The Assault on Benefits in Venezuela

September 25, 2007

Latin America continues to lead the way in the free-market overhaul of social benefits. This lead was just widened when outgoing Vene-zuelan President Rafael Caldera gained Congressional approval for the privatization of the five main components of the country’s social-security system: health, retirement, unemployment compensation, housing and recreation. In addition, the Caldera government approved a new severance-pay plan which removes retroactive cost-of-living adjustments from workers’ entitlements. The two steps represent significant setbacks for Venezuela’s workers and indicate the current weakness of the country’s trade-union movement, particularly the dominant labor federation, the Venezuelan Confederation of Workers (CTV).

In late 1995, Caldera established a Tripartite Commission of business, labor and state representatives to draft legislation to revise both the social-security and severance-pay systems. Most telling is the extent to which labor backed down from the demands it originally formulated within this commission. The labor movement accepted at least four major setbacks in the laws revamping social security and severance-pay benefits.

First, under the new system, severance payments are no longer calculated “retroactively.” Under the old law, a worker’s severance benefits were determined by multiplying his or her last monthly wage by his or her length of employment, specifically the number of years with the company. Benefits were thus calculated on the basis of a worker’s last, presumably highest monthly wage. These retroactive payments served to compensate for increases in the cost of living. In a tentative accord reached by labor and management in January 1996, each employed worker was given the right to choose between the old and new systems of severance payment, but the final arrangement made the new system mandatory for all workers. The majority of workers, especially those with large sums of severance pay already accumulated, would have undoubtedly opted for the old system out of fear that the money they were currently entitled to would be eaten up by inflation during their remaining years on the job.

Second, the Tripartite Commission originally placed a 13-month limit on the amount of seniority taken into account in the calculation of a special severance payment for workers who had been laid off through no fault of their own. The final agreement whittled the limit down to five months, an amount clearly insufficient to discourage layoffs. Under the old system, workers were compensated according to the number of years they had been on the company payroll, with no built-in maximum. This was an important source of job security, dating to the Labor Law of 1936, co-authored by a 20-year-old Rafael Caldera. The elimination of this compensation favors the “flexibilization” of layoffs in accordance with the imperatives of free-market globalization.

Third, the 1996 tentative agreement linked wages to the cost of living, although differences existed between labor and business over the extent to which one should be pegged to the other. At the time, labor representatives insisted on such a cost-of-living indexing arrangement on the grounds that it would compensate for the elimination of retroactive severance payments as a hedge against inflation. Nevertheless, the final settlement between worker and business representatives eliminated the provision altogether.

Fourth, the CTV accepted the participation of insurance companies and banks in the management of workers’ health and retirement benefits. Under the new plan, workers will choose from a list of private companies to administer their health and retirement funds, with coverage that depends on the amount of their individual contributions. It is far from clear, however, how the vast majority of employees who earn close to the minimum wage, and the large numbers of informal-economy workers who typically earn even less, will be able to pay enough into their privatized individual accounts to ensure adequate protection. Meanwhile, Chile’s Corp Banca and Spain’s Bilbao Vizcaya, both of which specialize in retirement funds, recently bought into the Venezuelan banking system, and are thus well positioned to gain considerable control of the new system once it gets off the ground.

The political agreement between President Caldera and the still-powerful opposition party, Democratic Action (AD), partly explains organized labor’s willingness to make these major concessions. The CTV has long been incorporated into AD and typically does the party’s bidding on labor matters. Through 1994 and 1995, the first two years of the Caldera government, the President and the dominant faction of AD were resistant to neoliberalism, but by 1996 both the Administration and the AD leadership had reversed their positions and began to push for privatization. AD’s leaders had defended the old system of severance payment, which for decades had been a sacred cow in Venezuelan politics, but when the party joined Caldera in his move to the right, the CTV’s opposition to neoliberal labor reform was dampened.

Another factor helps explain the softening of the CTV’s position. Various presidential administrations and businesses had tacitly collaborated to dismantle the system of severance payments by limiting wage increases in the public and private sectors to “bonuses” excluded from the calculation of severance payments. A government decree in 1991 legalized the practice, and by 1997 only about 20% of the minimum wage was considered the “basic wage” used to calculate severance pay. In addition, the government conditioned further increases in the minimum wage on acceptance of severance-pay reform.

Until now, severance pay had been the worker’s most effective form of social security. Workers could draw on their accounts prior to leaving employment in order to cover medical and housing expenses. And for laid-off or retired workers, severance pay represented a substitute for unemployment compensation or retirement benefits. Indeed, for the Venezuelan working class as a whole, the situation has taken a sharp turn for the worse.

Steve Ellner is director of the Research Center for Administrative and Economic Sciences of the Universidad del Oriente in Puerto La Cruz, Venezuela.

Tags: Venezuela, labor, neoliberalism, social welfare, unemployment

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