Increasing Formalization and Access to Social Security Among Entrepreneurs in Brazil

Increasing Formalization and Access to Social Security Among Entrepreneurs in Brazil

Cesar Zucco, Anna-Katharina Lenz, Rafael Goldszmidt, and Martin Valdivia

Abstract

Business informality may not only impede the growth of small firms but might also lead to long-term under coverage of social security, as informal microentrepreneurs typically do not make any social security contributions. The Brazilian Government has made efforts to address informality among the country’s microentrepreneurs. Since 2009, self-employed and micro-entrepreneurs, who hire up to one employee are allowed to register as an “individual microentrepreneur” (Microempreendedor Individual or MEI).

The MEI program incentives formalization through a combination of:

1) subsidized contribution to social security
2) the exemption from income taxes
3) a simple and reduced monthly flat rate payment in lieu of other business taxes

Despite the unique set-up of this formalization program, formalization of microentrepreneurs in poorer socio-demographic areas is still low. The study evaluates a series of interventions that facilitates the take-up of the formalization program and encourages payment of monthly contributions by microentrepreneurs in Rio das Pedras, Rio de Janeiro. These interventions are aimed at evaluating the relative effectiveness of information campaigns, reminders, interaction through social networks and perception of political endorsement of the formalization program.