Policy for social protection in Latin America constantly runs up against the prevalence, flexibility and persistence of informal work throughout the region. These constrain the funding of social security systems financed through payroll taxes, and make it hard to create eligibility criteria that are inclusive yet limit abuse. Both militate against coverage, and have led to shortfalls that extend well beyond the poor. In most countries contributory systems fail to reach even half of middle-sector workers.
Difficulties do not mean, however, that it is impossible to design systems which provide adequate protection. Recent decades have witnessed substantial efforts in Latin America to reform social-protection systems with the twin objectives of financial sustainability and increased coverage. Reforms typically recognise that pensions, health care and unemployment cover have different characteristics and different priorities. They have therefore tended to separate previously bundled items. Health-care systems have been reformed in the direction of universal insurance against a set of predetermined eligibility criteria. Pensions systems have been reformed with financial sustainability and incentives in mind, in some cases complemented by social pensions to alleviate poverty in old age.
This chapter’s detailed analysis of four diverse countries has shown that the middle sectors are largely informal in Latin America. Social insurance for a significant proportion of the middle sectors will therefore have to be achieved in ways other than through links to formal employment. Some reforms have already allowed for social protection among informal workers. Nevertheless, informal workers’ participation in social-insurance systems remains strongly dependent on their income.
Social-assistance policy is typically seen in terms of the poor, with income support and health-care provision designed to alleviate poverty and preserve human capital. Though overlooked, insufficient coverage of the middle sectors poses a serious challenge to traditional social protection systems. Left to – often incomplete – markets individuals are likely to under-insure or insure inefficiently, if they insure at all. Yet middle-sector workers combine a capacity to save with a potential demand for social protection – as we have mentioned, many of them would need only a relatively small shock to return to the ranks of the poor. Given Latin America’s particularly constrained fiscal space, encouraging the informal middle sectors to join contributory social protection schemes will be a vital part of mobilising their savings for social insurance, and building fairer and more efficient social risk-management systems.