations characterized 15  For instance, rising internet penetration in Brazil was found to lead to lower employment for low-skilled workers performing manual tasks (Corseuil et al, 2018) but not by as much as in other countries in LAC. The authors suggest that the policy environment (such as labor regulations or wage rigidities) can foster a new optimal technology-workers mix within businesses. CHAPTER 3 38   Figure 15. Changes in average task content of   Figure 16. Changes in average task content of occupations, by education level (2012-2020) occupations, by age group (2012-2020) SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL 0.05 0.04 0.04 0.03 Difference in task index value Difference in task index value 0.02 0.03 0.01 0.02 - 0.01 (0.01) - (0.02) (0.03) (0.01) (0.04) (0.02) (0.05) (0.03) (0.06) Non- Non- Routine Routine Non- Non- Non- Routine Routine Non- routine routine cognitive Manual routine routine routine cognitive Manual routine analytical interpersonal manual analytical interpersonal manual Below Secondary Secondary Tertiary Youth 14-29 Middle Age 30-50 Prime age 51-65 Source: Alternative Futures for Brazil Flagship Report (Forthcoming). Source: Alternative Futures for Brazil Flagship Report (Forthcoming). by mostly routine tasks are more vulnerable to long- been associated with closing gender wage differentials term wage loss and higher unemployment spells than in local labor markets (Vieira et al, 2021) and might those in occupations characterized by non-routine also help to reduce race-based discrimination against tasks (Martins-Neto, 2021). specific workers, which is still highly prevalent in Brazil. The pandemic also boosted demand for digitally These changes are occurring in the context of rising provided goods and services and broadened the labor market duality in Brazil’s formal sector, with range of jobs provided via the internet, though the formal self-employed being subject to lower these still constitute a small share of employment taxes but receiving fewer protections. In 2006, the in Brazil. Online platforms provide smaller companies government introduced the simplified tax regime for with unique opportunities to trade their goods and firms (SIMPLES) and allowed self-employed workers services both locally and internationally. They also give to register as an MEI (individual microentrepreneur) individuals the chance to find and perform work on the and thus contribute to social insurance and become internet. This is known as platform work, in which the eligible for pension and disability benefits. These online forum connects remote workers with businesses moves were an attempt to reduce the complexities who have need of short-term freelance workers to do involved in the formal sector, while avoiding the piecemeal or assignment-based work. These so-called need for comprehensive changes to the tax and microtasks tend to be small jobs that require a low labor code. Under these simplified regimes, offering level of skill, take minimal time to complete, and yield services as an independent worker or firm became minimal remuneration. Estimates show that COVID- far less costly than through the traditional dependent related lockdowns led to a 50 percent increase in the employment. However, MEI workers are ineligible for use of platform work in LAC in March 2020 and that unemployment or accident insurance. In 2017, the downloads of microtasks and freelance platforms use of non-dependent workers was further liberalized increased by 30 percent in the first quarter of 2020. by the removal of restrictions preventing businesses However, the platform worker population has been from outsourcing.16 As a result of these economic and estimated to be less than 3 percent of the global labor regulatory changes, over the last 10 years there has force (Packard et al, 2019) and only about 1 percent been a steady rise in the share of formal jobs occupied in LAC. Little is known about the welfare effects of by the formal self-employed (figure 18). The number of platform work in Brazil. In Brazil, platform work has registered MEIs rose tenfold, from half a million in 2011 16  Law 13,467 of July 13, 2017.   Figure 17. Contributors to social insurance, by   Figure 18. Distribution of workers by forms of 39 type of plan (2008–2020) work and labor income deciles (2019) SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL 60 100% Average number of monthly contributors 50 80% Share of workers 40 60% (millions) 30 40% 20 20% 10 0 0% 2008 2010 2012 2014 2016 2018 2020 1 2 3 4 5 6 7 8 9 10 Labor income deciles Formal Ind-Plano Ind-Plano Completo Trab. Informal Public employees Simplificado (TA) (PJ/TA Ocasional) Autonomo Workers + Military Ind-MEI Individual-all Domestic worker MEI SIMPLES Formal employees Source: Statistical Yearbook of Social Security, Ministry of Labor Source: PNADC 2019. (several years). to 5.4 million in 2020. These formal self-employed, in code.18 A new startup law, sanctioned by the Congress, part, have replaced the formal dependent workers further expanded the MEI regime by raising the displaced by labor market shocks in 2015 and after maximum revenue allowed.19 the 2020 COVID-19 crisis.17 As informality is not expected to disappear in the The phenomenon of pejotização is likely to keep future, the discussion should shift to how to better growing, enabled by technological change, and cover individuals in the context of technological and presents a problem for the sustainability of social structural changes in work relations. As in many protection financing. Evidence on the first waves of developing countries, few working-age adults in the MEI registrations over the past decade show that the informal sector in Brazil are protected by the social MEI policy was successful in formalizing many previous protection system. Informality is likely to grow as it is ‘invisible’ workers (Hsu Rocha and De Farias, 2021). At the main way in which workers adjust to labor market the same time, by allowing contributors to declare up to shocks when jobs are lost in the formal sector. Moreover, five minimum wages in gross earnings per month with young people are increasingly preferring to take minimal levels of social contributions, the MEI regime advantage of digital work opportunities and platform over time also served as a convenient tax loophole freelance jobs than doing wage work within a rigid for professionals in the middle class. Evidence from contract, so the main challenge is to ensure that even imputations from the Continuous National Household such forms of work provide workers with fundamental Sample Survey (PNADC) suggests that MEI contributors labor protections and social insurance. are today overrepresented among medium- and upper- income earners (figure 17). Platform-based work and 3.2 Climate change internet-based outsourcing will likely fuel this process further, especially given that the Brazilian judges have There is a growing literature documenting the effects already clarified the contentious issue that platform of climate change on livelihoods in both urban and workers are not dependent employees under the labor rural areas in Brazil. Studies have found that climate 17  Complementary Law 182 of July 1, 2021. 18 https://www.gov.br/casacivil/pt-br/assuntos/noticias/2021/marco/em-2020-numero-de-meis-teve-um-aumento-de-8-4, accessed on December 13, 2021. In 2022, the number is expected to increase further, given the increase in the ceiling of revenues for small entrepreneurs who wish to contribute in this subsidized category. 19  Complementary law 182 of June 1, 2021. CHAPTER 3 40 change in the form of both heatwaves and rainfall have negative effects on productivity, labor markets, “Climate-related disasters and health SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL and human capital accumulation. Disasters such as spending are projected to push an landslides and flooding are the cause of 87 percent of additional 1.3 percent of the Brazilian disaster-related deaths in south and southeast Brazil population to extreme poverty (US$1.9 (Pedroso, 2021). About 13 percent of the Brazilian PPP per day) by 2030” semiarid region (northeast and north of Minas Gerais) is considered to be in an advanced stage of desertification. The southeastern Legal Amazon faces the greatest risk of climate-related changes (including Mato Grosso, one of the heartlands of soy production in Brazil), with Figure 19. Estimated impact of climate change rainfall projected to decrease by nearly 20 percent on income for the bottom 40% and on extreme and temperature increases anticipated to be the most poverty in Brazil, high-impact scenario severe in the area. Brazil - Change in income of the bottom 40% Climate-related disasters like droughts, floods, and landslides will continue to disproportionately affect 1 1.4 low-income households. These households tend to 0 1.2 be located in informal urban settlements with poor -1 1 infrastructure located in higher-risk areas (such as -2 -3 0.8 steep slopes, creeks, and low-lying plateaus in urban -4 0.6 centers) and are starkly exposed to natural hazards like -5 floods and landslides. More than two-thirds (69 percent) 0.4 -6 of households in these communities have household 0.2 -7 per capita incomes of less than one minimum wage -8 0 (Cunha et al, 2018). Based on a high-impact scenario, Agri revenues Disasters Food prices Labor productivity All impacts Agri revenues it is predicted that increased health spending due to Health climate change will push an additional 1.3 percent of the population below the US$1.9 poverty line by 2030 (figure 19). Brazil - Change in income Brazil - additional people below Source: Jafino et al (2020). Source: Jafino et of the bottom 40% $1.90 as % of total population Low savings and high discount rates limit households’ 1 resilience to the multiple shocks of the future and 1.4 0 their ability to plan. Financial instruments like savings, 1.2 -1 credit, and microinsurance could help the poor navigate 1 -2 through shocks without depleting their assets or -3 0.8 permanently damaging their human capital (World -4 0.6 Bank, 2021b). However, few of the poor in Brazil have -5 sufficient savings or access to affordable credit and are 0.4 -6 therefore often unable to raise money in an emergency 0.2 -7 (figure 20). Also, although many Brazilians frequently -8 0 lose assets in floods and landslides, it is rare for the Agri revenues Disasters Food prices Labor productivity All impacts Agri revenues Disasters Food prices Labor productivity All impacts Health Health poor to have any insurance due to their lack of financial education and a lack of incentives for the private market to serve these potential clients. Source: Jafino et al (2020). Source: Jafino et al (2020).   Figure 20. Ability of Brazilian adults to raise funds in an emergency, by income quintile 41 SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL Average Q5 Q4 Q3 Q2 Q1 0% 10% 20% 30% 40% 50% 60% 70% Savings Selling assets Borrowing from financial, Family and friends Money from working Not able to raise funds institution, employer, or private lender Others Source: World Bank (2021b). Note: Ability reported by individuals through an objective survey. In addition, global and domestic climate policies differences between the skills need in the old and will likely force Brazil into a ‘green jobs’ transition, the new occupations and geographical locations of requiring its workers to adapt in order to survive. the jobs in question. An analysis conducted by Mealy Reaching net-zero emissions and transitioning to a and Teytelboym (2022) suggests that there is some green economy often raise the concerns about job potential in Brazilian green sectors such as wind, losses. This transition is not expected to be overly hydroelectricity and solar power to absorb workers from disruptive in Brazil thanks to its already relatively clean brown sectors based on their skills and occupational and renewable energy matrix.20 However, for Brazil to proximity. However, there can be huge differences in the remain competitive in global markets, resources and transferability of the different skills used within a single investments will need to shift towards relatively low- sector. Geography is another determinant of whether emission sectors.21 This transition is likely to have long- the transition between brown and green sectors will be term negative impacts on workers in “brown” jobs in smooth. Workers in the coal mining industry have skills such industries as fossil fuels.22As always, the risk of that would allow them to easily switch to green mineral becoming unemployed is higher for vulnerable people sectors (such as the extraction of graphite). However, in with lower education and less capacity to learn a new this instance, that may depend on where the new jobs occupation. The ability to switch from brown to green are located and whether it would be possible for the ex- or neutral sectors depends on several factors, including coal miner to relocate elsewhere if necessary. 20  Renewables account for roughly 48 percent of the Brazilian energy matrix and over 80 percent of its power matrix. 21  World Bank’s Brazil Climate Change Development Report (World Bank, forthcoming). 22  This analysis draws from the World Bank’s Brazil Climate Change Development Report (World Bank, forthcoming). CHAPTER 4 42 Assessing the SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL performance of social protection to enhance equity, opportunity and resilience KEY MESSAGES The chapter evaluates the ability of Brazil’s social protection system to protect and promote human capital through four analytical lenses: Equity: • Poverty and income inequality remain high. • Public expenditures are not progressive, and financing is not fairly distributed across society. • The social protection benefits received by those in the poorest quintile are lower than those received by the richest quintile. Opportunity for the present and the future labor force: • Most social protection programs are not designed to promote labor productivity or human capital. • Skills and labor market programs are largely focused on formal workers, while economic inclusion programs were pathbreaking but have mostly expired. • Some of the CCT’s recent innovations could improve human capital outcomes but remain to be implemented. Resilience: • Informal workers have more volatile incomes but have less access to protection. • Generous but short-term unemployment programs provides hardly any protection to vulnerable workers, even if formal. • Social protection programs need to be designed to ensure a timely response to climate shocks. • The tax-benefit system is only mildly redistributive when accounting for tax exemptions, implicit subsidies, and indirect taxes. • The pension system is highly regressive and generous. Efficiency and Sustainability: • There are too many overlaps across programs. • Pension spending is not fiscally sustainable. • Programs need to adopt the innovative delivery mechanisms used in the COVID-19 Auxílio Emergencial program. 4.1 The Equity, Opportunity, accumulation and depletion of human capital as 43 a result of different shocks. A social protection Resilience, and Sustainability system can be considered to be fostering equity Framework for Social Protection SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL if: (i) its programs provide sufficient protection for the poor and (ii) social protection financing is fairly This note takes a four-pronged approach to assessing distributed across society, and public expenditures the ability and capacity of Brazil’s social protection are progressive. system to protect and promote the human capital of its population. The World Bank recently launched an • Opportunity refers to the ability of the system update to its Social Protection strategy (World Bank to promote the accumulation of human capital 2022a, World Bank 2012) that defined systems in and provide productive work for all. Promoting terms of their ability to promote resilience, opportunity, opportunity for all requires using resources to and equity (ROE) throughout the lifecycle. In this note, enhance labor productivity and human capital we build on this framework by adding a fourth goal accumulation. It also involves trying to balance of efficiency and sustainability, which is an essential contributions and rewards for all groups in society element in the context of fiscal constraints and of and providing individuals with ways to protect their Brazil’s already large social protection and labor system. human capital and to access productive work. The four elements can be described as follows: • Resilience refers to the ability of the system • Equity refers to the ability of the system to protect to insure the vulnerable against the impact the population against poverty and against of different shocks. A social protection system loss of human capital. It covers both inadequate that promotes resilience is capable of insuring   Figure 21. Brazilian Social Protection and Labor policy interventions for human capital accumulation throughout the lifecycle Early childhood Childhood, adolescence Adulthood Old Age and youth EQUITY Child allowances: Cash & in-kind for the poor Child allowances: transfers: Salário Família Social pensions: Salário Família Bolsa Família, Disability-related BPC-old age Protecting against Fee waivers: Utilities’ Abono Salarial, transfers: Care services: n.a. dire poverty and loss Tarifa Social based Salário Família BPC-disability of human capital on CadUnico Public works: n.a. OPORTUNITY CCTs for education: LM services: SINE Nutrition/ECD: Economic inclusion: for all Primeira Infância Bolsa Família ACESSUAS Trabalho, Life-long learning: Youth employment: facilitated access no SUAS ATER, PAA, Economia ACESSUAS Trabalho to higher education Promoting human CCTs for pre-school: Solidaria, Fomento Nutrition: PNAE (Estatuto do Idoso) capital and access to Bolsa Família à produção; Cisternas. productive work Skill: training programs Re-skilling: training prog. Emergency cash: AE*, Bolsa Família, Defesa Civil. In-kind transfers: RESILIENCE Emergency cash: AE*, Emergency cash: AE*, SISAN, Cestas alimentos. Old age pensions: for the Bolsa Família, Bolsa Família, Services: SUAS. RGPS (rural/urban), Defesa Civil; Defesa Civil; RPPS vulnerable In-kind transfers: In-kind transfers: Unemployment and Disability insurance: disability insurance: SISAN, Cestas SISAN, Cestas SD, Auxílios INSS. BPC-disability Insuring against alimentos; alimentos; Subsidized insurance: impacts of Services: SUAS Services: SUAS Garantia Safra. different shocks Matching savings: n.a. 0-5 years old 6-29 years old 30-65 years old 65 or older Accumulation of Use and Human Capital protection of HC Protection of HC Source: Adapted from Resilience, Equity, and Opportunity: The World Bank Social Protection and Labor Strategy 2012–2022. Note: *Auxílio Emergencial (AE) was a temporary response to the COVID-19 crisis; the program was discontinued in 2021. CHAPTER 4 44 individuals from present and future risks over their 4.2 Equity: Is social protection entire lifecycle. It also guarantees access to social supporting those most in need across the lifecycle? SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL protection regardless of the family’s formal or informal working status. Equity relates to the ability of Brazil’s social • Finally, the efficiency and sustainability of a social protection system to provide the population with protection system is related to three essential sufficient protection against poverty and loss of characteristics: (i) it has few overlaps between human capital throughout the lifecycle. This section programs; (ii) it delivers benefits and services evaluates each major program in terms of its coverage, effectively and efficiently to the intended population; benefit adequacy, and progressivity. The analysis largely and (iii) its expenditures and financing are fiscally relied on the microsimulation tool (BraSim) of Brazilian sustainable. tax and benefits. This allows to simulate the theoretical incidence of fiscal policies on households across the The Brazilian social protection system has all of these income distribution, even those not directly reported characteristics up to a point as can be seen in figure in household survey. Total program expenditures in this 21. Nonetheless, in this chapter, we highlight some of note were classified by function using the World Bank’s its important imbalances and deficiencies, which will taxonomy in the Atlas of Social Protection Indicators need to be reformed in order to ensure that the system of Resilience and Equity (ASPIRE). Box 2 discusses the remains relevant and efficacious in the coming decades. various tools used in this note.   Box 2. Analytical approaches used to analyze the Brazilian social protection system in this Note ASPIRE The Atlas of Social Protection: Indicators of Resilience and Equity (ASPIRE) is a database of expenditure and incidence indicators for social protection programs. As of 2022, ASPIRE encompasses information for approximately 140 countries and more than 3,000 programs, including Brazil. This note adopted the ASPIRE taxonomy to categorize federal social protection expenditures, which are derived from federal budget data. Data collected includes information about program design, executed expenditures and beneficiary numbers from 2010 to 2020. BraSim BraSim is a microsimulation tool developed by the World Bank Poverty and Equity team, designed to estimate the distributional impacts of fiscal policies. The tool works on a synthetic population, based on household survey data, the PNAD Contínua (PNADC) 2019 annual survey, that represents the entire distribution of households in Brazil. The tool applies the rules of each federal tax and transfer program on each synthetic family according to their demographic and employment characteristics. BraSim allows to identify the incidence of direct and indirect taxes, social insurance contributions by employers and workers, formal pensions, as well as Bolsa Familia, the BPC, rural pensions, Abono Salarial, and Salário Família. The tool also allows users to model partial equilibrium distributional implications of changes to tax and benefit policies, while it does not model behavioral responses or consider general equilibrium implications. A key caveat is that the tax benefit system is reproduced in BraSim (and similar models) under an assumption of perfect implementation, and as such the analysis is particularly useful to evaluate design rather than program performance. The results differ from incidence analysis that is based on reported receipt of specific transfer in the same household survey. Brasil De Jure Model BraJure is a tax-benefit model tool developed by the World Bank Social Protection and Jobs team and built upon the BraSim tool, designed to simulate the impacts on the disposable income of families of   Box 2. continue 45 SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL changes in employee and employer contributions, taxes, as well as benefit entitlements, for different forms of formal work types (dependent, self-employed, MEI, and others) in Brazil. The tool allows to set a family type composed of one to four members, for instance being two adults and two children, given that one adult is employed in the formal sector, and simulates the family disposable income at each salary unit increase. PROST Pension Reform Options Simulation Toolkit (PROST) is a proprietary World Bank software. It is a deterministic generic model that has been used to model long term pension system outcomes in over 100 countries around the world. The model uses age-specific data on pension system participants and exogenous user-determined assumptions on future evolution of economic variables, behaviors of pension scheme participants, and changes in pension scheme parameters. Coverage of the Social Protection System elderly (83 percent in 2019). This is similar to spending patterns in the much “older” economies of the OECD. Historically, Brazil’s social protection system has Because children and young people receive fewer or not protected all poor people equally well throughout no benefits, they are overrepresented in the bottom the lifecycle. Figure 22 shows the distribution of quintile of Brazil’s income distribution (figure 23), while programs according to the primary age group of its old-age poverty is rare. Programs for the elderly also target beneficiaries. While the social protection system tend to be provided in a stable way over time, in the has developed programs for all age groups, when form of permanent pensions, while the value of benefits aggregated, most federal social protection spending and services targeted to children and youth tends to is allocated to programs that directly target the fluctuate over the years.   