WB: Informality in Latin America Creates Social Security Paradox

June 8, 2010

June 8, 2010, Rio de Janeiro, Brazil — As the economic recovery gathers pace, Latin American and Caribbean countries face major challenges to expand social security, a new World Bank report says.

In most countries in the region, well-targeted cash transfer programs now protect the extreme poor.  But pensions, unemployment and health insurance still cover a minority of workers.  However, the 2008–09 financial crises has shown that systems in the region designed to offer support and social services for the most vulnerable remain ill equipped to provide most workers with adequate protection against shocks, especially for those in the informal sector, the report notes.

The report called Achieving Effective Social Protection for All in Latin America and the Caribbean: from Right to Reality, written by Helena Ribe, Ian Walker and David Robalino, was presented at the Second Rio de Janeiro Conference on Human Development. Eduardo Paes, Rio’s Mayor, Marcia Helena Lopes and Carlos Eduardo Gabas, Brazilian Ministers of Social Development and Social Security, respectively, and Makhtar Diop, World Bank Director for Brazil opened the conference, which gathered more than 300 development experts and government officials from twenty countries.

The study points out that countries still need to tackle the very low coverage of contributory social insurance, which recent reforms have not resolved. The main difficulty is that the region’s mandatory systems for providing pensions, health insurance, and unemployment benefits are not apt to cover workers in the informal sector. More than half of region’s workforce is employed in the informal sector and is not covered by social security.

“Right now, half the region’s workers are excluded from basic rights to social security,” says Helena Ribe, the World Bank’s regional manager for social protection. “Opening up pensions, unemployment and health insurance to include informal workers will be critical to boosting job quality and economic growth and to protect workers against future shocks,” Ribe adds.

The most noteworthy social protection tool in Latin America and the Caribbean has been the introduction of well-targeted conditional cash transfer systems. They have brought millions of poor families within the scope of social protection for the first time and have been adopted as a model by developing countries worldwide.  These programs have strengthened anti-poverty safety nets but there is scope to focus more on promoting human capital development and links to good quality jobs.

“Brazil is seen by the world as a country that has taken a fundamental decision to expand public policies, such as the Brazilian conditional cash transfer program Bolsa Familia, which benefits 12.4 million families,” said Marcia Helena Lopes, Brazil’s Minister of Social Development.  

Social insurance systems in most countries are fragmented, meaning that parallel programs offer different benefits to various segments of the labor force, even when they make similar contributions.  Pensions, unemployment benefits, and health insurance systems are running deficits in many countries, which must be financed from general taxes on current and future generations. Similarly, the region’s social assistance (SA) programs, which provide targeted transfers to the poorest households, have yet to achieve their full potential to prevent poverty and to promote gains in the areas of health and education.

“Alternative social policies are capable of reducing poverty in Latin America and the Caribbean,” said Carlos Eduardo Gabas, Brazil’s Minister of Social Security of Brazil during his remarks at the Second Rio de Janeiro Conference on Human Development.  “In Brazil, strong investment in social programs has led the country through the global financial crisis in a less turbulent manner. However, still a lot of work remains ahead of us in order to expand our social security programs,” Gabas adds. 

Informal workers should have access to social security programs

From Right to Reality notes that in many countries, far from declining, informality has risen in recent decades. Many workers move in and out of the formal sector (and the social security system) multiple times throughout their working lives. In Argentina, Chile, and Uruguay, for instance, the average worker spends only half of their working life contributing to social security. The lowest level of informality is in Chile at around 40 percent, and the highest is in Bolivia at close to 75 percent.

The study highlights five principal challenges facing social protection policy makers:

  • Addressing the limited progress that has been made in extending social insurance (SI) coverage. This is analyzed using new cross-country data on the scope of contributory and noncontributory programs for old-age income support, health, and unemployment protection.
  • Reducing the fragmentation of institutional arrangements in SI, which arises, in part, from the ad hoc development of subsidized programs and leads to differentiated provision and benefit adequacy between insurers and population groups.
  • Changing the opaque and often regressive nature of financing and redistribution arrangements for SI and the associated lack of financial sustainability for many programs and systems.
  • Reinforcing the targeting and poverty reduction effects of income transfer programs, to strengthen their impact on human capital accumulation, improve their crisis response capacity, and ensure that they avoid labor market disincentive effects.
  • Strengthening the region’s active labor market programs (ALMPs), improve the relevance of training programs, and increase the efficiency of the job-search and matching process.

The report also argues that contributory social insurance programs should be opened to all workers, regardless of where they work. This means maintaining mandatory insurance in the formal sector but also promoting the inclusion of informal sector workers in contributory social insurance programs on an optional basis, with adequate financial and institutional incentives.

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