Evidence from a Nationwide Quasi Experiment in Brazil

Nudging the Self-employed into Contributing to Social Security

According to the World Bank, independent workers make up about one third of the world's workers, and almost half of them are in low- and middle-income countries. However, this group falls outside the social security and tax institutions.

For several years, the Brazilian government has been implementing a series of initiatives to increase social security coverage and compliance with tax payments among self-employed workers. In 2009, the Brazilian Ministry of Social Security (Ministerio da Previdencia Social) implemented the Independent Micro Entrepreneur (MEI) program to register self-employed workers. The program reduced the cost of compliance with social security and tax authorities for this group (from 20% of net income to 11% of the minimum wage, or 7% of net income) and also simplified compliance capacity by making a single payment for social security and municipal and state taxes.

However, two years after implementing the program, only 2 million of the 9 million independent workers had joined MEI. And only 45% of them were making payments.



According to the World Bank, independent workers make up about one third of the world's workers, and almost half of them are in low- and middle-income countries. However, this group falls outside the social security and tax institutions.

For several years, the Brazilian government has been implementing a series of initiatives to increase social security coverage and compliance with tax payments among self-employed workers. In 2009, the Brazilian Ministry of Social Security (Ministerio da Previdencia Social) implemented the Independent Micro Entrepreneur (MEI) program to register self-employed workers. The program reduced the cost of compliance with social security and tax authorities for this group (from 20% of net income to 11% of the minimum wage, or 7% of net income) and also simplified compliance capacity by making a single payment for social security and municipal and state taxes.

However, two years after implementing the program, only 2 million of the 9 million independent workers had joined MEI. And only 45% of them were making payments.
To encourage independent workers to contribute to social security, the Ministry of Social Security sent a brochure that served as a reminder, informing members of the obligation to make payments (in a 2013 survey, 20% of members replied that they did not know that their registration in the MEI involved monthly contributions); called attention to the benefits to which they were entitled by contributing to social security; lastly, the brochure could have been seen as a monitoring tool, since the envelope was sealed by the Ministry of Social Security and the Ministry of Finance.

The brochure also served as a simplification tool since 12 coupons were attached for making payments at any bank during the next year. This was aimed at reducing the cost of contributing.
A quasi-natural experiment was conducted resulting from the scaling up of the intervention in the period February-July 2014, which was gradually introduced in groups of states. In particular, each month the Brazilian authorities prioritized different groups of states due to logistical restrictions on sending out the brochures. These restrictions resulted in a scaling up of the intervention over a period of four months. The brochure was sent to all members in a particular group of states, regardless of their date of entry into the program.

Although all the variations in treatment which are exploited take place at state level, the econometric method is concentrated at municipal level. As a result specific municipal tendencies are controlled and the effects of heterogeneity are explored also at municipal level. The way the scaling was done is crucial to the identification strategy since it was not done randomly; the authorities in Brazil decided to establish geographical criteria. The intervention began in the relatively poor region of the North, and ended in the South in Sao Paulo which has about 25% of the MEI members. Based on the information, a differences in differences model was estimated which captures the effect of the intervention in different treatment and control groups.

Microentrepreneurs  registered  with social security but who do not pay tax. 

Increase compliance with payments by people already members of MEI.  

Results

Sending the brochure increased the number of payments by 15% and the compliance rate by 7 percentage points. This increase is concentrated in the month that the brochure was delivered and dissipates three months after the intervention. This is known as action and backsliding. However, the increase in payments, even for a limited period of time (6 months), was double the cost of sending the brochures.