Figure 22. Social insurance, labor market, and   Figure 23. Distribution of population, by age social assistance expenditure throughout the groups and income quintiles lifecycle in Brazil (2019) 3% 700,000 100% 100% 8% 14% 83% 90% 17% 17% 90% 600,000 80% 80% 500,000 70% 70% 56% 60% 62% 400,000 60% 62% 70% 70% 50% 50% 300,000 40% 40% 200,000 30% 30% 12% 20% 20% 41% 100,000 5% 30% 1% 10% 10% 21% 16% 13% 0 0% 0% Not age Child Adult Elderly Q1 Q2 Q3 Q4 Q5 specific Social Insurance Social Assistance % of total 0-17 18-63 64 or more Labor Market Total Source: The World Bank using expenditure data from Portal da Source: PNADC 2019. Transparência, 2019. Note: Includes SA, SI, and LM programs, classified by the authors according to main target-age groups. Bolsa Família is classified as SA-child, SUAS and housing policies are classified as SA-all, Salário Família is LM-child. CHAPTER 4 46 “Due to their design, the CCT Bolsa Família, and the wage supplements Salário Família SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL and Abono Salarial reach Brazilian families across the entire income distribution.” Figure 24. Simulated distribution of benefits, by family income deciles 90% Share of population receiving each benefit or combination of benefits 80% 70% 60% 50% 40% 30% 20% 10% 0% Poorest 2 3 4 5 6 7 8 9 Richest Receives only BF Receives BF and AS/SF/Both Receives AS and SF Receives only SF Receives only AS Source: The World Bank's BraJure simulation model. Note: Family composed of two adults, two children (between 3 and 21 years old). BF – Bolsa Família, AS – Abono Salarial, SF – Salário Família. Cash benefits are provided to working families across Brazil’s CCT flagship program stands out as the most a broad spectrum of the income distribution. Working progressive benefit with the most modern design to families across most of the income distribution receive alleviate poverty. This program, both when started cash from several programs including (in 2019) Bolsa as Bolsa Família and Auxílio Brasil 2021-2022, has Família, Salário Família, and Abono Salarial (see figure 24). been effectively targeting the poorest households by These programs have different objectives and designs, adjusting the level of the benefit according to the number with many overlaps and exclusion errors. For instance, of children in the household to reduce household income Abono Salarial, which is targeted entirely to formal gap.24 The Auxílio Brasil and new Bolsa Família program workers earning up to twice the minimum wage and 2023, have not been incorporated in this study. Their regardless of their household income, has become less design features are very similar to Bolsa Família 2019, effective over time in terms of reducing poverty. This but the benefits are significantly higher. occurred because most members of poor households are not in formal wage jobs, while many middle-class Although Brazil’s transfer programs for working households have members earning up to twice the families are fragmented, when considered all minimum wage (which is about ten times Bolsa Família’s together, they provide a social assistance floor with poverty line in 2019). Salário Família, which targets benefits that decrease as beneficiaries’ incomes households with both low formal wages23 and children increase. Ultimately, household welfare depends on the in the household, is more progressive but reaches a combined effect of tax and benefits rather than from small share of Brazil’s children. individual programs. De jure tax-benefit models are 23  The wage thresholds are defined annually by the government. In 2022, for instance, the eligibility criteria was having a child up to 14 years old (or a child with disabilities at any age) and a wage below R$ 1,655.98. Note that in 2022 the minimum wage was at BRL 1,212.00. 24  Auxílio Brasil introduced a component that rewards formal labor market contracts with bonus cash benefits. This component consists of Auxílio Inclusão Produtiva Urbana for formal labor contracts in urban areas and Auxílio Inclusão Produtiva Rural for family farmers. However, this component was never implemented and disappeared in the last program reform.   Figure 25. Net total take-home income from transfers for a family of two adults and two children, 47 with one adult working in the formal labor market SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL Threshold 700 Threshold RE Cadastro Único Extreme poverty Poverty line 1 MW (BRL 475 per capita) 600 line (BRL 89 per capita) (BRL 178 per capita) 500 400 300 BRL 200 100 0 -100 -200 -300 502 543 585 627 669 711 752 794 836 878 920 961 1003 1045 1087 1129 1170 1212 1254 1296 1338 1379 1421 1463 1505 1547 1588 1630 1672 1714 1756 1797 1839 1881 1923 1965 2006 2048 2090 2132 2174 2215 2257 2299 2341 2383 2424 2466 2508 2550 2592 2633 460 418 376 334 0 42 84 125 167 209 251 293 Declared labor income Variable Benefit BF Variable Benefit RE Beneficio Cidadania Salario Familia Social Security Contributions Net Per capita Income (RE) Net Per capita Income (no RE) Source: The World Bank BraJure, de jure tax benefit model for Brazil in 2019. The model simulates the amount and level of benefits received (vertical axis) by a family, under different levels of labor income (horizontal axis), starting from zero (when no member has a formal job). Poverty lines refer to year 2019."RE" stands for Regra de Emancipação, a rule in Bolsa Família program that allows the family to continue receiving most of the program’s benefits for up to two years after their income rises above the eligibility threshold. “Non RE” means a family that did not participate in Regra de Emancipação. Beneficio Cidadania is the household level benefit in AB. The family type considered in this version of the model is composed of four members, being two adults and two children, and given that one of the adults is employed in the formal sector. The model assumes the worker does not receive Abono Salarial once employed, since the benefit is provided only after five years of formal employment. See Fietz et al (2019) for a full illustration of BraJure. widely used to understand the net effect of government Adequacy fiscal policy on the income of different types of family. These models are in effect income calculators that Simulations based on data from Brazil’s national show what a worker has the right to receive from the household survey PNAD Continua reveal that about government, and what they have a duty to pay, for 21 percent of families remained poor in 2019, even every amount of wage income earned (figure 25). The after receiving social protection transfers, and that model in figure 25 is applied to a family of four, with these are mostly families with children.26 Adequacy one adult member who works in the formal sector at refers to whether the transfer is sufficient in value to different wage levels (on the horizontal axis). The figure protect its recipient from a shock, in this case severe shows that the government continues to provide some poverty. When compared to all other tax benefit form of income supplement as labor income rises and expenditures (see figure 26), Bolsa Família was the most across the formal-informal spectrum, almost in the efficient program in reducing poverty for each BRL guise of a tapering universal basic income (Gentilini et spent. Importantly, the poverty reduction impact of al, 2019). Bolsa Família has been mainly due the program’s good targeting and large scale (Morgandi et al., 2019) rather In Brazil’s case, the coexistence of benefits that than its generosity, low at the time. In fact, simulations have different targeting approaches creates some made using the BraSim tool for the BF program in duplications when a worker enters a formal job and 2019 suggest that, even if Bolsa Família would have has the right to receive Salário Família (and possibly been perfectly implemented (on other words, all eligible also Abono Salarial) 25 but remains poor and thus also households received the program’s benefits), about continues to receive Bolsa Família benefits. This is not 21 percent of families in Brazil in 2019 would still had problematic from the equity perspective but it is not lived in moderate poverty, which implies that the level efficient. of benefits was not adequate. This contrasts with the 25  Abono Salarial is provided only to worker who accumulated five years of prior work in the formal sector. 26  Simulated in the BraSim tool using PNADC 2019 data. Assumes perfect implementation of programs and includes civil servants’ income as a source of protected income. Poverty was defined at half of the minimum wage per capita, or US$D 6.2 PPP. CHAPTER 4 48 value of benefits provided by programs for the elderly, consolidated the program at an average transfer which, in nearly all cases, lift recipients well above similar to the Auxílio Brasil program, and reduced SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL the Cadastro Único poverty line. Social pensions have some of the problems linked to the Extraordinary a stronger impact on poverty reduction, albeit less Benefit and subsequent myriad of programs. efficiently. The reason for this is the high value of the benefits provided. 2021 also saw, through separate legislation, the introduction of the Benefício Extraordinário (BE) The generosity levels of social assistance began to and Benefício Complementar (BCompl). These rise in 2021 with the Auxílio Brasil reform. As the compounded the complexities of social assistance Auxílio Emergencial temporary benefit was brought benefits instead of addressing the shortcomings of to an end in 2021, the Auxílio Brasil program was AB’s generosity. Benefício Extraordinário was launched introduced as a replacement for Bolsa Família, and, as a top up to all families in Auxílio Brasil, regardless of with higher eligibility thresholds and the removal of family composition, to ensure that all would receive budget constraints, the new program reached the at least BRL 400 monthly. Benefício Complementar historic mark of 18 million beneficiary families, only was also a temporary additional flat benefit of BRL to be surpassed by in October of 2022 reaching 21 200 to be delivered between August and December million families. The pure AB reform introduced many 2022 to ensure each beneficiary family of BRL 600. innovations to the design of the benefit,27 which Initially conceived as a temporary benefit, the repeated altogether led to an increase in the average benefit extensions under political pressure contributed to give from BRL 196 to BRL 217,28 which mostly favored the perception of permanent reform.29 Such piecemeal families with young children. This helped to reverse the changes have resulted in a suboptimal design of social gradual decline in the real value of Bolsa Família benefits assistance, and generated significant horizontal (see Morgandi et al, 2019). The average benefit paid inequities between poor families of different size. The by Auxílio Brasil remained nearly one-fifth of the value 2023 reform maintained the average transfer amount provided by continued payment benefit (BPC) and the and reduced the negative incentives for household rural pension program. The 2023 Bolsa Família reform duplication.   Figure 26. Benefit-cost ratio of the main social assistance, labor, and tax incentive programs in Brazil IRPF Other Deductions IRPF Child Exemption IRPF Formal Pension Exemption All private transfers Bolsa Familia Declared BPC All social assistance Seguro Desemprego Salario Familia Abono Salarial All labor market programs Pension RGPS Rural Pension 0 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 Benefit-cost ratio Source: BraSim, based on PNADC 2019, assuming perfect implementation of programs. Note: Includes civil servants’ income as a source of protected income. Poverty was defined at half of the minimum wage per capita, or US$6.2 PPP. The benefit-cost ratio is the poverty gap reduction in a unit of local currency for one unit spent on the social program. A value of zero means that the expenditure had no impact on poverty reduction. 27  For example: (i) a review of value of the benefits; (ii) a reduction in the types of the variable benefit; (iii) an extension of the variable benefit to young people between 18 and 21 years; (iv) a new rule governing graduation from the program; and (v) new benefits aimed at encouraging science and sports achievements in schools. 28  Note that the cited amounts do not include the impact on the total benefits due to Beneficio Extraordinário. 29  Benefício Extraordinário in May 2022 became a permanent benefit (Law 14.342/22). In July 2022, Benefício Extraordinário was amended to provide an additional BRL 200 to all Auxílio Brasil beneficiary families between August and December 2022. The minimum benefit thus became BRL 600. Historically, the indexation of most social protection non-cash programs and services (in part because these 49 programs excluded the Bolsa Familia CCT, which services have no budgetary earmarks, unlike health and SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL was never tied to the minimum wage. Automatic education). In 2019, only 8 percent of federal spending adjustments of benefits are necessary to preserve their in the area of social assistance and a staggeringly low purchasing power parity over time and thus to mitigate 1.7 percent in the area of labor market programs was poverty. These adjustments usually take into account devoted to non-cash programs. Active labor market both the living conditions of the beneficiaries and the policies and economic inclusion programs in rural available fiscal space. In Brazil, most programs, including and poor urban areas, early childhood development unemployment insurance (Seguro Desemprego), programs, social work, and long-term care for the elderly Abono Salarial, contributory pensions, rural pensions, are examples of the types of services that were left to and the old age and disability BPCs, set their minimum subnational governments to fund according to their own benefit floor at the level of the national minimum wage. fiscal capacity. The minimum wage also serves as a reference value for the income eligibility criteria to receive the BPC and to Progressivity be registered in the Cadastro Único. Social assistance transfers in Brazil are generally As such, the minimum wage has been used both as well targeted, but the significant subsidies provided an indexation tool and as a substitute for an actual to pension programs tend to benefit many middle- poverty line, even though adjustments of its value have and upper-class families. Figure 27 uses the BraSim generally not targeted the preservation of purchasing microsimulation tool to identify the share of total power of low-income citizens. Programs that are not household income represented by social protection tied to the minimum wage, which are largely those transfers in each quintile of the Brazilian income targeted exclusively to the poor (such as Bolsa Família), distribution. The figure also shows the average income all remain outside the constitutional social contract, of households in each quintile. It reveals that social which also protects health and education. As a result, transfers play an important role in supporting families the value of the benefits provided by poverty alleviation in the first (lowest) income quintile of the population, programs have been subject to more infrequent value as they represent about 65 percent of total income adjustments, and the fiscal space allocated to them of the poor. This level of protection is mostly delivered has been crowded out by the other benefits (especially in the form of extensive support for the poor elderly, after the 2015 crisis). Moreover, 2022 also saw a spike rather than to poor working-age population or in ad-hoc energy-related programs.30 children. However, the figure also shows that social protection transfers, essentially contributory pensions, Poverty is multidimensional, yet federal social represent about 20 percent of the revenue of families protection expenditure has increasingly focused in the third, fourth, and even fifth quintiles. The high on cash-based programs at the expense of in-kind value of the pension benefit means that beneficiaries services. Poverty is exacerbated by limited access by the are usually between the fifth and sixth deciles of the poor to labor markets, basic services, health, and housing income distribution, as these pension benefits carry a and by their higher risk of malnutrition (Campante Vale significant implicit subsidy31 that largely benefits the and Lara Ibarra, 2022). Clearly, not all such issues can middle classes, especially through a generous minimum be solved by the social protection system, but social pension guarantee (described further below). To put protection has a comparative advantage in some areas, these findings into a different perspective, figure 28 for example, by being able to ensure that government shows the mean value of such transfers in absolute services reach the poor or by delivering tailored benefits terms. While they are very necessary for the poor, the and services to vulnerable groups. Conditional cash value of the transferred amount to households in the transfers are one of the few remaining hybrid cash- lowest (first and second) quintiles is small and almost service programs that still exist to scale. Otherwise, with the same as to the value of the benefit received by the winding down of the Brasil Sem Miséria strategy, the the middle class (those in the third quintile), although social protection system has made savings by cutting through a different set of programs. 30  During 2022, temporary cash benefits created through a Constitutional Amendment proposal (Proposta de Emenda Constitucional - PEC 15/22) included cash benefit to truck and taxi drivers, expansion of the cash benefit for cooking gas (Auxílio Gás dos Brasileiros), transfer to states and municipalities for providing free public transportation to elders. 31  It is not possible to exactly quantify the subsidy portion of pensions because of the absence of sufficient data to estimate recipients’ contributory history. CHAPTER 4 50   Figure 27. Social protection benefits and direct   Figure 28. Simulated mean value of direct taxes as a percentage of household income in transfers and taxes on households, by per capita SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL each quintile income quintiles (2019) 70% 1000 60% 800 Benefits per month (BRL) 50% 600 40% 400 BR R$ 30% 200 20% 0 10% 0% -200 -10% -400 -20% -600 2 3 4 288 501 839 1356 3766 Poorest quintile quintile quintile Richest Poorest 2 quintile 3 quintile 4 quintile Richest Noncontributory Rural Pensions Bolsa Família BPC Salário Família IRPF deductions Contributory Pensions Abono salarial Unemployment benefit INSS contributions IRPF (PIT) Source: BraSim microsimulation tool developed by the World Source: BraSim microsimulation tool developed by the World Bank Poverty and Equity team, based on PNAD Continua 2019. Bank Poverty and Equity team, based on PNAD Continua 2019. Note: Chart shows the share of specific social protection expendi- Note: Quintiles are computed as per capita disposable income tures in total per capita disposable income (after tax) of each (after tax income) in the BraSim methodology. IRPF refers to quintile. personal income tax - Imposto de Renda da Pessoa Física. BPC is a noncontributory means tested pension. INSS is the national social security institute.   Figure 29. Net impact of direct taxes and benefits on households’ disposable income, by quintile 1000 300% 800 250% Net position as % of market direct taxes and benefits 600 Net position (BRL) after 241% 200% income + pensions 400 200 150% 0 100% 1 2 3 4 5 -200 50% -400 0% -600 14% -5% -12% -50% -800 -18% -1000 -100% Net Position (Pensions 100% income) Net position as a % of the Gross Market Income + Pensions Source: BraSim using PNADC 2019, based on a model developed by the World Bank poverty team. Note: “Net position” is the difference of household income after all cash benefits and direct taxes, excluding indirect taxes. Taking into account both taxes and transfers, by only 18 percent after direct taxes, contributions, the Brazilian tax-benefit system is only mildly tax expenditures, and benefits (figure 29). As shown redistributive. Microsimulations of Brazil’s system of in figure 28, the main drivers of this generally low direct taxes and transfers using BraSim (Morgandi et redistribution are the country’s relatively high (and al, 2019) have revealed that the total income of those subsidized) pension transfers and low effective income in the wealthiest quintile, who are on average 12 times tax rates, especially due to significant exemptions. richer than those in the poorest quintile, is reduced This includes a partial tax exemption on contributory pension incomes at a cost of 75 billion BRL in 2019,32 has proven to improve several human development 51 which was more than twice the budget of Bolsa Família outcomes in children and young people, accounts for SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL in that year. Separate analytical work has also revealed about one-third of all social assistance expenditure. how indirect taxes absorb a much higher share of the Additional programs that directly foster human capital disposable income of the poor than of the rich. accumulation include Criança Feliz or its successor and the national school feeding program as well as creches, the last two included in the education budget. 