News about the FGTS (Fundo de Garantia por Tempo de Serviço) has appeared frequently. Subject is not missing. There are several new partial fund withdrawal modalities; there are projects in the Executive to reduce rates and dismissal fines; there is a fear on the part of the civil construction sector that the fund’s resources will become insufficient for the demands of use in the sector; there is a complaint that the fund’s remuneration is very lagged in a scenario of high inflation return; there is the possibility of its use in the privatization of Eletrobras.
The creation of the FGTS in 1966 arose from the need to offer security to workers who would no longer have the right to ten-year job stability. The idea was to create a forced savings mechanism that could only be used at the end of one’s working life or with the express purpose of acquiring one’s own home. With accounts linked to the worker, the money deposited there would not be mixed with the resources of the treasury. The fund’s own tripartite administration would give it the assurance that these resources would not be treated as taxes.
Several changes have been implemented since 1966, affecting the original intention of the FGTS creation law. In this sense, the most important ones have been those that allow access to the fund’s resources without the conditions usually imposed on their use. The reason for the change is the opposite of the creation of the fund: to release resources locked up as savings to stimulate immediate consumption by families.
Immediate and unconditional access to a part of the individual FGTS account is not necessarily something that generates welfare losses for society. There are several reasons to believe that, from an individual point of view, access to FGTS resources can generate benefits, especially for workers who are restricted in credit or who prefer not to wait for their retirement to consume their reserves. There are still those who want to withdraw in order to reinvest the funds in more profitable assets than the FGTS, which, year after year, offers returns below inflation.
The criticism of recurring withdrawals stems from the fear that they end up reducing the amount available for use by civil construction and, therefore, make credit to companies in the sector more expensive. Subsidized credit everyone wants. However, its cost to society should be made explicit. What other investment projects could be either more profitable or more socially desirable than civil construction projects? What efficiency gain is there in reducing misallocation of capital to bad projects?
One criticism that seems more reasonable to the authorization of withdrawals from the fund is that we may need some forced savings. Workers who reach the end of their working lives without having amassed enough resources for old age would be better off if they had been forced to save. Individuals can end up making wrong decisions about how much to save, especially when subject to uncertainty and incomplete information; may make decisions that are not intertemporally consistent; and they may act opportunistically, anticipating that there will eventually be government support to support their old age. Under these conditions, the release of FGTS withdrawals can be harmful to society.
Forced saving, however, should not imply underpayment. Individual accounts should yield like other conservative investments, such as Treasury bills. It is definitely not what happens today. The TR, used to remunerate the FGTS, was 0.04% in March this year, far below inflation or what Treasury bonds pay.
Anyway, given the potentially disastrous use of these resources and the meltdown of individual accounts with high inflation, it may even be better for society to allow recurring and partial withdrawals from the FGTS.
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