Social Security:

Tax on Labor Income, Subsidy to Retirement

Abstract

The Brazilian federal old age, survivors, and disability insurance program (Regime Geral de Previdência Social – RGPS) is a binary intervention which renders itself to investigation from two different perspectives: taxation and expenditures. Compulsory payments to RGPS constitute a tax on income from labor, increases individual time preference and should result in diminished savings. This result wasn’t found neither in this investigation, nor in a review of studies based in highly aggregated data. Most studies based on disaggregated data, however, corroborate the theory prediction, what indicates disaggregation as the appropriate path for future investigations. RGPS expenditures are subdivided between consumption and transfers. Bureaucrats consume a significant portion of the payments made to the RGPS on their own compensation or direct use of various goods and services. The remainder is transferred to individuals selected by politicians and bureaucrats, mainly under the form of pensions. These transfers constitute a subsidy to leisure. It is expected that they result in a reduction of labor activity, a prediction which is corroborated by this investigation and other studies. RGPS’s binary intervention reduces the utility experienced by the members of the Brazilian society. Utility maximization requires not merely a pension reform, but the RPGS’s extinction.