4.3 Opportunity: Are resources However, as mentioned earlier, these kinds of services promoting human capital are significantly underfinanced in comparison with accumulation? expenditure on cash benefits, despite being critical for furthering the goal of opportunity. Moreover, Social protection is also a way to increase the equality most social assistance expenditures, and social of opportunities and reduce intergenerational protection expenditures more generally, are allocated poverty. Programs designed not only to offer short- to supporting the elderly and disabled (figure 30). Even term protection but also to promote human capital these expenditures lack a strong focus on building accumulation and to incentivize labor productivity human capital (such as supporting beneficiaries to live gains are key to reducing long-term poverty and independently or to integrate into the labor market). increasing social returns to investing in the population. Investments in nutrition and health, early stimulation, The Auxílio Brasil reform of 2021 had the potential and child protection during the first 1,000 days are to strengthen the opportunity dimension of Brazil’s essential to building a strong foundation for a person’s social protection system in the years to come, but healthy and productive life as this is the fastest period many aspects of the law were not implemented. For of a human’s growth and development (Packard et al, example, the reform expanded conditionalities that 2019). Given that nearly half of Brazil’s future workforce require beneficiaries to ensure that their children attend are children living in poor households today, the goal of preschool and complete secondary education. It also increasing opportunity is a vital strategic challenge for created a new specific benefit to reimburse childcare Brazil. costs, and opened up the possibility to transfer funds to CRAS offices for the provision of economic inclusion As of now, only a small share of social protection programs. However, the implementation of this new expenditures explicitly promote human capital strategy has been more complex and slower than accumulation and preservation. Bolsa Família, which expected.   Figure 30. Social assistance expenditure in 2019, by type of program elderly benefits (BPC) 24% disability benefits (BPC) 32% Bolsa Familia 31% SUAS and Criança Feliz 4% school feeding 4% subsidies (Cisternas, Água Doce, Minha Casa Minha Vida, others) 4% unconditional cash transfer (Defesal civil, fomento à produção) 1% food and in-kind transfer (PAA, Restaurantes) 0% fee waiver and subsidies 0% Source: The World Bank using data from Portal da Transparência, 2019. Note: Programs are categorized according to the World Bank ASPIRE methodology. 32  Receita Federal do Brasil. https://www.gov.br/receitafederalt/pt-br/centrais-de-conteudo/publicacoes/estudos/imposto-de- renda/estudos-por-ano/gn-irpf-2021-2020.pdf CHAPTER 4   Figure 31. Participation of municipalities in Criança Feliz, 2021 52 SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL Gaps in early childhood service provision No. of children visited by Criança Feliz per total no. of receiving Bolsa Familia, 2021 Proportion No. children2 visited by CF Mean proportion (States*) 100* No. children1 receiving by CF Alagoas 34.0% 0.00% - 18.0% Ceará 32.2% 18.1% - 32.0% Maranhão 33.0% 32.1% - 50.0% Amazonas 16.6% 50.1% - 70.0% *states with more than 90% of More than 70.0% municipalities covered by Criança Feliz Out of Criança Feliz 1 The Bolsa Familia data refers to the number of children from 0 to 36 months old reciving the benefist on Feb/2021. 2 The Criança Feliz data refers to the number of children visited on Jun/2021. Criança Feliz covered 2645 municipalities on Jun/2021. Source: Ministry of Development and Social Assistance, data on Criança Feliz beneficiaries and Cadastro Único. Criança Feliz, the parenting program for early program currently supports only 1.3 million (figure 31). childhood stimulation, aims to provide new parents This is because not enough municipalities have signed with training and assistance through home visits in on to the program. In 2021, only 2,910 out of Brazil’s order to reinforce families’ competencies to enhance 5,570 municipalities (52 percent) participated. The main their children’s skills, and it strengthens the state reason given by municipal authorities for not signing the capacity of active search to vulnerable families. up is that the flat per-child transfer that Criança Feliz It targets families with pregnant women and children offers to municipalities is insufficient to cover the costs aged between 0 and 3 (or between 0 and 6 if the and logistics of delivering the service to more complex child has disabilities) who are in a situation of social locations. For instance, the extent to which counsellors vulnerability. The program, which was initiated in 2016, can access poverty-stricken areas varies depending on consists of two pillars: (i) home visits, which is the the terrain, seasonal conditions, personal safety, and program’s main activity, and (ii) coordinated actions the availability of transportation. Hence, the program between federal, state, and municipal committees to might now not be delivered where it is most needed. strengthen policies that have beneficial impact on early childhood development. The program was created A second key role played by social protection in based on evidence that parenting programs for parents increasing opportunity is to strengthen the labor of children in the first three years of life have positive productivity of the poor and vulnerable. With effects on their children’s cognitive, language, motor, technological change and climate change poised to and socioemotional development, including stronger transform labor demand and livelihoods, Brazil’s SPL emotional attachments and fewer behavior problems, system has a key role to play in finding ways for poor as well as having a positive impact on parents’ and vulnerable adults to build their human capital and knowledge and parenting practices and improving increase their productivity, especially after they have parent-child interactions (PLAN-PNUD, 2020). left formal education. This is a complex endeavor that, in the best case scenario, combines benefits (complete However, Criança Feliz has not yet reached its with appropriate incentives) with services that can intended coverage, especially in remote areas. increase individuals’ employability and that can match Despite its initial goal of reaching 3 million children, the them with available job opportunities.   Figure 32. Participation tax rate for a family with two adults and two children, receiving only one 53 income of 1 MW SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL 100 80 60 40 20 0 Estonia Brazil without RP Brazil with RP Slovak Republic Latvia Greece Turkey Czech Republic Hungary Lithuania Canada OECD - Total France Bulgaria United Kingdom Israel Malta Portugal Australia Romania New Zealand Spain Ireland Korea Poland Slovenia Germany Belgium Luxembourg Japan Croatia Netherlands Source: Fietz et al. (2021). Note: Calculations for Brazil are based on 2019 values, and for other countries are based on OECD 2020 data. Participation tax rates are defined as share of earned labor income that is lost due to taxes, contributions and loss of social benefits, when moving from inactivity to full time employment at minimum wage. RP = regra de permanência in Bolsa Família. In Brazil, social assistance benefits are already insurance and the outlays of the unemployment savings compatible with participation in formal employment. fund (Fundo de Garantia por Tempo de Serviço or FGTS) Analysis based on benefit rules of 2019 has shown that typically absorb three-quarters of this spending (figure Brazil’s conditional cash transfer program contains no 33), whereas little is spent on labor intermediation, disincentives to engage in formal work. The participation economic inclusion programs, or other active labor tax rate, measured as the share of earnings lost due to market programs (ALMPs) to support vulnerable higher taxes and lower benefit entitlements when an workers. In fact, the share of spending accounted for unemployed individual takes up formal employment, by passive benefits has increased over time (figure is much lower in Brazil than in other countries (Fietz 34). Public spending on labor policy is also regressive et al, 2021), as illustrated in figure 32. This is because because most of it goes to formal workers only, and the minimum wage in Brazil is much higher than the the Fundo Amparo ao Trabalhador is in part supported average benefit, but also because the program allows by the general budget (World Bank, 2018). It has been beneficiary households to continue receiving benefits estimated that 1.8 percent of expenditures are allocated for two years after members start earning wages in the to programs targeting workers outside the formal sector. labor market, even if their income exceeds the normal This allocation does not align with the needs of Brazilian eligibility criteria (see box 2). Recent changes to the workers. Household survey data have shown that most generosity of the Auxílio Brasil benefit, in particular after of Brazil’s unemployed are in the informal sector or are the introduction of Benefício Extraordinário and Benefício young people making the transition from school to work Complementar, may have altered this optimal situation. (Morgandi et al, 2020). Although the number of those Further analysis will be required to estimate its likely in formal employment who lost their jobs is low, the impact on work incentives for different typologies of programs financed by the federal government’s Workers’ workers and families. Protection Fund (Fundo de Amparo ao Trabalhador) is almost entirely devoted to this group. Federal labor market spending in Brazil is largely allocated to regressive and passive income support, The main type of Active Labor Market Program that with little being spent on active labor market is available at scale is training. Recent analysis of programs and vulnerable workers. Brazil’s total household survey data has shed a new light on the take- expenditure on labor market policy is sizable and close to up of formal short training (FST). This can be considered the OECD average (World Bank, 2018). Unemployment a form of ALMP when it is targeted to working-age CHAPTER 4 54   Box 3. How the Permanence Rule/Emancipation Rule contributes to labor market integration SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL Recipient families of Bolsa Família in Brazil had a right to continue receiving most of their benefits for up to two years after their income rises above the eligibility threshold. This concession, named the Permanence Rule (Regra de Permanência), was available if families: (i) voluntarily updated their income information in the Cadastro Único and (ii) had incomes that were less than half of the minimum wage per capita (which was nearly three times the entry eligibility threshold). As of 2020, the rule applied to 8 percent of Bolsa Família families. About 68 percent of them were still below the program eligibility rule of BRL 178 and would only lose the basic benefit in the absence of the rule. Thus, most families to which the rule applied were not on a graduation path out of the program but were simply moving from extreme to moderate poverty over time. Nonetheless, the rule provided ample space for adults in social assistance to experiment with taking a formal job without the fear of losing their benefits. In fact, one out of four adults in Bolsa Família in 2019 held a formal job, and two-thirds earned some form of labor income. When Bolsa Família became Auxílio Brasil in November 2021, the Permanence Rule was renamed the Emancipation Rule (Regra de Emancipação), and its conditions were slightly altered with clear definition in the Law and new exit thresholds. However, in the context of a limited federal budget and a long waiting list to enroll in the program, the Emancipation Rule will continue to play an important role in increasing the resilience of poor households that seek to emancipate themselves from poverty by participating in the labor market. Source: Fietz et al. (2021) and Article 34 in Decree 10,852 of November 8, 2021. adults, especially if they are vulnerable. In 2019, around Several past evaluations have shown that FST courses 1.7 percent of out-of-school Brazilians between the ages in Brazil, including those targeted to vulnerable young of 18 and 65 years old took part in FST, which amounts people and low-income groups, can be effective if they to more than 1.8 million adults. Most of these students include certain characteristics. A study by Almeida et (56.3 percent) were enrolled in private institutions, al (2015) found that short-term training in Brazil yielded presumably paid for out of their own pockets, about positive returns for participants compared with non- 10 percent received training through their employer, 17 participants but only for those who attended private percent were trained by Sistema S (which offers both or Sistema-S institutions (rather than federal public free and fee-based programs), and 16 percent received technical schools) and for those completing short-term training through public federal institutions. This shows training courses (2.2 percent on average). However, that publicly funded programs remain a small share the authors found wide variation in their results, with of the market. While annual enrollment rates increase those who received short-term training provided by monotonically with household income (from 0.9 public providers having returns close to zero. Similarly, percent for adults in bottom decile to 2.9 percent for an evaluation of the National Program for Access to those at the top) and with education levels, students Technical Education and Employment (Programa Nacional of FST largely have low and middle levels of education de Acesso ao Ensino Técnico e Emprego or PRONATEC), (less than 20 percent completed university). This shows one of the flagship interventions of Brazil’s anti- the potential of FST to update the skills of those who poverty strategy until 2016, showed that when training have already left formal education. The probability programs were designed in accordance with demand of students completing training is also higher than (such as offering training only in skills that were expressly might be the case with longer courses. Holding all requested by employers), then short-term training had other characteristics constant, the unemployed and a positive impact on the employment outcomes of informal sector workers are those with the highest risk participants compared to control groups, including for of noncompletion. participants from families in the Bolsa Família program.   Figure 33. Active and passive labor market expenditures (2018–2020) 55 SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL Total PLMPs 109.22 Total Total ALMPs 44.97 180.21 Sistema S 24.62 Training (e.g. Bolsa Qualificação, Pronatec) 0.66 Services Entrepreneurship support, startup incentives, 0.27 microcredit (Rural and Urban) Labor Intermediation, Labor Registries, services through PES 0.17 Other ALMPs (Economia Solidária, Agricultura Familiar) 0.02 FGTS - Dismissal Withdrawal 67.87 Seguro Desemprego (Contrib and Noncontrib) 36.32 BEm - Cash Abono Salarial 17.24 FGTS Complemento 5.03 Salario Familia* 2.00 - 100 200 Expenditure 2018 Expenditure 2020 Source: The World Bank using data from the Transparency Portal (Portal Transparência) for 2018 and 2020. Note: Includes expenditure financed by the federal government and by employers: *=out of budget expenditures financed by mandatory employer contributions. Passive Labor Market Policies (PLMP)= Salário Família, Abono Salarial, Seguro Desemprego, FGTS, and BEm (Benefício Emergencial de Manutenção do Emprego e Renda).   Figure 34. Evolution of expenditure on labor market programs (2014-2019) 70 60 PLMP - Out-of-work income maintenance (Unemployment benefits, non-contributory) Annual expenditure in BRL 50 PLMP - Out-of-work income maintenance (Unemployment benefits, contributory) ALMP - Training (vocational, life skills, 40 Billions cash for training) ALMP - Other Programs 30 ALMP - Labor Market services and intermediation through PES 20 ALMP - Entrep. support /startup incentives (cash and in kind grant, microcredit) 10 ALMP - Employment incentives/wage subsidies 0 2014 2015 2016 2017 2018 2019 Source: The World Bank using data from the Transparency Portal (Portal da Transparência). There are often no links between training programs training and formal education. These kinds of programs and other labor market services such as labor are not coordinated with any income support programs intermediation.33 Few federal programs exist that aim (such as social assistance or unemployment insurance). to improve the qualifications of specific target groups. Another peculiarity is that Brazil’s public employment These include Employ More (Emprega Mais), which services network (Sistema Nacional de Emprego or promotes qualification and employment opportunities SINE) plays little or no role in helping jobseekers to aligned to companies’ needs, and the Learning Contract access other ALMPs. SINE’s functions are limited to job (Contrato de Aprendizagem), which assists approximately matching, labor documentation, and enrolling workers 400,000 young people annually with on-the-job in unemployment insurance. Funding for SINE has 33  Some of these concerns were raised in a recent survey of federal initiatives to prepare the Brazilian labor market for the digital transformation carried out by the national auditing authority in Brazil. https://portal.tcu.gov.br/imprensa/noticias/sistema-s-deve- preparar-o-mercado-de-trabalho-para-a-transformacao-digital.htm, accessed on November 29, 2021. CHAPTER 4 56 been minimal and falling. In 2018, spending on labor globalization in services all increase workers’ exposure intermediation was equivalent to less than 1 percent to labor and income shocks. In this section, we discuss SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL of spending on unemployment insurance. SINE’s role the origin of segmentation of the labor market between was further diminished after unemployment insurance formal dependent workers and informal/self-employed began to be delivered digitally in 2021. Borges, Lobo and workers and the three major aspects of Brazil’s system Foguel (2017) estimated that even minor improvements to protect individuals from risk: (i) protection from labor in the effectiveness of intermediation would result in income shocks, (ii) protection from climate-related large fiscal savings on unemployment insurance, thus shocks, and (iii) protection from old-age poverty and freeing up funds to be allocated to other active labor disability. market policies. The way in which working-age adults participate in 4.4 Resilience: Is the social the labor market affects how well they are able to protection system insuring the manage risk. The ability of workers to adapt shocks population against different to their income hinges upon their access to risk shocks? management instruments (Levy and Cruces, 2021 and Packard et al, 2019). Brazil has a range of programs to Effective social protection systems are able to react help workers to cope with several major risks throughout quickly when households are affected by shocks by the lifecycle, including unemployment protection, providing support, which is often channeled through disability and accident insurance, protection from old- the labor market. In addition to economic cycles and age poverty, subsidized credit, and on-the-job training. the typical income volatility associated with informal However, most of these benefits are available to formal work, as discussed in Chapter 2, the effects of climate dependent workers but not to those in the informal or change, technological change, and new forms of self-employed sectors (table 2).   Table 2. Labor-related insurance against main risks, by form of work Risks Form of work and estimated number in Brazil (millions) Labor earnings Old-age Work injury Disability volatility/ poverty Formal employees (CLT, public) Full RGPS FGTS, SD, Multas Auxílio Acidente RGPS benefits (36.7 million) benefits Means Tested Micro Emprededor Individual Basic RGPS Social Assistance Auxílio Acidente BPC (2.5 million) benefits (CCT program) Means Tested Trabalhador Autônomo Full or basic Social Assistance Auxílio Acidente RGPS benefits (6.2 million) RGPS benefits (CCT program) Means Tested Firm owners (Pessoa Jurídica) Full RGPS Social Assistance Auxílio Acidente RGPS benefits (0.6 million) benefits (CCT program) Means Tested Informal workers (self-employed Social Assistance Auxílio Acidente BPC BPC and employees) (31.9 million) (CCT program) Source: Estimates from World Bank microsimualations model (BraSIM), based on PNAD Continua. Note: BPC = Benefício de Prestação Continuada; PJ= Pessoa Jurídica; RGPS = Regime Geral de Previdência Social. Number of workers based on World Bank BraSIM microsimulation model, using PNAD Continua 2017 monthly average for the primary job.   