The economic team is weighing reduced payments for workers with larger severance packages and higher contributions from sectors with higher turnover

09/16/2024

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Alexandre Manoel — Foto: Rogerio Vieira/Valor

With a strong job market and low unemployment, the government’s economic team is exploring ways to address what some experts view as double protection for workers dismissed without just cause: unemployment insurance and the 40% severance fine on deposits in the Workers’ Severance Fund (FGTS).

One proposal is to adjust the number of unemployment insurance payments based on the size of the severance fine. Under this plan, the higher the fine, the fewer unemployment insurance installments a worker would receive, creating a balance between the two forms of compensation. Notably, the proposal does not involve altering the FGTS fine itself.

Another idea under consideration is improving the funding of unemployment insurance. This benefit is financed through the Workers’ Support Fund (FAT), funded by a portion of the PIS and Cofins social taxes. The government is exploring the possibility of increasing contributions from industries with higher worker turnover, as these sectors rely more heavily on unemployment insurance. While the Constitution allows for differentiated rates, this provision has not yet been implemented.

These preliminary ideas have not yet been formally presented to the Ministry of Labor and Employment and will need to be refined through discussions with other government sectors, as well as reviewed by key ministers and President Lula. Whether they will become concrete proposals remains uncertain.

These discussions are part of a broader spending review aimed at curbing the rise in mandatory expenditures to ensure the fiscal framework’s sustainability.

The spending review focuses on three key areas: revising social benefits, modernizing automatic rules for budget allocations to specific sectors, and reformulating public policies.

The aim of adjusting government programs is to save resources, address inefficiencies, and improve productivity.

While experts agree that the government’s efforts to strengthen the spending review are moving in the right direction, concerns remain about the implementation of potentially unpopular measures.

“Reforming mandatory spending, such as adjustments to the Continuous Cash Benefit, wage subsidies, or unemployment insurance, is essential to restore fiscal credibility, which has been eroding since the start of the year,” says Alexandre Manoel, chief economist at AZ Quest. He believes the government has fallen short in managing the expectations of economic stakeholders since taking office.

Rafaela Vitória, chief economist at Banco Inter, adds that a reform and consolidation of benefits could positively impact the fiscal outlook in the medium and long term, potentially accelerating fiscal adjustments. “The current structure shows that stronger economic growth has led to faster spending, complicating the adjustment process,” she explains.

Manoel Pires, coordinator of the Fundação Getulio Vargas Center for Fiscal Policy and Public Budget, notes that many of the ideas being discussed are not new. “The issue is not formulating the ideas but getting them on the government’s agenda,” he says. “That has yet to happen.”

Echoing Mr. Pires’ observation, the government is internally resistant to the spending review. One official acknowledged that the economic team’s main challenge is “selling” the concept to the various ministries.

Professor Alberto Handfas from the Federal University of São Paulo (UNIFESP) views the government’s push to cut social program spending as excessive. “I don’t believe this will solve the fiscal tightening issue,” he remarked, suggesting that other expenses, such as the salaries of judiciary officials, high-ranking military personnel, and interest payments, should be addressed first.

In inflation-adjusted terms, the government spent R$52.3 billion on unemployment insurance in the 12 months leading up to July this year. Data from the Ministry of Labor indicates that despite a booming job market, the number of people claiming the benefit has not decreased.

“Unemployment insurance spending has grown by 7.5% above inflation this year, which starkly contrasts the more favorable labor market, characterized by record employment and formal job creation,” says Ms. Vitória. “This discrepancy reveals that the program’s design is not well-suited to the cyclical conditions of the economy, and it imposes a significant fiscal burden, complicating the necessary adjustment of government accounts.”

Ms. Vitória also highlights the overlap between support mechanisms for workers, such as the FGTS fine and unemployment insurance. “This duplication incentivizes turnover rather than fostering job stability.” A government technician echoed this sentiment, explaining that internationally, it’s typical to use one form of support or the other—but not both, as is the case in Brazil.

To qualify for unemployment insurance, beneficiaries must have worked under a formal contract for at least 12 of the 18 months preceding their dismissal when applying for the benefit for the first time. The requirement drops to nine months for a second application, and for subsequent applications, it falls to six months.

The number of installments a worker can receive ranges from three to five months, depending on how many months they were employed. The FGTS severance fine is paid to workers dismissed without just cause.

In cases of dismissal without agreement, the fine amounts to 40% of the total balance in the FGTS account, while it drops to 20% if the dismissal is part of an agreement between employer and employee.

In a booming economy, government experts suggest that many workers strategically seek the FGTS fine and unemployment insurance, confident they can quickly find new employment once their savings are depleted.

“If I’m fired, I can claim unemployment insurance, receive the FGTS fine, withdraw from my FGTS account, collect severance pay, and take accrued vacation plus an additional third. In other words, I leave with a compensation package and a guaranteed income through unemployment insurance. Evidence suggests this creates a tendency among workers to seek redundancy, which in turn encourages turnover,” explained a source.

This dynamic led to the proposal to adjust the number of unemployment insurance installments based on the FGTS fine. According to economic team technicians, this change could result in tax savings while also helping to reduce turnover.

*Por Lu Aiko Otta, Jéssica Sant’Ana — Brasília

Source: Valor International

https://valorinternational.globo.com/