Social security effects on income distribution: a counterfactual analysis for Brazil

Abstract

One of the reasons for the existence of social security systems is that they function as an income redistribution mechanism (Diamond, 1977). Nevertheless, there is no obvious consensus about this social security property. We test it to the Brazilian case and try to answer an additional question: is the trend of social security systems increasingly progressive or regressive? We conclude that the changes in Brazilian Social Security legislation reduced inequality between 1987 and 1996, but only for the elderly. For the other age groups, there is a stable trend. Results for the period between 1996 and 2006 reveal that the Brazilian system is neutral for all cohorts.

Keywords:

• social security
• income distribution
• counterfactual distribution

JEL Classification:

• H55
• C14
• D31

Acknowledgement

We are grateful for the comments made by all participants of Latin American and Caribbean Economic Association (LACEA) (2008) and Northeast Universities Development Consortium (NEUDC) (2009) conferences, EPGE and IPEA seminars and XXXV Brazilian Economics Meeting. Any remaining errors are our own responsibility.

Notes

¹Progressive means when social security achieves a better income distribution.

² Gokhale and Kotlikoff (2002) show that social security may greatly increase the inequality in American wealth distribution. In turn, Liebman (2002) finds that social security redistribution is not related to income. Ferreira (2006) shows that retirements and pensions increase the level of per capita household income inequality in Brazil. But the Brazilian evidence is still not conclusive.

³ Wages refer to logarithm of the sum of net earnings of all family members in per capita terms.

⁴ In the explanation of the methodology, we always used these pairwise years.

⁵ We omitted domains for simplicity.

⁶ In the next section, we too consider reversing the order of change in the variables.

⁷ It represents the counterfactual density of wages in 1996 if only the share of beneficiaries (b) and taxpayers (c) had remained at their 1987 level while all other attributes had been at their 1996 level. The same logic applies to 06bc96, 06b96 and 96bc87.

⁸ The percentage can be easily verified by dividing, for example, 96bc87 by 96bcx87 from Table 2.

⁹ The effect can be approximately measured as the sum of percentages of Table 8.

¹⁰ To perform this decomposition, we apply the procedure described in the previous section, but in reverse order. Then, we estimate , and . We obtain an estimate of , applying the Bayes’ rule: . was estimated by a probit model. And was estimated as , replacing x with b.