Figure 35. Access to social protection programs, by labor force status 57 SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL SA PLMPs ALMPs SI age* BPC Pensioners 12.8% Legend Annual expenditure 2020: FGTS Large Formal Salarial*/ (>30bn BRL) Accident insurance Família* Maternity salary Pension Labor Force (18-64 years old) 67.9% Dependent Salário Abono Unempl. insurance Midsize Federal training program workers Entrepreneurship support (2 to 20bn BRL) 30.4% BEm Employed 60.3% Sistema-S training Tiny spending Labor intermediation (<300mi BRL) Formal BPC-disability * Auxílio Brasil * Independent workers 9.4% Informal Few programs workers for the informal 20.5% in working age Unemployed 7.6% Out of the labor force Note: Eligible If below a certain income threshold. (18 or older) and Elders Source: BraSiM based on PNADC 2019 and Portal da with no income or Transparência. Labor status of individuals 18 years and older. pension 19.4% Source: Authors. Share of individuals by BraSim based on PNADC 2019 and the Transparency Portal (Portal da Transparência). Notes: BEm was a temporary program implemented as a response to the COVID-19 crisis and discontinued in 2021. *Eligibility based on income threshold. As shown in figure 35, dependent employees are largest federally funded labor market program in better protected against multiple risks than other Brazil; (ii) unemployment insurance savings accounts workers, even though they constitute a minority of (the FGTS); and (iii) severance pay (Multas) (Firpo and the entire labor force. Many provisions were enshrined Portella, 2021). The unemployment protection system in the labor code, which does not cover other categories was designed in the last century (1986) based on the of workers such as micro-entrepreneurs, firm owners. premise of the increasing formalization of employment At particular risk are the rising numbers of workers in an industry-centered economy and has never enrolled as individual microentrepreneurs (MEI), who adapted to the realities of the modern working world. are the most likely to be illegally substituted for formal Its accessibility rules are strict, with formal workers employees, to pay lower contribution rates, and to defined as those having worked a minimum of 12 receive few or no benefits. Studies have shown that months in a wage contract in the previous 36 months. having more formal dependent workers in the Brazilian Today, most unemployed workers do not qualify for economy is positively associated with economic growth, unemployment insurance because they cannot meet but the country’s recent poor economic performance this condition or because of their limited contribution has led to a relative increase in the numbers of other history. In 2019, only 17.7 percent of the average types of workers. Also, as discussed in Chapter 3, the number of monthly unemployed workers in Brazil expected technology-enabled transformation of work is received unemployment benefits. Formal workers who likely to reduce the number of dependent formal sector are listed in the Cadastro Único, particularly those jobs, which means that the share of workers benefiting receiving social assistance, are disadvantaged as from social protection could continue to fall. they have a higher likelihood of working under short- term contracts that are ineligible for unemployment Unemployment protection programs in Brazil do not insurance and of having average job tenures of cover workers with an intermittent employment less than one year. It is even less clear whether history, informal workers, or the self-employed. unemployment insurance, as currently designed, Brazil’s unemployment protection system contains will provide protection for the workers of the future three elements: (i) unemployment insurance (Seguro given the growth in much shorter contracts and the Desemprego) (unemployment insurance), which is the declining incentives to enter formal work. CHAPTER 4 58 the initial greater than salary pay-outs are not required to look for work as a condition of receiving the benefit, “During the first months of SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL which gives them a perverse incentive to cycle between unemployment, dismissed workers tend short periods of work and short-term periods of to earn significantly more than while unemployment (Firpo and Portella, 2021; Carvalho et working, as they receive unemployment al, 2018; Doornik et al, 2018; and Gerard and Gonzaga, insurance, savings from FGTS accounts, 2016). The resulting high labor turnover is ultimately and severance pay at the same time.” harmful to workers’ productivity and to the economy. Active labor market policies are those designed to provide workers with services that will enhance their employability, but spending on such services Figure 36. Value of unemployment insurance pay- in Brazil is low and they are not coordinated with outs expressed in monthly wages after 24 months programs to support unemployed workers and to of employment provide a minimum income. Unlike OECD and other 9 LAC countries, Brazil’s ALMPs are composed almost Unemployment payout (monthly wages) entirely of wage subsidies (Abono Salarial and Salário 8 Família), while labor intermediation services constitute 7 a small and shrinking share of ALMPs. The federal 6 government’s provision of workers’ training is currently 5 divided between the Ministry of Education (through 4 a network of federal institutes) and Sistema-S, a 3 network of sectoral institutions financed by mandatory 2 contributions from private employers. The government’s 1 provision of technical training used to be stronger in the 0 2000s when it operated the PRONATEC network of 1 2 3 4 5 training institutions, but the program lost budget and Pre-unemployment monthly wage (in MWs) importance during the fiscal crises in 2015/16. With SD Severance Pay FGTS savings accounts inconclusive and divergent assessments, the program never returned to its original status. The rapid changes Source: World Bank (2021b). Note: The calculation assumes a contribution history of 24 months in the world of work that are already happening and will to receive five installments of SD. Further, it assumes a constant continue over the following decades will necessitate an wage level before unemployment and that the unemployed claims increase in ALMPs to re-train the adult labor force in SD for the first time. the new skills needed by employers going forward and to prepare the young people who will arrive in the labor Current unemployment programs have generous market with lags in their human capital accumulation replacement rates but only for short periods. When because of the COVID-19 pandemic. workers receive unemployment insurance, FGTS benefits, and severance payments at the same time, Climate-related events are also likely to be a source this can raise the value of their unemployment payouts of household shocks in the future, and social safety above their pre-unemployment wage, especially for nets and the United Social Assistance System (SUAS) low-wage workers (figure 36). Morgandi et al (2021b) are already helping communities to cope when these carried out an extensive review of the literature on shocks occur. In the case of natural disasters, well- unemployment insurance in Brazil. The authors found designed early warning systems are in place in high- that the system’s relatively high wage replacement rate risk areas of Brazil with the capacity to warn the contrasts with the short duration of the payments (five population about different kinds of disasters. After a months maximum), which is not sufficient to protect disaster occurs, the Civil Defense34 steps in and triggers low-educated workers or those affected by structural the involvement of SUAS and all the municipal CRAS, changes in the economy. However, workers receiving which then rapidly identify those who are affected 34  The Civil Defense is responsible for emergency prevention, response, and recovery during a shock. by the disaster and enroll them in the Cadastro Único. response to climate-induced natural disasters. Brazil’s 59 When a state of emergency is declared,35 the Ministry main strength is the strong coordination between SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL of Development and Social Assistance and the SUAS the agencies responsible for social protection and network provide temporary benefits to the affected those responsible for Disaster Risk Management population, including advance payments of the CCT with clearly assigned roles and responsibilities and program or BPC benefits. The CRAS also direct families minimum overlaps. This is reinforced by a robust data to basic services such as shelters, health services, and information system with well-established and social care, and other public services. Because Brazil is a functional early warning systems and social registry decentralized country, the effectiveness of the response (Cadastro Único). However, some gaps remain in the to shocks varies at the regional level. existing system that are restricting its scalability and readiness, including the need for more resources for A recent review of Brazil’s social protection policies, social protection shock responses and a need to include coordination arrangements, delivery systems, information on households’ vulnerability to climate and instruments revealed that there is a need change in the social registry. to strengthen adaptive social protection (ASP) measures (figure 37).36 The social protection stress Finally, one of the major functions of social test created by the World Bank in 202137 is a tool that protection systems is to prepare households to yields a rapid appraisal of the adaptiveness of a social cope with the loss of income in old age. Brazil has protection system in response to a shock. Brazil’s achieved quasi-universal old-age coverage through average score indicates that the country’s system is a combination of contributory, semi-contributory, ready and has the potential to be scaled up rapidly in and non-contributory pension schemes. Older people   Figure 37. Brazil’s results on the Social Protection Stress Test Latent Nascent Emerging Established Advanced Programs 3.7 Programs and delivery Delivery system 4.1 systems Payment systems 4.3 Early Warning Systems 4.5 Data and information Registry 4.1 Financing 3.5 Government 4.3 Institutional leadership arrangements Institutions 5 Overall 4.1 Source: World Bank team elaboration. 35  Instrução Normativa nº 36, December 4, 2020. 36  Ed, Gonzalez and Ferreira. Forthcoming. Climate Change and the Role of Social Protection in Brazil. 37  See World Bank (2021c) for further information. The social protection stress test, launched by the World Bank in 2021, can be used to make a rapid appraisal of how adaptive a system would be in response to a shock. The test makes it possible to identify and quantify gaps in and constraints to both the preparedness and scalability of the system to respond to the most frequent climate disasters in Brazil (floods and droughts). This part of the test is conducted through an analysis of each of the four building blocks of ASP, namely, (i) programs and delivery systems; (ii) data and information; (iii) financing; and (iv) and institutional arrangements. Each building block is disaggregated into components and criteria that are expressed in the form of questions. Based on the responses to these questions, each component is assigned a score of 1 to 5. The final score of the test is the average of scores of the different components. CHAPTER 4 60 are relatively well protected against poverty and are priority in queues at any service and dedicated service underrepresented among the poor (Paiva and Ansiliero, and payment counters). However, these policies have SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL 2021). Complementary policies also help to increase a number of disadvantages. Pensions as currently the resilience of the elderly, including tax exemptions designed consume an excessive share of Brazil’s total on income for that age group, incentives to work and spending, they do not reduce income inequality, and education provided for in the Statute of the Elder, they allow certain categories of workers, such as and a range of smaller benefits, both pecuniary (such teachers, health professionals, security personnel, the as half-price entry into cultural events and free rides military, to draw pensions at an early age. Some of on public transportation) and non-pecuniary (such as these issues are addressed in this note.   Box 4. Evolution of the social protection rights of the elderly in Brazil Over the last century, Brazil has developed a social protection system that offers high levels of coverage and wide protection against poverty for older people. Through a combination of contributory, semi-contributory, and non-contributory benefits, 9 out of 10 people aged 65 or older now receive a pension benefit. The first social insurance scheme, for railroad workers, was introduced in the 1920s, and other schemes were created in the following years and decades, eventually covering all categories of formal workers. Up until the early 1970s, domestic workers were also legally covered. Different schemes were administratively merged, but social protection continued to be offered on a strictly contributory basis, which included health services. As a result, large parts of the population were not covered by social insurance. In the first half of the 1970s, small semi-contributory and non-contributory schemes emerged, aimed at rural workers, poor elderly people, and people with disabilities. Rural pensions began to be paid to one eligible member per household aged 65 or older at a rate equivalent to half of the minimum wage. Renda Mensal Vitalícia was the first virtually non-contributory benefit aimed at the urban poor. It paid a benefit to poor people aged 70 and older and to persons with disabilities that was also worth half a minimum wage. Three factors contributed to the expansion of the coverage even further. First, a new social contract emerged with the re-democratization of the country in the mid-1980s. This led to the drafting of a new Constitution in 1988 that made health services universal and considerably expanded semi-contributory and non-contributory schemes. Also, rural pensions were revised in 1992, and the social assistance benefit for poor elders (Benefício de Prestação Continuada or BPC) was created in 1996. The BPC benefit was set at the level of the full minimum wage, the same level as the minimum benefit guarantee provision for contributory pensions. Second, the ongoing aging of the population shifted the preferences of the median voters in favor of old-age income protection. This caused a consistent move toward more elderly-oriented policies in response to the growing older voting population. Third, Brazil’s long-standing social attitudes of respect for the elderly meant that there was broad social support for programs targeted to the elderly. This is probably why the country provides so many benefits and services to the elderly, including free-of-charge public transportation, reduced fares for cultural events, and preferential tax treatment. These social norms and related benefits and services are likely to be related to organic solidarity – defined as social cohesion based on the dependence that different family members have on each other –which is particularly important to the poorest multigenerational families, in which the elders are often the main providers with the most stable incomes.   Box 4. continue 61 SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL The post-1988 combination of contributory, semi-contributory, and non-contributory schemes continues to provide generous social protection benefits to almost all older people in Brazil. The system provides them with widespread coverage (more than 90 percent of people aged 65 or older receive a benefit), high replacement rates for low earners, and low levels of poverty (the poverty rate for people aged 65 and older are half of the average for the Brazilian population and eight to ten times lower than for children up to the age of 15). However, generous pension rules for civil servants (especially uniformed personnel) and higher- income formal private sector workers also contributed to unjustifiably high pension expenditures for a country with a relatively young population. Three pension reforms were introduced in 1998/1999, 2003, and 2019, mainly to reduce the expected increase in expenditures over the subsequent decades due to the aging of the population that is expected to be twice as fast as the one experienced by developed economies in the last few decades. These pension reforms had only limited success in curbing expenditures, and their trajectory in the long term still looks unsustainable. The challenge for the next years and decades is to retain the gains made in improving the lives of old people without compromising other relevant social goals. The high old-age coverage and the low poverty rates among older people are important social achievements for Brazil and reflect a broad social and political consensus. However, it will be necessary to continue to make adjustments to the generosity and eligibility criteria for old age benefits to curb the explosive growth of pension expenditures and the crowding out of other important social and economic objectives. In public sector employment, some groups are granted more than those who collect a pension and can enjoy very generous retirement ages and replacement their leisure. In 2019, 65 percent of new old-age pension rates, with no clear justification from a public policy recipients (70 percent of women and 56 percent of men) standpoint. While the pension reform resulted in major were benefiting from the minimum pension guarantee, parametric changes that put Brazil’s pensions closer which put them in between the third and fourth income to global benchmarks, some categories of workers quintiles (as shown in figure 28 above). Currently, 6 are still given the option to retire earlier than the rest out of 10 benefits paid by the General Social Security of the population, and many civil servants are granted System (Regime Geral de Previdência Social or RGPS), extremely generous replacement rates when they retire. which is the national pension system for the private For these categories of workers, Brazil is a global outlier sector workers, are valued at one minimum wage, in both respects. For example, the 2019 pension reform and this share will continue to grow further due to the retained the lower pension age for women (three years lower replacement rates generated by the new benefit lower than for men), teachers (five years lower than for calculation formula that is being gradually phased in other workers), rural workers (five years lower than for after the 2019 reform. urban workers), and uniformed personnel (who have various retirement ages but significantly lower than Members of the RGPS who expect to benefit from those for other civil servants), which does not seem the minimum pension guarantee currently have no justifiable (Amaral et al, 2019 and Paiva et al, 2018). incentive to increase their pension contributions. In fact, the minimum pension guarantee greatly subsidizes In Brazil, the minimum pension guarantee is set those who only contributed 15 years – the minimum at the level of the minimum wage, which is above qualifying period – over their working lives, while taxing international benchmarks and mostly benefits those with only 1 to 14 years of contributions (ineligible middle-income beneficiaries. A minimum pension to the pension benefit despite having some contribution that equals the minimum wage is high by international history). Today, workers transitioning between formal standards, since it is usually considered appropriate for and informal jobs, with low contribution densities, who those who are actively working should be remunerated contribute fewer than 15 years are not able to claim a CHAPTER 4 62   Figure 38. Internal rate of return by decile of   Figure 39. Length of contribution periods contributions made, for urban retirees with a of beneficiaries who retired with a minimum SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL minimum pension benefit pension benefit in 2008 14% 25 12% 20 10% % of individuals 8% 15 6% 4% 10 2% 5 0% -2% 0 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 2930 31 Years of contribution period Years of contribution 2 4 6 8 10th decile of contribution amounts Source: SEPREV/Ministry of Labor. Color lines represent different Source: SEPREV/Ministry of Labor. deciles of the distribution of contribution amounts by pension Note: No information was available on the contribution history of beneficiaries during their working lives. individuals who eventually did not meet the minimum require- ments for retirement, which potentially extends the left-hand side of the distribution. contributory old-age pension, that is, they ‘lose’ their rest of the system. First, with a value equal to the contributions, subsidizing RGPS. On the other hand, minimum contributory pension, the BPC pension low-earners who already contributed for 15 years can undermines incentives for individuals to contribute understand that they would not benefit from additional throughout their working lives and is not fair to those contributions, which might have some negative effect low-income workers who contributed to the pension on formality. The minimum pension guarantee typically system. Second, as discussed earlier, the minimum provides high but varied returns to contributors. For wage is not an adequate measure of need. Indexing those contributing low amounts for short periods of benefits to a minimum consumption basket would be time, the real internal rate of return is as high as 12 much more appropriate since the goal of the benefit percent, which is an unreasonably and unfairly high is to protect the recipients from poverty. Finally, the subsidy. Simulations show that in the first eight deciles current eligibility criteria for the BPC, which are based of contribution amounts, the real return is just above on household income, fails to protect many vulnerable 4 percent, even for those who have contributed for a elderly people, as some do not meet the minimum full 30 years (and higher for others) (figure 38). If the criteria of 15 years of contributions but also fall slightly implicit rate of return were held at around 4 to 6 percent above the household income eligibility criteria, despite not only for those with a complete in-work career but having no old-age savings of their own. also for those with only a partial career by prorating the minimum pension amount, total pension spending for Finally, a fast and efficient way to support those those urban old-age pensioners who benefit from the affected by either a temporary or a permanent minimum pension guarantee would fall to 64 percent disability helps to build the resilience of individuals of current spending. Clearly, such changes would result and their families. Formal workers facing unexpected only in partial fiscal savings, because some households or acquired permanent disability in Brazil are would qualify for old-age social assistance payments. covered by the pension system. The social security administration, however, has been facing significant As currently designed, the BPC, the social pension challenges, including long claim processing periods, for those with an insufficient contribution history, batch processing of claims, judicialization, and the creates incentives that are incompatible with the inability to plan.38 The average length of time it took 38  Social Security Statistical Bulletin (Boletim Estatístico de Previdência Social) January 2019 to January 2022 for claiming periods and judicialization and the Personnel Statistical Panel (Painel Estatístico de Pessoal) available at http://painel.pep.planejamento.gov.br/, 27/4/2022.   