This study has developed a behavioural model to assess how changes in the rules of pensions and unemployment benefit systems could affect savings rates, the share of time that individuals spend outside of the formal sector, retirement decisions, and system costs. Key parameters are: (1) preferences regarding consumption and leisure; (2) preferences regarding formal versus informal work; (3) attitudes towards risks; (4) the rate of time preference; and (5) the distribution of an outside shock that affects movements in and out of the social insurance system, given individual decisions. Simulations suggest, among other findings, the importance of joint policy analysis of unemployment benefits and pension systems.
Social insurance policies affect individual behaviours and can have serious effects on the supply side of the labour market. Often, benefit formulas that are not fair and minimum pension guarantees induce early withdrawals from the labour force. This increases the cost of the pension system and reduces employment levels. Unemployment insurance systems can reduce incentives to search for or keep jobs. When the package of social insurance benefits includes benefits that are not valued by individuals or includes an important redistributive component, it can promote evasion and informal sector work.
However, the standard analysis of the economic impacts of policy changes in the social insurance system generally ignores these effects. This is because no econometric model has linked the complex set of rules of a given system (say pensions) to behaviours. So, existing econometric models tell us how the presence of a social insurance programme affects a certain behaviour, but not what would happen if the rules of the system were to change.
Because the five parameters are related to individual preferences or exogenous shocks, the joint distribution is unlikely to change when the social insurance system changes. Thus, the model is used to explore how alternative policy interventions could affect behaviours and through this channel, benefit levels and fiscal costs. The results from various simulations provide three main insights:
- The Brazilian social insurance system today might generate unnecessary distortions (lower savings rates and less formal employment) that increase the costs of the system and can induce regressive redistribution.
- Financial sustainability and efficiency could be improved by making redistribution more explicit and transparent. This could involve creating an actuarial link between contributions and benefits and then combining matching contributions and anti-poverty targeted transfers to cover individuals with limited savings capacity.
- There are important interactions between the unemployment benefits and pension systems, which call for joint policy analysis when considering reforms.