Figure 40. Number of disability pensions granted by year 63 SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL 300,000 250,000 N of individuals 200,000 150,000 100,000 50,000 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Urban Rural Urban + Rural Source: Anuário Estatístico da Previdência Social (AEPS) and Boletim Estatístico da Previdência Social (BEPS), various years, SEPREV/Ministry of Labor. the National Social Security Institute (INSS) to grant 3 may erode the base of contributors or expand the a benefit jumped up from 51 days in 2018 to 88 days number of old-age beneficiaries. This section discusses in 2021 (a 73 percent increase). The proportion of three strategic areas that require immediate attention benefits granted by courts because applicants had to from policymakers: (i) expenditures on contributory resort to legal action to access the benefits increased pensions; (ii) the existing financing of social protection; from 10.4 percent in 2019 to 13.2 percent in 2021. The and (iii) the need to adopt innovations in the delivery of granting of benefits that depends on the evidence of benefits. medical doctors (such as the disability pension) has understandably been badly hindered by the COVID-19 Structural expenditures on social protection and pandemic in the last two years (figure 40), and the labor have grown only slightly over the last decade, share of these kinds of benefit decisions made by courts until the COVID-19 pandemic measures (figure 41). peaked at 70 percent of the total in 2021. Advances Social assistance, social insurance, and labor market in digitization have apparently not been enough to expenditures have not changed much since the World compensate for the reduction in the number of active Bank’s conducted an in-depth expenditure review in INSS civil servants in recent years (from 36,500 in 2016 2017. The only exception was during the COVID-19 to 22,800 in 2019 and remaining at this level up to crisis in 2020-2021 when Brazil delivered one of the 2022). Much more efficient and streamlined processes region’s largest pandemic responses (Palomo et al, are needed to prepare for the expected increase in the 2022), but that temporary spike was not designed to number of claims due to the rise in retirement ages that last (figure 42). The relatively stability of the country’s came into force since 2019. social assistance expenses until the COVID-19 crisis resulted from the so-called “expenditure ceiling” (teto dos gastos), enacted in 2016, which limits expenditure 4.5 Sustainability and Efficiency: growth to the level of the previous year’s inflation Major opportunities and rate. However in 2022 the structural social assistance unresolved challenges expenditure envelope reached an unprecedented peak, and it will be important in the coming years to identify In recent years, the social protection system has been a fiscally-sustainable level, including through reforms at the center of public policy discussions because of that improve efficiency of noncontributory transfers. concerns about the fiscal sustainability of the federal budget. A major challenge in the future will be to maintain Pension reforms implemented in the past decades a balance between expenditures and revenues for social have not been able to fully control the pension protection, given that the trends described in Chapter deficit. Subnational pension plans for civil servants CHAPTER 4 64 “Growth in structural social protection expenditures has been constrained by fiscal adjustment SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL and the expenditure ceiling, but raised temporarily during the COVID-19 pandemic.” Figure 41. Social insurance, labor market, and Figure 42. Social assistance and labor market social assistance expenditures as a share of GDP expenditures (2019-2022) (2004-2020) (2022 refers to "valor empenhado" until July) 25% 400 380 350 20% 19.1% 300 BRL Billions Percent of GDP 15% 5.1% 250 200 1.3% 157 171 10% 150 12.8% 100 94 100 5% 54 48 57 4.2% 50 0% 0 2014 2015 2016 2017 2018 2019 2020 2019 2020 2021 2022 Pensions Social Assistance Labor Market LM SA Pensions deficit Total SPL Source: The World Bank using Portal da Transparência and SEPREV Source: Portal da Transparência, data retrieved in September 2022. (pension deficits). Note: 2022 data refers to ”valor empenhado” budget. Note: Rural pension classified as social insurance. have brought several states to the brink of insolvency, of pension benefits will fall very gradually due to the displacing funding for essential service delivery. Despite progressive impact of the latest 2019 pension reform the passing of several pension reforms in the last three over a 30-year long transition period and is expected decades, the country’s pension schemes continued to to stabilize at the new level only after 2050 (figure 44). generate rising deficits. In 2020, the RGPS had a BRL However, these measures are not sufficient to balance 270 billion deficit, the result of insufficient contributions revenues and expenditures in the medium term (figure from urban workers and a highly subsidized rural sector 45). Once the benefit of the retirement age increases (figure 43). The COVID-19 crisis led to a sharp decline are reaped by 2030, the growth of the deficits will in urban contributions, which raised the deficit to resume as a result of the rising number of elderly. unprecedented values. The most significant part of the RGPS deficit can be attributed to rural pension sub- However, the medium to long term outlook for schemes, which collect very little revenue (on average private sector pensions is less certain and depends only 7 percent of the annual benefits paid to rural on today’s policy choices. The aging of the population beneficiaries). is one of most obvious trends that can be predicted for the future, but forecasts about other factors, Recent parametric changes will be slow to produce such as economic growth, real wage growth, and the fiscal savings so projected expenditures will continue number of active contributors in the labor market, are to outpace revenues. The average replacement rate less reliable.39 Membership of the RGPS is quite high, 39  Since RGPS pension payments directly depend on individual wages, which are indexed to inflation, contributions revenues grow together with nominal wages. The higher the real wage growth, the higher the difference between the rates of growth of expenditures and revenues. The World Bank estimates that a 1 percent sustained difference in real wage growth could reduce the scheme’s deficit by about 1.5 percent of GDP by 2040, a trend that would continue in the following decades. The deficit could also be substantially influenced by changes in the contribution density of the working-age population.   Figure 43. Urban (left) versus rural (right) RGPS revenues and benefits (2016-2020) 65 550.3 SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL 600 516.3 533.9 600 502.1 468.5 500 500 400 400 414 419.7 425.4 435.4 410 BRL billions 300 300 BRL billions 200 200 131.5 137.9 138.1 139.9 140.1 100 100 9.4 10.7 11.1 9 8.9 -54.5 0 -82.4 -90.9 0 -98.5 -140.4 -122.1 -127.2 -127 -130.9 -131.2 -100 -100 -200 -200 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 Benefits paid Revenues Result Source: Boletim Estatístico da Previdência Social, 2016-2020, SEPREV/Ministry of Labor.   Figure 44. Average replacement rate of   Figure 45. Projected revenues, expenditures pension benefits gradually falling due to the and deficits of RGPS progressive impact of the latest pension reform 100% 20% 15% 90% 10% 80% 5% 0% 70% -5% 60% -10% 50% -15% 2020 2024 2028 2032 2036 2040 2044 2048 2052 2056 2060 2064 2068 2072 2076 2080 2019 2023 2027 2031 2035 2039 2043 2047 2051 2055 2059 2063 2067 2071 2075 2079 Average replacement rate, male PAYG Total Revenue PAYG Total Expenditure Average replacement rate, female PAYG Current Balance Source: The World Bank estimates using PROST. Source: The World Bank PROST simulations using INSS data. although many memberships held by the working-age because of the aging of the population, low economic population are inactive. For the reasons discussed above, and wage growth, the increasing automation of work, the number of RGPS members is unlikely to increase and the growth of expenditures on disability programs. very significantly in the future. However, if employment becomes increasingly formal, this could mean that each In the short term, the fiscal sustainability of affiliated person would contribute to the RGPS more subnational pension systems for civil servants regularly. If the number of monthly contributions were remains the main concern. These systems have ever- to go up by 10 percent, the deficit of the RGPS would growing deficits that are not expected to slow down be reduced by around 0.5 percent of GDP. On the other until the mid-2040s. This is partly because of the large hand, if intermittent or casual formal work relations numbers of teachers, uniformed personnel, and civil increase, then this could reduce contribution density servants hired before 2003 who retained their early and, thus, RGPS revenues. Even taking this uncertainty retirement and generous pension privileges even after into account, the fiscal outlook for the RGPS look bleak the pension reform (figure 46 and figure 47). While CHAPTER 4 66   Figure 46. Projection of deficits of selected   Figure 47. Proportion of pensioners and state civil servant pension programs (as a survivors to active employees in subnational SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL percentage of current revenues) governments Projected State RPPS Deficits as % of State Revenues 40% 2.0 35% 1.69 1.6 1.46 30% 1.37 25% 1.2 1.10 20% 0.96 0.85 0.76 15% 0.8 10% 0.4 0.26 5% 0.05 0% 0.0 2020 2025 2030 2035 2040 2045 2050 RS RJ PB RN CE SE SP AL PR MA AM PA RO RR RG do Norte Rio de Janeiro Bahia Midwest Norte North East São Paulo Maranhão Paraná South Southeast Santa Catarina Alagoas Average Mato Grosso Amazonas Source: The World Bank using data from Plano de Ajuste Source: The World Bank using data from Anuário Estatístico de Fiscal/National Treasury Secretariat. Previdência Social do RPPS/Ministry of Labor, 2020.   Figure 48. Share of the population in each decile, according to the number of benefits received by their households 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 100% 3% 1% 7% 5% 5% 5% 90% 14% 11% 10% 14% 11% 18% 21% 80% 23% 28% 30% 33% 40% 70% 27% 25% 60% 44% 59% 43% 50% 50% 42% 40% 37% 37% 39% 36% 30% 55% 20% 41% 32% 10% 23% 21% 20% 21% 24% 18% 18% 0% D1 D2 D3 D4 D5 D6 D7 D8 D9 D10 0 programs 1 program 2 programs 3 programs 4 programs 5 programs Source: World Bank (2018), using PNAD Continua data. Note: Deciles using Market Income plus Pensions per capita. subnational governments are allowed in principle retirement provisions, which mostly benefited higher- to extend their own parametric reforms beyond the income members of the RGPS and civil servant pension provisions of the federal civil servant reform, but so far, regimes (RPPS). However, Brazil has yet to pass some most states that have made any changes have opted fundamental parametric reforms such as setting the to copy or weaken federal civil servant reform. same pensionable age for men and women and for rural and urban workers, which should be remedied in future It is likely that additional measures to control pension reforms. The current rules allow rural women to receive expenditures will be needed in the next decade. The an old-age pension 10 years earlier than urban men. It 2019 pension reform justifiably mainly targeted early is also critical for subnational social security systems   Figure 49. Delivery chain of a social protection system 67 SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL ASSESS ENROLL PROVIDE MANAGE Outreach Intake and Assessment Elegibility Determination Notification Provision of Beneficiaries Exit decisions, registration of needs and and of benefits and benefits compliance, notifications, conditions enrollment and service onboarding and/or updating, and and case decisions package services grievances outcomes 1 2 3 4 5 6 7 RECURRING 8 9 CYRCLE PERIODIC REASSESSMENT Source: Lindert et al. (2020). to adopt reforms that will curb the fiscal imbalances accessed more than 40 data sources across the federal arising from their pension regimes. government. This showed that vulnerability and income losses can be assessed most accurately by comparing Beyond the pension situation, the sustainability of different relevant databases (Fietz et al, 2021). The Brazil’s social protection system is also challenged by experience also showed that, to make such innovations inefficiencies, such as those stemming from overlaps permanent, the governance of social assistance, between programs and errors of inclusion. World pension, and labor records will need to be reviewed. Bank estimations have shown that about 40 percent Ideally, the records of the Cadastro Único, the General of households in income deciles 2 to 5 receive two or Register of the Employed and Unemployed (Cadastro three benefits (figure 48), often due to the poor design Geral de Empregados e Desempregados or CAGED), and of the programs in question (particularly in terms of the FGTS Collection and Social Security Database (Guia targeting) rather than to imperfect implementation. de Recolhimento do FGTS e de Informações à Previdência Social or GFIP) should be integrated, and the National Finally, a major determinant of the efficiency of Register of Social Information (CNIS) seems to be the Brazil’s social protection system is how well they are best place to house them. Reducing the amount of delivered. Delivery systems are the means by which information that has to come from users themselves social protection benefits and services reach their (on, for example, their formal employment record, intended beneficiaries, and they are organized according education qualifications, and receipt of other benefits to core implementation phases along the delivery from the system) would increase the accuracy of the chain (figure 49). The delivery of social protection is data as well as reducing the burden on the users in the facilitated by communications, information systems, future. and technology, among other factors. The emergency pandemic programs also adopted a The emergency programs introduced during the digital account system for paying social protection COVID-19 pandemic used innovative ways to deliver benefits to recipients fast and securely. This innovation benefits to the population, but many of these have has led to the adoption of the same mechanism for not yet been integrated into Brazil’s longer-term Auxílio Brasil, which now by default provides payment programs. Perhaps the most important was that these in digital social accounts. Policymakers, however, still emergency programs exploited the core registries of need to find ways to ensure the equitable access to contributory and non-contributory benefit programs, digital services and to harness the potential of more formal employers, and social insurance contribution private providers to offer high-value financial services records to identify those households and individuals who to beneficiaries. were in need of support. Auxílio Emergencial, for example, CHAPTER 4 68 Another area for future development is that the Finally, communication between social protection Cadastro Único is still used as a means-testing programs and their beneficiaries also needs to SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL registry of potential beneficiaries, with limited be developed. Except for Auxílio Brasil, which has a capacity to record the beneficiaries of those programs mobile app through which it can communicate with its that make use of it. Programs use the Cadastro Único recipients and receive their feedback, the only interface to determine the eligibility of beneficiaries but are not that other social programs have with their beneficiaries able to send information to the registry, such as data is during the enrollment process, or via grievance on enrollments. In addition, there is a persistent historic redress services. There is thus ample room to develop divide between the contributory and non-contributory digital channels to facilitate more frequent interaction registries and between implementing institutions between program users and managers. (World Bank, 2018). CHAPTER 5 69 SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL Paving the way: Reform options for the next two decades KEY MESSAGES • This note proposes ten policy reforms for the social protection system that can prepare Brazil to address structural issues, and new challenges deriving from long-term trends. • The future social protection system should include a guaranteed minimum package of programs, designed to reduce exclusion errors, and directly coordinated with contributory programs. • Subsidized coverage should focus on the most vulnerable, and gradually be withdrawn based on the ability to contribute; • Brazil should reduce the gaps in access to social protection programs, and the differentials in contributions and taxes, between different forms of working (employed, self-employed) • A universal cash transfer for children, combined with a means-tested benefit for poorer households, can improve efficiency and equity of the fragmented set of transfers for families. • We propose a consolidated old-age social pension, directly coordinated with contributory pensions, capable of restoring incentives to contribute and fair returns at any contribution level. • To improve early childhood development, conditional cash transfers can be accompanied by cost-effective interventions to strengthen parenting practices and coordination with other services. • Several changes can improve the responsiveness of the SP system to climate-induced disasters • Revamping systems to deliver labor market policies and economic inclusion interventions will be key to support the future workforce along many transitions. A reform of cash-based labor benefits can make space to finance a modern network of labor offices, while improving labor productivity. • Enhanced delivery systems and technology can support execution of these policies, but should not substitute CRAS/SUAS, which instead could be strengthened to focus on social service delivery. 2 CHAPTER 5 70 5.1 Guiding principles of temporary relief programs. Recent developments regarding the size and design of Auxílio Brazil are taken SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL Several reforms could prepare Brazil to face the into account. Even though Brazil’s total expenditure on challenges brought by future megatrends. Figure 50 social assistance is now higher, the recommendations illustrates a selection of ten reforms that stem from for the medium term remain valid. the systemic analysis in this paper according to their expected impact on poverty and equity, their fiscal The social protection policy package should focus impact (positive, neutral, or negative), and the time on ensuring access to risk-sharing instruments, horizon needed for their realization. The key will be especially for the most vulnerable, as a way to to achieve a fiscally balanced package given Brazil’s expand opportunities and inclusion. The recent papers constrained budget and the already large allocation Charting a Course Towards Universal Social Protection devoted to the social protection system. In this chapter, (World Bank, 2022a), Time for a New Course: an essay on we discuss the principles underlying these reforms and social protection and growth in Latin America (Levy and then each one of these reforms in turn. Cruces, 2021) and Risk Sharing in a Diverse Labor Market (Packard et al, 2019) laid out some guiding principles The majority of these reform proposals build on, for developing countries for revisiting their provision of or directly draw from, prior analytical work. The programs in the light of the challenges to expanding purpose of this chapter is thus to suggest a general coverage and generating incentives for development, direction and a policy package and to refer to more the changing nature of work, new sources of risks, in-depth publications exploring the detail behind the and advancements in administrative systems. These policies. The reforms were largely drafted with the pre- principles are also applicable to the renewal of Brazil’s COVID 19 scenario as a baseline, given the challenges social protection and jobs system and are the basis for involved in simulating the tax benefit system with the proposals for incremental policy reform discussed 2020-2021 data and the uncertainty about the future in this chapter.   Figure 50. Direction of fiscal and poverty impacts of the proposed reforms to Brazil social protection system Positive Close gaps, Innovative delivery of Climate-responsive Early Childhood safety nets Development programs Consolidation of Economic inclution transfers for Impact on poverty for rural areas working families Reform of unemployment Active labor market Financial instruments cash programs policies for XXI century for informal workers Digital reforms of Reduce Minimun Neutral Cadastro Único, new functions for CRAS differentials in pension benefit labor taxation reform Fiscal impact Moderate fiscal cost Low fiscal cost Neutral fiscal impact Low savings Moderate savings short term impacts medium term impact Source: Authors. 71 The foundation of a social protection system for The government should also actively encourage 71 the future would consist of a guaranteed minimum individuals to save for the short and for the long SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL package of benefits to be targeted in such a way to term, building a third layer of protection with low minimize exclusion errors. The guaranteed minimum fiscal costs. Our policy proposals in the next section would consist of two components: (i) transfers to propose to expand individual savings for self-employed prevent poverty and (ii) subsidies to cover the premiums and informal workers; they aim to help workers to for insurance against catastrophic losses for which self-insure against labor income shocks beyond what there is no market alternative. Packard et al (2019) would be available from the guaranteed minimum argued that the guaranteed minimum is best financed package. Historically, voluntary saving schemes have from the national budget (the broadest tax base) and had a low take-up in developing countries, as they are should prioritize approaches that minimize exclusion a normal good, that is, people save more as income errors,40 even at the cost of higher inclusion errors.41 rises. Moreover, people are subject to numerous biases Following this principle, our first proposal would be to that dampen the interest in saving for future needs. institutionalize a universal cash transfer for children, To overcome in part this limitation, some countries combined with a means-tested minimum income have experimented with built-in behavioral nudges to benefit for poorer households. Our second proposal, remind people to save, default opt-in features to set recognizing the quasi-universal (but fragmented) aside part of income streams into separate accounts, coverage of existing programs for the elderly in Brazil, and behaviorally informed monetary incentives such would be to create a universal old-age social pension as matching contributions. Investing in the financial benefit, deliberately coordinated and incentive- education of the population can also increase knowledge compatible with contributory pensions. This would both about and interest in insurance and savings. close the limited outstanding gaps in old age coverage and increase efficiency of total spending on old age. The guaranteed minimum package should also set These two reforms are key to ensuring protection adequate benefit levels, ensure that incentives are throughout the lifecycle and can be considered as the compatible across all programs, and be fiscally first layer of protection to be provided by a future social sustainable and countercyclical. These different protection system. desirable attributes are often difficult to attain simultaneously, but a few lessons have been learned The guaranteed minimum package would be from global experience that can help to achieve all supplemented by several additional layers of these goals: protection, with the second layer being mandated and individually financed insurance (or savings). This • Programs operate as entitlements, which means insurance or savings mechanism would be proportionate that they should respond to observed needs. For this to the ability of an individual to contribute and would to happen, programs need to be rights-based (UNDP, cover losses that are relatively rare and catastrophic 2021), countercyclical, and have a continuous (for example, disability, premature death, and extended eligibility process. In Brazil’s case, this means that longevity). Requiring people to save and self-insure cash transfer programs need to be given the same through instruments that provide actuarily fair benefits legal status as other social protection programs, lowers the risk of moral hazard and ensures that public that is, to become a guarantee of rights, to prevent resources are transparently allocated to people who any form of rationing or waiting lists. Adaptive need them the most. Our proposal on reforming the reforms are also needed to give them the fiscal minimum pension guarantee aims to disentangle the space to respond to times of crisis. At the same subsidy and contributory components of Brazilian time, since the average benefit of the CCT program pensions. A transparent contributory pension would be grew substantially, compared to its pre-crisis level, open and required of all workers, regardless of how they its benefit level could be revised, and its design engage in the labor market, including self-employed made more efficient, to ensure that the program is workers doing new forms of digital work. available to all those in need. 40  For example, a guaranteed minimum income program consisting of strict means-tested benefits aimed at preventing poverty at minimum expense to the budget. However, this approach carries a risk of under-coverage, meaning not reaching all eligible recipients. 41  For example, a universal basic income program, in which a flat amount would be paid to every individual regardless of their means, which would result in fewer exclusion errors. 2 CHAPTER 5 72 • The guaranteed minimum package should allow for duplications in some households and a lack of coverage the gradual phasing-out of benefits to avoid any in others. Additionally, with the creation in 2022 of the SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL sudden sharp reductions in household income. This Benefício Extraordinário (Extraordinary Benefit), a series will require all programs to adhere to the same means- of generous extra payments from Auxílio Brasil, total testing mechanisms (not thresholds necessarily) expenditure on family transfers increased substantially and for their administration to be coordinated. Our compared to before the pandemic but in a way that reform proposals for the old-age pension and social privileges single-member households to the detriment assistance also aim to prevent any break in coverage of those with many children. for households due to temporary changes in income or contributory period. Brazil could consolidate its transfers for working families into a single tapered social transfer, which • Eligibility thresholds for the package should be set could support the chronic poor and those affected by relatively high to make it possible to support the transitory shocks more generously and sustainably. substantial number of individuals who move in and Over the years, several authors have proposed this type out of poverty. of benefit consolidation (see World Bank 2018, and Paiva et al, 2021). Our proposal, named the “consolidated Finally, facing many of the structural issues of social assistance benefit,” builds on this literature and the future depend on the provision of high quality on the innovations achieved by the social protection services. This implies a partial reallocation of social system since the COVID-19 crisis. We propose that it protection budgets away from cash expenditure, should have the following features: and greater emphasis on systems that ensure good governance, capacity building and quality assurance of • A strong focus on inclusion and lessons learned from locally delivered programs, including by expanding the the experience of the Auxílio Emergencial. One of capacity of the federal government to steer and finance the important innovations adopted by the Auxílio complex policies. There are important precedents in the Emergencial was to include by default households Brazilian public administration, such as in the roll-out of that may temporarily be able to rise out of poverty SUAS nationwide, that can be extended to other sector but do not have sufficient means to remain there. and programs. • The avoidance of disincentives to formal labor market participation by adopting a relatively high exit 5.2 Ten policy reform proposals for threshold and a smooth phase-out benefit rule to a 2040 outlook prevent families with earnings slightly above the eligibility threshold being drastically penalized, We make the following suggestions for reforming the including when they enter the formal labor market. Brazilian social protection system to enable it to cope with the trends and changes that are expected over the • Treating different forms of labor income in the same next two decades. way for taxing and contributory purposes, including income from wage and self-employment, to i. Consolidation of fragmented transfers for enhance horizontal fairness in the rewards from working families work. Similarly, contribution levels should be equally rewarded in terms of benefits across forms of work. To increase the sustainability of the CCT program and ensure its true countercyclical capacity, benefits for • Deliberately coordinating social assistance and working families should become coordinated, ideally unemployment insurance to make social assistance integrated in a single program. As discussed in Chapter a second-tier safety net when insurance benefits 4, the Brazilian government provides some form of expire, and to avoid household-level duplication of income supplement to households in all segments of the benefits. income distribution, in the guise of a “tapered universal basic income” (where total benefits received fall as • Ensuring that the consolidated social assistance household income rises). In Brazil’s case, however, this benefit serves as a platform to promote the use of tapered income support is fragmented. The coexistence other services. These could include early childhood of benefits with different targeting approaches creates development, support attendance to health, early 73 and basic education, and serve as entry for financial threshold (means tested component). The eligibility 73 and economic inclusion programs, as already done threshold used in the simulation was R$ 250 per capita SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL by Bolsa Familia/Auxílio Brasil. at 2019 prices,42 which was set at a level that would allow low-income formal workers to benefit from the • Addressing the weaknesses in the design of the targeted component. For those with incomes above the Benefício Extraordinário and Beneficio Complementar, R$ 250 eligibility line, we assumed the benefit would such as the flat amount that disregards family be withdrawn with a marginal tax rate of 50 percent, composition, and ends up as an incentive for families meaning that a R$ 1 increase in per capita income to split. above the eligibility threshold would lead to a decrease of R$ 0,50 in the benefit level per adult. A reform with these characteristics would be compatible with the legal basis of the Bolsa Familia/Auxílio Brasil This new consolidated social assistance benefit program, as the program’s law allows to absorb other would remain reasonably well targeted and would benefits into the CCT program. reduce poverty by a similar degree as would be the case if the current fragmented system could be One possible way to implement a single social perfectly implemented. Despite its universal design, transfer would be to combine a universal benefit the child benefit would be progressive.43 This is because for children with a broadly targeted means-tested the distribution of children in Brazilian households is benefit to poor households. This new program would skewed towards the poorer quintiles. In this budget- have two components: neutral simulation, there would be only small, and statistically insignificant, variations in the poverty i. Universal flat child benefit: This would consolidate all rate after the reform (using different poverty lines) existing transfers targeted to children, which are compared to the perfect implementation of all transfers now fragmented throughout the tax benefit system scenario. However, the new structure of benefits would (including the child and youth benefits of Auxílio be coherent (as opposed to the current fragmented Brasil, Salário Família, and child-related income-tax structure), would bridge coverage gaps, would reach a deductions) larger number of beneficiaries, would avoid overlaps, and would offer appropriate incentives for individuals to ii. Means tested benefit: This would consolidate the look for formal jobs. The smooth reduction of transfers unconditional component of Auxílio Brasil (the over the income distribution (figure 51) is a good Citizenship Benefit or Benefício de Cidadania) with illustration of the consistency of the new design. Abono Salarial, a program originally meant to support low-wage workers, albeit very ineffectively The main advantage of this reform would be to at present. The benefit would begin to taper off above reduce the likely exclusion errors that arise as a the eligibility poverty line to preserve incentives to result of the current fragmented system, and of the participate in the formal labor market. imperfect implementation of means tested benefits. The consolidated program would not only prevent We performed simulations of this proposal with a overlaps but would also bridge the existing gap in the budget neutral design using program expenditures coverage of children. Soares et al (2019) using data in 2019 as the baseline year. We used the World from the 2017 Brazilian National Household Sample Bank BraSim tool calibrated for 2019 with the budgets Survey (PNAD) estimated that 2.5 million children of Bolsa Família, Abono Salarial, Salário Família, and received more than one benefit whereas 17 million child income tax deductions as the baseline. The new children received no benefit at all, half of whom were consolidated social assistance program would pay a in the bottom 30 percent of the income distribution. flat benefit to all Brazilian children aged between 0 and The universal component would thus create a stable 17 (universal component), and one flat benefit to each income stream to support children living in vulnerable adult living in households below a poverty eligibility households, regardless of the households’ form of 42  Recalling that eligibility thresholds in 2019 were R$ 89 for extreme poverty and R$ 178 for poverty. 43  Universal benefit has a concentration coefficient of -0.19. Combined, the universal and the targeted components would have a concentration coefficient of -0.32. The concentration coefficient measures how progressive or regressive is a specific source of income. It varies from -1 to +1. Income sources with concentration coefficients below the Gini coefficient (which measures income inequality) may be considered progressive (that is, they contribute to reducing income inequality). Income sources with concentration coefficients below 0 may be considered highly progressive. 2 CHAPTER 5 74 engagement in the labor market or of the frequent Many operational aspects of such a reform would fluctuations of income that currently cause families to require further planning. From an administrative SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL constantly rotate in and out of programs (Fietz et al, perspective, unifying the budgets of the relevant 2021 and Morgandi et al 2022). programs would be anything but simple. The benefits of Abono Salarial are paid more than a year after   Figure 51. Incidence of the proposed recipients meet the eligibility criteria, and Salário consolidated transfer for children and low-income Família and income tax deductions are tax expenditures families, compared to sum of all major fiscal rather than social protection spending. Also, only transfers for families in 2019 Cadastro Único and the income tax registry contain reliable information on children in Brazilian families, 45% and, according to Paiva et al (2021), 26 million children 40% are not reflected in either registry. As was done in the 35% case of the Auxílio Emergencial program, the Cadastro Percentage of resources 30% Único could be scaled up through the use of a simplified 25% digital application form to construct a single national 20% registry of households for the purpose of applying to 15% the universal program. This could help to promote self- targeting, as upper-income households are less likely to 10% apply for a benefit of limited generosity, whereas as of 5% today, the benefit is automatically captured as a tax 0% 1 2 3 4 5 deduction.45 Quintiles of per capita income PBF+AS+SF+TD Consolidated SA benefit Another key issue relates to the role and breadth of benefit conditionalities, which are the lynchpin Source: Authors’ simulations based on the 2019 BraSIM of Auxílio Brasil. More analysis will be needed on the Microsimulation Tool. Note: The figure shows the incidence of the proposed consolidated transfer, compared to the incidence evidence of CCTs effectiveness in Brazil, and patterns of all family-focused transfers (Bolsa Familia, Abono Salarial, of service usage by children and youths across the Salario Familia and the Child deduction to income tax). income distribution. One option might be to extend hard conditionalities to all beneficiaries of the universal The broadening of the beneficiary base, especially transfer. After all, Salário Família has similar conditions among the vulnerable middle class, could also to those that were required by Bolsa Família (school support the political economy of reform. Under the attendance and vaccination), with the main difference assumption of perfect implementation, our simulations being that they are not enforced. However, this would suggest that the total number of direct and indirect probably not be compatible with the rights-based beneficiaries would go up from the current 125.7 approach advocated here. An even less justifiable million44 to 140.9 million. Earlier attempts to consolidate option would be to limit conditionalities to children all transfers into a single benefit only reaching the living in households that also receive the means-tested poor (Renda Brazil reform, 2021) rapidly succumbed component, which would overlap to a considerable to the political economy dynamics that explain the extent with the current set of families receiving Auxílio endurance of poorly designed benefits such as Abono Brasil benefits. A potentially interesting option would Salarial in Brazil. The new design sends a clear signal be the adoption of soft conditionalities, maintaining to most beneficiaries of Abono Salarial, Salário Família, the monitoring system and engaging social workers in and income tax deductions that most of them would case of noncompliance with the conditions of school get something from the new program (either because attendance and health checkups and thus move they are low earners, or because they have children) and towards a more nuanced, risk-based model, which with less risk of being required to exit the program. At exists in other countries. However, this option raises the same time, the large overrepresentation of children operational and costs concerns. among the poor in Brazil would ensure that it was sustainably progressive. 44  Benefiting from Bolsa Família, Abono Salarial, Salário Família, or child income-tax deductions. 45  It would also be a response to the Supreme Court’s determination to accelerate the implementation of the universal basic income process provided for in law 10,835/2003. 75 Finally, these reform simulations could be updated the minimum contribution period. Second, we propose 75 in the future to incorporate the 2022-2023 Auxílio revising the level of the BPC to restore incentives SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL Brasil budget as the new baseline and to revise the to contribute to the pension system and, finally, Benefício Extraordinário. As stated in Chapter 4, the consolidating the BPC with rural pensions. Benefício Extraordinário exhibits design weaknesses, and led most Auxílio Brasil beneficiary families to receive Pro-rating of the generosity of the minimum pension a flat generous benefit at a R$ 600 regardless of to the number of years that individuals have their size or need. As such, it canceled out the design contributed to the system during their working lives improvements in Auxílio Brasil, which tried to maximize would be fairer. The minimum pension amount is set in its impact on specific groups. A second potential the Brazilian constitution as equivalent to the minimum risk of the Benefício Extraordinário is that it may give wage, but currently only those who make at least 15 families an incentive to split into smaller units. Finally, years of contributions receive any benefit. The proposed the benefit exacerbates inequities between those just reform would remove the 15-year minimum contribution, above and below the eligibility line. It remains unclear thus no longer penalizing those with shorter work whether the 2023 budget for Auxílio Brasil/Bolsa Familia histories.46 At the same time, the benefit would no longer (which, including Benefício Extraordinário, accounted for have its currently high floor and, instead, be prorated to 1.4 percent of GDP), can be sustained as the permanent years of contributions. A worker with a full contribution fiscal baseline for family social assistance. In the history (35 years for men at the moment) would context of our proposal, the resources currently spent continue to qualify for a full minimum pension, while on the Benefício Extraordinário would be used to increase one with 5 years of contributions would receive 5/35 of the generosity of the means-tested component of the that amount. Only the contributory part of this benefit consolidated benefit. It is also important to consider the would be extendable to survivors. This reform would opportunity costs of further expanding cash benefits, remove the subsidy component of the minimum pension given the alternative uses to which such funds could be guarantee. For those who did not qualify for the full put, especially to develop underfinanced services in the pension, the BPC benefit could be used to complement social protection package, as will be discussed further the income gap, as discussed below. in this chapter. The BPC could then be coordinated with this newly ii. Minimum old age benefit reform and designed contributory pension to ensure that all elimination of retirement age differences elderly people remain out of poverty. Consistent with usual practice in most countries, the BPC benefit could Considering the major sustainability challenges be gradually reduced in real terms (keeping its nominal facing the pension system, the reform of the value) to become lower than the minimum contributory minimum pension benefit will be vital, coupled with pension. In addition, for those elderly people who qualify compensating measures in the provision of social for only a portion of the contributory pension (because pensions. Brazil currently provides a “minimum benefit of their short contributory history), the BPC would kick guarantee” for most old age residents through several in to complement their income. For those elderly people programs: (i) the guaranteed minimum pension; (ii) the with no contributory pension (such as those who have (de facto non-contributory) rural pension; and (iii) the worked in the informal sector all their lives), the BPC BPC social pension. As discussed in Section 4.4, this mix would be paid in full (see figure 52). This design would de of programs is fiscally expensive and has several design facto make the minimum old-age protection universal elements that make it unsustainable and distortive. and eliminate the means test currently applied to the We recommend a series of design changes to all three BPC. This universal approach would not be overly costly, benefits to improve their equity and consistency and to since most elderly people already receive some benefit increase their efficiency. First, we suggest reforming the now but would help to ease the political challenge of guaranteed minimum contributory pension benefit by a reform and reduce administrative inefficiencies. The prorating the generosity of the benefit to the number income tax reforms that we propose below make it of years of contributions, eliminating the difference in possible for the government to claw back part of the retirement age between men and women, and removing benefit paid to higher earners. 46  The pension is currently accrued at 4 percent of the wage base per year for the first 15 years and at 2 percent thereafter. 2 CHAPTER 5 76   Figure 52. Consolidating the components of old-age pensions (BPC and rural pension) and the prorated minimum contributory pension guarantee SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL a) Current rules b) Proposed rules 100% 100% 80% 80% 60% 60% % of MW % of MW BPC Minimun BPC Minimun 40% or nothing pension 40% pension 20% 20% 0% 0% 0 5 10 15 20 25 30 35 0 5 10 15 20 25 30 35 Years of contribution Years of contribution Non-contributory Contributory Non-contributory Contributory Source: Authors. The savings generated by this reform would enhance families do not even receive the minimum level of fiscal sustainability of the system without increasing support. The proposed reform would improve incentives poverty. With the aging of the population, the demand to contribute, increase fairness, and increase the fiscal on mandatory entitlements in pensions would otherwise sustainability of the pension system. Also, our proposal continue to rise, so reforms like this will be essential to regarding the consolidated social assistance benefit avoid crowding out other less protected and more pro- would reduce the administrative burden on individuals, poor expenditures. As the minimum pension accounts the Brazilian Social Security Institute (INSS), and for a large share of pension benefits granted annually, the courts while also ensuring that all of the elderly the reform would have a sizable fiscal impact. Under population is protected against falling into poverty. our proposal, if the implicit rate of return is held at 4 to 6 percent, not only for those with a complete work iii. Reducing differentials in the taxation of career of 35 years but also for those with partial career different forms of working (by prorating the minimum pension amount), the total savings on current pension spending would be 36 The changing nature of work, and Brazil’s 2017 reform percent. Even accounting for increased expenditure of the labor code, highlighted the need to adjust the on the BPC, the total savings would still be around 30 tax wedge and contributions to social insurance. The percent of all current spending on minimum benefits, tax wedge (the difference between total labor costs and or BRL 80 billion per year (0.9 percent of GDP).47 To put the net wages that workers receive) on dependent work this into perspective, expenditure on the entire BPC in Brazil is one of the highest in the LAC region and is program is currently BRL 35 billion per year. just below the average in OECD countries. In contrast, the tax wedge faced by individuals who sell their labor Thus, the proposed reform would offer multiple legally on the market as firms (sole proprietors or advantages. It would provide all the elderly with partners) is significantly lower. Depending on the form secure protection against poverty, while avoiding the of incorporation involved (such as MEI, SIMPLES, or duplication of benefits at the same elevated level in other forms of legal entity), non-dependent workers a context of high fiscal tradeoffs where many poor can shield a large part of their earnings from income 47  Savings from equalizing the retirement age are not included in these calculations. 77 tax,48 pay reduced social insurance contributions, and wherever possible. Involuntary self-employment can 77 avoid other levies that form part of the tax wedge of be problematic as these workers cannot access the SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL regular wage employees.49 This heterogeneity in taxes social protection tools in place for wage employees. and mandatory contributions related to different The changes to the labor law adopted in 2017 reduced forms of work results in different effective tax rates on the restrictions on workers performing many tasks as Brazilian workers, even between those performing very independent subcontractors of larger companies, thus similar work (see figure 53). further expanding the demand for this form of work. Legal provisions against “disguised self-employment” Concerns about the phenomenon of pejotização (or remain in place in Brazil, but they are not necessarily outsourcing) are growing, particularly with regard effective, especially as technological change has made to its negative effects on efficiency, fiscal revenue, it easier to segment and outsource labor inputs without and worker’s vulnerability. The considerable cost a direct dependent contract. Brazil’s special regimes and regulatory advantages associated with self- also have a significant negative impact on revenues. employment are likely to explain the increasing share In 2017, 61 percent of the 4.9 million formal firms that of non-dependent workers in the formal workforce, as contributed to the Brazilian Social Security Institute discussed in Chapter 3. International experience has (INSS) were part of the SIMPLES or MEI regimes. These shown how cost arbitrage opportunities generate strong firms represented 26 percent of total employment and incentives for firms to contract self-employed workers 16.8 percent of total wages (AEPS, 2017).   Figure 53. Total tax wedge as a percentage of labor earnings for different forms of work in Brazil, current design and potential reform Brazil (2018) Reform proposal 40% 40% 30% 30% Total Tax Wedge Total Tax Wedge 20% 20% 10% 10% 0% 0% 1 2 3 4 5 6 7 8 9 1 2 3 4 5 6 7 8 9 10 Minimum Wages Minimum Wages CLT at PJ Baseline MEI Baseline CLT Reform MEI Reform SIMPLES Baseline CLT at SIMPLES Baseline SIMPLES Reform TA Reform TA Baseline PJ - LP Baseline PJ - LP Reform Source: World Bank de jure tax and benefit model for Brazil for 2018 developed by Katharina Fietz, Stella Carneiro, Matteo Morgandi, Cornelius Fleishaker, and Rodrigo Orair. Note: The model identifies the tax wedge (% of total labor costs paid in contributions and taxes) by different individuals selling their labor under different regimes. CLT identifies dependent workers hired under the labor code, either in a regular firm (PJ) or in a firm in the simplified regime (SIMPLES). TA= Trabalhador Autônomo in the labor code. MEI = microentrepreneurs. SIMPLES = firm partner in the SIMPLES (simpli- fied tax) regime. PJ = firm partner in the regular regime (Pessoa Jurídica - PJ). LP = expected profit (Lucro Presumido - LP). 48  In Brazil, labor income is subject to personal income tax (IRPF) as well as payroll contributions (which vary according to each kind of employment). On the other hand, dividends paid out to shareholders of a company (including an individual owner of a small company) are tax-exempt. Dependent workers must declare all of their earnings as labor income (pro-labore), while autonomous workers and micro- entrepreneurs (two different forms of self-employment) can deduct part of their revenues as costs (whether real or presumed). Also, owners of firms (such as SIMPLES or PJ) are able to choose the share of their net profits that should be considered labor income, with the rest being tax-exempt dividends. 49  Levies include the INCRA contribution, the Salário Educação contribution, the Sistema S contribution, and the Seguro Accidente Trabalho contribution. 2 CHAPTER 5 78 We propose that several changes be made to taxes To offset the revenue losses from reducing payroll and contributions to reduce the cost of labor, improve taxes, Brazil could align personal income taxes SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL equity and increase neutrality across different forms with international good practices by removing of work. Proposals areas follows: (i) reduce the difference the current exemptions for dividends and pension in the costs of procuring labor from a dependent wage incomes. In Brazil, dividends distributed to individual employee and a self-employed worker; (ii) align taxes shareholders are exempt from income taxes, which is across types of types of incomes (dividends/profits, a global anomaly. This further incentivizes individuals pensions, wages, and rents) to achieve tax neutrality; and to incorporate as firms. A second group that is treated (iii) Increase the overall progressivity of the direct tax differently than dependent workers are pensioners. system by collection of the personal income tax, through Income tax exemptions on a portion of the income more progressive rates in line with OECD countries, and from pensions currently costs the government more fewer exemptions. These proposed changes contribute than BRL 70 billion per year. Both changes would to harmonize the tax wedge across all types of workers increase the neutrality of income taxes and would and are designed to be fiscally neutral.50 Figure 54 help to finance a reduction in the cost of labor, thus presents the results of simultaneously applying all of stimulating the creation of formal employment in our proposed changes on final tax rates. Importantly, formal firms. the reform would significantly reduce the cost of formal dependent work and, in general, would lower Second, aligning pension contributions rates for all the differential in tax wedge between forms of work, types of workers would further reduce incentives particularly for high earners who are most capable of to disguise dependent work as self-employment. exploiting arbitrage opportunities. The fact that SIMPLES and PJ owners can declare an arbitrary contribution base (salário de contribuição) More in detail, eliminating the taxes that are regardless of their actual profits allows them to legally financing pure public goods from the dependent under-report their income for pension purposes. In our workers’ payroll, could already reduce significantly proposal, we aim for a harmonization of contribution cost of dependent wage employees. To reduce the high rates by: (i) applying a maximum contribution base tax wedge of dependent wage employees, the financing to the employer’s social security contributions; (ii) of public goods such as the Land Reform National applying the same rates as dependent workers to self- Institute (Instituto Nacional de Colonização e Reforma employed workers who are working for an employer; Agrária or INCRA), Sistema S, and Salário Educação could and (iii) increasing the contribution rate of MEI workers be removed from the payroll. Only this could reduce the to match that of dependent workers, from 5 percent to tax wedge for a single earner receiving the average 11 percent of the minimum wage. wage from 31 percent to 28 percent. A similar reform was carried out in Colombia, which increased formal iv. Unemployment protection programs for employment among low-wage workers (Kugler et al, formal workers in the future labor market 2017). Furthermore, we propose applying the same contribution base ceiling as is applied to employees’ To increase the efficiency of unemployment social security contributions to the employer’s security protection programs, unemployment insurance contributions (contribuição patronal previdenciária or (Seguro Desemprego) and individual savings accounts CPP). The current ceiling lies at about 6 minimum wages, (the FGTS) should be coordinated with each other and thus turning contributions into a pure tax on high- with other services. A large body of literature has been income workers. As a final step, the non-labor costs of calling for a reform of unemployment programs.51 One dependent workers can be harmonized, regardless of possible approach, based on international experience which firm they work for. For instance, the same rules (World Bank, 2018), is for individual savings accumulated of Seguro Acidente de Trabalho (work accident insurance) in the FGTS to be used as the first line of financing for should be applied to dependent wage workers working unemployment claims. Only once the worker’s funds in in firms in both the PJ and SIMPLES regimes. the FGTS is exhausted would the worker receive funds 50  This proposal was developed by the World Bank team jointly with Rodrigo Orair of the Institute of Applied Economic Research (IPEA). 51  Other potential incentive-compatible designs are proposed in the literature, for instance that the benefit could be paid in part through the unemployment individual savings account and in part through the unemployment insurance pool. 79   Figure 54. Unemployment payouts if unemployment insurance (Seguro Desemprego) and individual 79 savings accounts (FGTS) were coordinated SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL 1,400 100% 1,200 Unemployment Benefit in BRL 80% 1,000 80% 80% 80% 80% Replacement Rate 75% 70% 60% 800 65% 60% 55% 600 40% 400 20% 200 0 0% 1 2 3 4 5 6 7 8 9 Months of Unemployment FGTS + Multa Financing Public Financing Benefit Replacement Rate Source: Morgandi et al (2021). Note: Unemployment benefit for dismissed worker with a pre-unemployment wage equal to 1.5 of the minimum wage and job tenure of 24 months. from unemployment insurance.52 In this way, workers workers who were willing to immediately engage with would receive less than they earned while working (thus active labor market programs in search of a new job removing perverse incentives), payout periods would be to reduce the likelihood of beneficiaries depleting the extended (see the example in figure 54), and individual benefit. savings would be used up before any payouts would be given from the public risk pool. While Brazil already spends a similar amount on social protection as other countries with a similar The unemployment insurance can be improved by revenue capacity, legislative changes are needed making parametric changes to its access conditions to distribute this spending more equitably among and benefit generosity and by redistributing co- different age groups. Moreover, making other legislative responsibilities.53 Improving the sequencing and changes, such as changing the vesting period for first- integration of severance pay, social assistance, and time claimants could increase access to unemployment social insurance would also make unemployment insurance for those with intermittent working careers. insurance better suited for long-term unemployment How to further increase income protection for groups and would reduce the disincentives associated with the that are currently uncovered will be discussed under the benefit. Therefore, it would be desirable to reduce the next recommendation. replacement rate of unemployment insurance while at the same time increasing the duration of the benefit in line with international best practice. The FGTS could v. Financial instruments for be designated as the first payer of monthly income informal workers support after a worker’s dismissal, and unemployment insurance would start to be paid once the worker’s A salient question during Brazil’s recovery period will individual saving account (FGTS) is depleted. be how to increase the resilience of vulnerable and Simulations of this reform suggest that it would result informal workers, especially those who are ineligible in shorter average periods of unemployment. Benefit for social assistance. Financial inclusion policies can top-ups could further be provided to unemployed contribute to achieving this objective. 52  It is known that the FGTS is more than individual savings as it currently also finances housing and sanitation programs. Hence, using these funds as a substitute for unemployment insurance would not yield a neutral impact. In the context of Brazil’s 2040 future outlook, the FGTS should be thought of as an invention to fund public goods that made sense when private financial markets were less developed. However, in the current and the near future, these policies should be financed by other budget sources rather than by forcing workers to save. 53  See Morgandi et al (2020) for a more detailed overview of these specific policy recommendations for improving the unemployment protection system in Brazil. 2 CHAPTER 5 80 The Cadastro Único and Auxílio Brasil/Bolsa Família employed, but they are no longer extremely poor (Fietz can be used to provide precautionary saving products et al, 2021), so they may be more easily persuaded to SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL for the vast population of vulnerable and informal save. The experience of digital social savings accounts workers in Brazil. There are a number of steps that, (Conta Social Digital) should be studied to identify how taken together, can bring Brazil closer to international Auxílio Emergencial savings have been used. best practices, and these are described in more detail in World Bank (2021d). Of particular relevance is the The provision of saving products to families could use of precautionary saving schemes to strengthen enable them to mitigate ex ante the costs of shocks the income resilience and financial literacy of social and reduce their chances needing to re-enroll in assistance beneficiaries who are approaching the safety nets. World Bank (2021b) reviewed initiatives financial thresholds for graduation, such as those from around the world aimed at increasing saving who come under the Emancipation Rule. Auxílio Brasil/ rates, including in other middle-income countries Bolsa Família beneficiaries near the exit threshold of such as Colombia, Rwanda, Kenya, and Pakistan the program tend to work informally and to be self- (table 3).54 These initiatives have involved providing   Table 3. International experience of precautionary savings instruments for workers Type of program Target group Design features to Number of increase savings beneficiaries/coverage Matching contributions 666,990 beneficiaries Colombia (BEPS) lotteries, text message (2020). Potential reminders beneficiaries: 11.4 mi Some withdrawal-side 100,000 beneficiaries Kenya (Mbao Informal and restrictions, digitally (2018). Potential pension scheme) Pensions / long-term low-income provided beneficiaries: 12 mi savings (can also workers be used for other Matching contributions long-term savings by socio-economic 1.3 mi enrolled (2021). Rwanda (Ejo purposes in Kenya status, digitally provided, Potential beneficiaries: Heza) and Rwanda) bundled with life 2.9 mi insurance >300,000 self-employed Chile (Reform (2008): represents 33 2008) percent of those eligible to Formal self- contribute employed Unemployment Colombia insurance savings Favorable interest rates 8 mi beneficiaries (2018) (Cesantias) accounts Automatic transfers, 2.3 million families Mexico (PROIIF) Financial inclusion CCT financial education, free (2015-2018). Potential – Discontinued program beneficiaries life-insurance, potential target group: 6.2 million access to micro-loans beneficiaries. Voluntary savings Informal Pakistan (CRISP) Plot will target 150,000 scheme with uncovered, CCT Matching contributions – Planned beneficiaries. individuals accounts graduates Unemployment High Income Formal self- Insurance to formal OECD countries employed self-employed Source: World Bank (2021b). 54  A dozen countries in the OECD also have unemployment insurance windows for the formal self-employed, but these schemes appear ill-suited to a context where informality is high and it is difficult to accurately observe financial losses. A much stronger enforcement system would be needed to monitor adherence to job search conditionalities than Brazil currently has in place. 81 financial education, default options, and reminders and Such interventions are particularly important in a 81 rewards for reaching goals. For a higher fiscal cost, the context of persistent gender and race labor market SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL government could also provide matching contributions discrimination. They can: (i) reduce information for low-income workers outside wage employment in asymmetries and prejudice of employers (through order to help them to build up their individual saving worker’s skills signaling and objective intermediation); accounts more quickly. (ii) incentivize employers to give young people with a limited social network their first employment Efforts to encourage financial savings are sometimes opportunities, (through wage subsidies); (iii) improve job bundled with the provision of other services, such seekers’ interview skills and on-the-job learning (through as incentivized long-term savings for retirement, soft skills training); and (iv) enhance the purpose to support financial inclusion. For instance, by and pursuit of better quality skills training programs encouraging informal sector works to develop savings, (thorough orientation and counselling services). Several this gives them a visible financial history that could developing countries are also experimenting with serve as collateral to enable them to access credit. using performance-based contracts with providers Financial services providers might also consider offering delivering non-core functions such as technical microinsurance on catastrophic but rare losses (like training, personalized intermediation, and subsidized death or accidents) as well to mitigate those risks. placements, and this is a promising area for Brazil to Finally, providing complementary financial education explore. Greater coordination between ALMPs and will be critical to enable families to make the best use Sistema S initiatives would also be helpful to ensure of their savings accounts, and in general, to choose that the poor receive the support to prepare them to cheaper products, thus reducing repayment risks for benefit from spots on high-quality training courses. banks. To coordinate this agenda at the local level, Brazil vi. Revamping active labor market programs should start revamping its ailing employment services as entry gateways to other programs. Public Reforming the financing for modern active labor employment services (SINE) historically covered a narrow market programs (ALMPs) would help workers and set of functions: job matching, labor documentation, jobseekers to face the labor market shocks of the and enrollment in unemployment insurance. Funding future. Brazil has almost no ALMPs, except for training for SINE has been minimal and falling. In 2018, labor provision, which exists to some extent but is offered in intermediation amounted to less than 1 percent of what isolation, Brazil could already afford to invest in ALMPs was spent on unemployment insurance. SINE’s role has without having to increase total expenditures, for been further diminished since unemployment insurance instance, by reallocating current expenditures in FAT moved to digital delivery. Borges, Lobo and Foguel to Abono Salarial, which cost BRL 17 billion a year and (2017) estimated that even a minor improvement in mainly benefit those in the middle- and upper-income the effectiveness of intermediation would result in large quintiles with a formal job. Macroeconomic policies fiscal savings on unemployment insurance, thus opening to stimulate employment would need other sources space to fund other active labor market policies. Labor of financing to supplement the wages of those who intermediation is and will be even more in the future already have a formal job through Abono Salarial. provided through digital platforms that can help match jobseekers with jobs. However, this does not eliminate ALMPs can also improve equity in labor market the need to develop in-person offices that can conduct matching and reduce discrimination. ALMPs should essential functions such as profiling jobseekers, training start by profiling applicants and then offer them a mix clients in job search skills, providing them with referrals of career counselling, job search support, structured to local service providers for more complex issues, and skill development programs, socioemotional skills ensuring that everyone receives fair treatment with no development, and the possibility of accumulating work discrimination. experience by providing them with a temporary wage subsidy (see table 4 for a full range of interventions To help workers to cope with displacement induced possible). Monitoring and evaluation systems should be by technology and the green transition, Brazil should in place to identify successful programs and to evaluate organize more intensive reskilling pathways. Trade individual providers. adjustment assistance (TAA) programs have been 2 CHAPTER 5 82 implemented in some countries to aid workers affected instrument; (ii) carefully design the training component by industry-wide declines after trade agreements. to adjust to destination industries; and (iii) investigate SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL While TAA programs have had mixed results, some different cost-sharing options between the private have yielded positive outcomes and can shed light on and public sectors to efficiently finance the program. potential ways to organize reskilling programs in Brazil’s To support workers during transitions between jobs, it industries and occupations affected by future shocks. will also be important to consider providing them with Hollweg et al (2014) highlighted the need to take into additional benefits to supplement the short-duration account the following considerations when designing unemployment insurance so that workers have income these types of programs: (i) focus on one sector or one support throughout their time spent training.   Table 4. Classification of income support benefits and services by risk groups Employment Services: Helping people find jobs Employability- Benefits Enhancing Services Risk Group (Passive or Counseling, or ALMPs: helping Active) Information, Intermediation, people become more orientation Activation employable Casework Short-Term ST benefits (UI Self-service tools Job search • Training to refresh or Unemployed or UA), usually • Job matching assistance upgrade skills (similar to youth with IAPs & co- platforms • Caseworker • Entrepreneurship and first-time job responsibilities • Websites and call guidance and training seekers) • Back-to-work centers monitoring, including • Apprenticeships incentives IAPs • Wage subsidies to firms • Start-up support • Job referrals to hire unemployed or for businesses, • Career counseling first-time job seekers entrepreneurship • Subsidies for firms to adjust working place or to purchase assistive technology for employees with disabilities Long-Term • LT benefits (UA Self-service tools Intensified counseling Job-readiness and soft- Unemployed (LTU) or SA after UI • Job matching and caseworker skills training runs out), usually platforms guidance, including • Occupational / with IAPs & co- • Outreach IAPs technical skills training responsibilities activities for youth, • Some job search • Basic & second-chance discouraged, inactive assistance, referrals education workers • Mentoring • Digital literacy • Information • Wage subsidies for about the value of firms to hire LTU education, returns to • Public works/ job technical specialties creation Underemployed Self-service tools • Job search • On the job training • Websites and call assistance • Apprenticeships centers • Job referrals • Entrepreneurship and • Information • Career counseling business management about the value of • Information training (finance, education, returns to and counseling accounting, etc.) technical specialties about agricultural • Financial support and technology and micro-credits combined management with technical advice practices Source: Kathy Lindert, Tina George Karippacheril, Ines Rodriguez Caillava (eds), Bowen et al, 2020. 83 vii. Economic inclusion for rural areas efforts of the BSM but also in providing a gateway 83 for potential beneficiaries to access all of the bundled SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL Evidence from productive economic inclusion programs.55 programs has revealed that programs show positive results if well-coordinated geographically. Colin Making more use of the data in the Cadastro Único et al. (2021) analyzed global evidence on the impact and other public registries could further facilitate and costs of productive and economic inclusion the implementation of productive economic (PEI) programs. Such programs focus on poor and inclusion interventions. The Cadastro Único, especially extreme poor populations operating in highly informal if supplemented by data from other government economies and mostly in rural areas. PEI interventions registries, provides quite detailed information about vary but typically involve providing assets, transfers, individuals and families at the local level from the labor and skills training as well as efforts to link individuals market perspective. Such information could be used and groups to markets. The analysis considered 80 not only to administer cash transfers, as happens different case studies and found that the programs today, but also to plan and target economic inclusion had had promising short-term impacts including on programs according to the characteristics of individuals income, assets, and savings. The analysis further found and communities. World Bank (2021) presents a set evidence that coordination between components is of detailed recommendations on how to leverage the vital as bundles of interventions have been proven to public registries to pursue the PEI agenda. have a greater impact than stand-alone interventions. While the central government has a critical role to play viii. Adaptive and responsive safety nets to in establishing the rules and tools of the game, PEI climate change programs need to be coordinated at the geographical level. However, a major challenge will be to identify Making Brazil’s social protection system adaptive the institution or institutions with the comparative to environmental shocks is vital for helping families advantage to deliver the necessary functions at the and communities to cope with the adverse impacts local level. of climate change. Adaptive social protection (ASP) combines different sectoral approaches to build the Past experience from productive economic inclusion resilience of the poor and vulnerable by enhancing their programs in Brazil, such as Brasil Sem Miséria (BSM), capacity to prepare for, cope with, and adapt to covariate has demonstrated how the bundling of different social shocks. It aims to ensure that social protection policies has the potential to accelerate productive systems are well-equipped and flexible enough to inclusion in the country. The BSM was launched in 2011 adjust their response to the changing circumstances as part of Brazil’s productive inclusion strategy. The and needs of those affected when a shock occurs by program consisted of three main axes of action: (i) an providing a timely and appropriate response (Bowen income guarantee axis; (ii) a productive inclusion axis; et al., 2020). Even though Brazil has a well-established and (iii) an access to public services axis. All of these social protection system, a recent review revealed had the goal of targeting extreme poor families with some gaps and constraints that are restricting the insufficient production and food security. The BSM relied systems scalability and readiness to ensure a timely on a whole-of-government approach to coordinating and appropriate response to climate change related existing policies and programs such as Bolsa Família and shocks.56 the Food Acquisition Program (Programa de Aquisição de Alimentos) and new instruments such as Bolsa Verde and Making some simple design tweaks to the CCT the Promotion of Rural Productive Activities program program could enable it to provide timely and (Fomento a Atividades Produtivas Rurais) and packaging appropriate responses to climate change shocks. The them into a PEI bundle. Cadastro Único and SUAS were positive impacts of social safety nets on the ability of both important in facilitating the massive coordination poor households to cope with shocks, maintain their food security, and refrain from resorting to negative coping 55  Through the Cadastro Único, the Busca Ativa (Active Search) function enabled the program to find extremely poor families who had not yet been located. Thanks to Busca Ativa, 687,000 previously invisible families were included in the Cadastro Único in just the first year of the BSM. In addition, the BSM efforts ensured that 88 percent of families in extreme poverty were covered by at least one program within the BSM. Families that accessed a program through the BSM achieved the best outcomes with an average increase of 134 percent in family income (Mello, 2018). 56  Ed, Gonzalez, Ferreia. Forthcoming 2 CHAPTER 5 84 alternatives are well-documented (see Ulrichs and At the policy level, Brazil should develop protocols Slater, 2016).57 Brazil already has a strong foundation for ASP. A defining feature of ASP is that many SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL of social protection programs to build upon and could actors are usually involved in its implementation. This further develop ASP by including design features in the means that there is a need for protocols to anchor the Auxílio Brasil program that would facilitate the response planning, management, and delivery of ASP, as well to climate change. These features might include: (i) as strengthened partnerships between ministries and using the Auxílio Brasil program as a platform to inform agencies involved in disaster response. Because Brazil CCT beneficiaries about risks and appropriate actions is very decentralized, there will also be a need to explore in emergencies; (ii) investing in financial inclusion and how responsibilities for shock response are allocated at introducing savings accounts for low-income workers in the state and municipal levels. the Auxílio Brasil program; and (iii) promoting livelihood programs to support those households exposed to ix. Partially-digital delivery of Cadastro Único shocks. Lastly, other design tweaks to Auxílio Brasil and the strengthening of CRAS network and could be inspired by the features and rapid roll-out services of the temporary emergency cash transfer program, Auxílio Emergencial. Social assistance networks will continue to be fundamental in the delivery of social protection Brazil needs to strengthen its efforts to gather services, even as digital access increases. The partial information on household vulnerability to shocks and digital delivery of current administrative functions has their relative capacity to cope and recover. Social made it possible for social assistance services and the registries are especially critical for estimating the Social Assistance Reference Center (CRAS) to focus effects of a disaster on a household and for providing on more high-value human interactions. In particular, information on social protection beneficiaries and non- the Unified Social Assistance System (SUAS) for beneficiaries. Brazil already has a well-established years pioneered the use of household-specific case social registry with high coverage – the Cadastro Único management in the Family Accompaniment Program – but could strengthen it by including climate change (Programa de Acompanhamento Famíliar) but with high vulnerability variables and identifying the communities caseloads and limited administrative tools. OECD that are most vulnerable to climate change. The countries have largely transitioned to providing high- registry could furthermore enhance its relevance for value individualized social services, and many middle- ASP by updating information about high-risk areas income countries are following suit. This is challenging more frequently. The Ministry of Development and because of the high initial investments required but Social Assistance might further invest in the capacity represents an important opportunity to prevent the to conduct post-shock assessments or access non-monetary causes of poverty. For Brazil’s social vulnerability assessments from other sectors to ensure assistance sector to embrace this new set of functions, that policymakers have an up-to-date understanding its financing will need to be increased. The marginal of post-shock household needs. return of such investments are likely greater than simply continuing to increase the monetary value of Brazil could consider investing in an ex-ante system transfers without any accompanying interventions. A for responding to shocks. Disaster risk financing few expanded functions that could be given to CRAS involves the need to have risk financing strategies and offices could include: systems in place to respond to shocks before they take place (Bowen et al., 2020). For Brazil, this would mean • Monitoring by staff of machine-induced errors and moving from an ad hoc approach to a more proactive algorithm failures. approach to allocating funds for disaster response. To facilitate this, a risk layering financial strategy would • Including a more systematic and integrated needs be needed based on historical data on the costs of assessment that can then trigger intensified case responding to shocks combined with financial modelling management and referrals to social services for a to predict the cost of different future social protection minority of acute cases (as happens in the OECD responses. and Chile). 57  Ulrichs and Slater (2016). How Can Social Protection Build Resilience? Insights from Ethiopia, Kenya and Uganda. Working Paper, Building Resilience and Adaptation to Climate Extremes and Disasters (BRACED), London. 85 • Developing dedicated approaches to complex with the registries of other programs. Even 85 problems that remain widespread in Brazil, such as though the Cadastro Único is used by more than 20 SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL gender-based violence,58 and to serve new vulnerable targeted programs to verify beneficiaries’ income, groups, such as refugees and migrants. this information is not aggregated as each program maintains its own beneficiary registry. Making the • Supporting the digital inclusion of beneficiaries so Cadastro Único interoperable with the individual that they can access digital services independently, program registries, as is best practice in countries like which will be a necessary condition for social Chile and Turkey, would make it possible to identify any inclusion in the future. overlaps, manage access to packages of services, and ensure wider coverage of social assistance (Leite et CRAS would benefit from providing a mix of human al, 2017). It is not just social protection programs and services and digital delivery in several ways. Although agencies that need to move in that direction, but also technology can enable incredible advances in scale agencies and programs in other parts of government, and reductions in the cost of social services delivery, especially health and education. delivering welfare services entirely via technology is not recommended given the occurrence of algorithm failures Having integrated registries would strengthen and the fact that some services are better delivered in monitoring, including adherence to program exit person. Technological innovations that were first used criteria, the tracing of beneficiaries, and over time in Auxílio Emergencial could play a part in improving increase efficiency. The fact that Brazil has opened its targeting, improving citizens interface, and coordinating administrative data to a vibrant research community information from different sources. In particular, the has supplemented its limited investment in internal outreach to and registration of potential beneficiaries program evaluations. However, more analysis needs via online enrollment saves resources and enables the to be done of exit criteria from social programs and on service to be available around the clock at a low cost. the migration of users between programs to evaluate The integration of core registries and databases makes medium-term impacts of participation in the multiple it possible to carry out automatized eligibility checks social programs. and monitoring to trace the socioeconomic trajectory of beneficiaries. x. Closing coverage gaps in early childhood development through new delivery modalities In the coming decade, the outreach, intake, and registration functions of social assistance should Brazil has several policies for children in their first 1,000 incorporate advances in mobile and communication days, anchored in prenatal and postnatal universal technology. For instance, in the future, any primary health services coupled with public childcare communications between government and citizens centers and targeted services for more vulnerable about social policies and programs should make use of children. Nevertheless, there is a comprehensive range the possibilities offered by IT systems and the increasing of complementary policies to support children that (though still incomplete) access to the internet, even Brazil could be providing. Therefore, ensuring that these by the poor. There is scope to develop customized services are available wherever they are needed and are communications with users based on their profile well-coordinated is a high priority for the future (figure and enrollment status. The experience of the Auxílio 55). Emergencial also demonstrated the potential for using online enrollment in social programs, including during Parenting programs for early childhood stimulation shocks and disasters, and for performing required have the potential to become a cost-effective updates of the regular social protection registries and way to support children’s home-based integral programs. development. Criança Feliz, or its successor would benefit from expanding its coverage and enhancing its Brazil could also upgrade Cadastro Único to become quality, and there is also room for the introduction of a social registry by enabling it to be interoperable new delivery modalities, particularly in the future when 58  Emerging evidence of the impact of COVID-19 as well as lessons from past epidemics suggest that significant risks of violence against women (VAW) increase in these contexts, especially in countries with weak health systems, weak rule of law, and already high levels of VAW and gender inequality. In Brazil, between March and April 2020, there was a 22 percent increase in femicide and a 27 percent increase in complaints to the national violence against women helpline. The World Bank has developed a methodology for preventing gender-based violence (GBV) through the social assistance sector in Brazil that could be implemented at the subnational level. 2 CHAPTER 5 86   Figure 55. Complementary policies for early childhood development SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL INCREASE COMPETITIVENESS REDUCE INEQUALITY CHILDREN REACH THEIR FULL POTENTIAL (With the physical, social and emotional capacities to learn, earn, innovate and compete) CHILDREN ARE HEALTHY & WELL CHILDREN RECEIVE EARLY CHILDREN ARE NURTURED NOURISHED, ESPECIALLY STIMULATION & LEARNING AND PROTECTED IN THE FIRST 1,000 DAYS OPPORTUNITIES FROM STRESS • Good nutritional status of mothers • Positive and engaging interactions • Avoid household and community and expecting mothers with parents/caregivers stressors (neglect, violence, • Executive & continued breastfeeding • Opportunities for age-appropriate and displacement, household shocks) • Proper feeding of <5s + micronutrients play-based learning through quality • Positive emotional connections with preschool programs parents/caregivers • Inmunization & Rx of childhood illnesses • Supportive discipline • Good hygiene practices Source: Adapted from World Bank (2018). beneficiaries will have increasing access to technology assistance programs by families who are engaged (figure 56). in Criança Feliz. This seems to be a result of visiting program staff providing families with information One way to reduce the costs of the program and about access to social assistance programs that were mitigate the financing barrier for municipalities previously unknown to them. Since these home visits would be to adopt new delivery modalities. Group are an important doorway to other social assistance meetings and the use of technology for delivering services, integrating Criança Feliz state and municipal service, for instance, could significantly decrease SUAS activities is highly encouraged, including local the number of home visits, thus reducing costs of public childcare services. The existence of Criança commuting and even the number of required personnel. Feliz does not reduce the need to expand the national Criança Feliz’s staff are mainly employed on short-term coverage of day care centers (creches). In fact, they are contracts, which results in high staff rotation and often complementary actions, and, over time as children grow compromises their training. This may also negatively and mothers need to return to work, day care centers affect the quality of the program. become increasingly important. Regarding the quality of parenting interventions, xi Final remarks there is also room for improvement in the development of protocols (particularly to specific groups such as While this note does not contain a detailed costing indigenous groups and quilombolas). The program’s of every reform, most reforms could be packaged managers might also consider adapting Criança Feliz’s together in ways that would be fiscally neutral over activities to take account of local and cultural contexts the medium term. For example, curbing passive labor and encouraging fathers as well as mothers to engage market expenditures would leave room for investing more closely with program activities. Quality could in active labor market programs or for consolidating also be improved by providing ongoing training to the transfers for working families. The reform of the program’s staff (given the high rotation of staff who do minimum pension guarantee would generate sufficient home visits) and by strengthening monitoring tools at fiscal savings to increase sustainability in other areas the municipal level. and make it possible to invest in underdeveloped services for the vulnerable population, including social Finally, an impact evaluation of the program has care for the elderly, early childhood development shown an increase in demand for other social programs, and productive inclusion programs. 87   Figure 56. Pillars for strengthening early childhood development interventions 87 SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL SOC IAL P ROT ECT ION FOR T HE F U T U R E BR AZIL Expanding Introducing new Enhancing Intersectoral coverage delivery modalities quality coordination Incorporating group Permanent training to modalities and mixed PCF staff (high rotation) Closing coverage (home visits and group Integrating PCF with gaps in municipalities meeting) modalities SUAS in state where PCF is operating Developing protocols and municipalities initiatives Using technology to complement in person Expanding curricula activities (apps, SMS, and adapting to radio, complementary cultural context virtual meeting) - Pilots on technology Involving fathers Reaching the most vulnerable in areas Linking with childcare without the program Adequate financing benefits/ creches Strengthening to different monitoring tools at modalities considering municipal level local context Source: Authors. In addition, important institutional changes could Finally, many of the key proposals presented in be introduced that involve only small investments this note attempt to incorporate political economy with no significant fiscal impact. These might considerations. It has historically been difficult to alter include investments that leverage technology, cross- the benefits received by the well-organized share of the sectoral synergies to improve delivery systems, early Brazilian middle class, and this note recognizes this childhood development policies, and improving the reality. It will be important for policymakers to engage implementation of existing funded programs. Some in a broad social dialogue to present the motivation for of these reforms could lead to quick gains that will and reach consensus on a package of reforms that will build confidence in and the credibility of the new social translate savings from inefficient programs into better protection system. 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