Chávez severance-pay reform turns out to be a lot like W’s Social Security privatization!

OK, now I’m really confused.

Since the new super secret Organic Labor Law (LOT) was unveiled yesterday, I’ve been looking around for some kind of credible instant analysis of the new-old Prestaciones Sociales (a.k.a. Severance Pay) system in the the new Law.

No luck. The reform of the Severance Pay system is flying under the radar, with most comments going to the flashier, but far less important, shortening of the work week from 44 hours to 40 hours.

With no expert to guide me, what is a lonely blogger to do but, gasp, grab the law and read it? With me, that’s always dangerous. Caveat lector, yaddi yadda…here goes.

My brows were raised when I read articles 142 and 143 of the new law. Shockingly, it appears to this layman that Chávez announced a kind of Severance Pay regime equivalent to George W. Bush’s 2005 social security reform proposal.

Instead of a right to an unknown amount of money a worker is due at an unspecified future date – the Balance-Sheet Kryptonite that the 1999 Constitution seemed to mandate – Chávez’s reform places the bulk of the assets a worker is entitled to on individual accounts or trust funds – in Spanish, “fideicomisos.”

According to the new law, the worker is able to call these his own, invest them in the financial institution of his choice, must be informed on their balance periodically, and can even draw on them ahead of time under certain circumstances…which is pretty close to the Social Security Reform Bush asked for in his 2005 State of the Union address!

Put that in your pipe and smoke it…

In fact, the reform is not much of a “reform” at all. The fideicomiso system, and the mandate to deposit 60 days’ salary into it each year, are the status quo.

¡Gracias, Dr. Caldera!

The major change comes in article 142 of the law, sections C and D, which raises the possibility that, in some cases, the individual accounts will not cover the whole of the employer’s Severance Pay liability. When the workers’ entitlement is not covered by his trust fund, employers will still need to cough up extra cash at the end of the employment relationship.

In other words, the trust fund is supposed to cover the workers’ entitlements, but it might not, and if that happens, we’re back on Balance Sheet Kryptonite territory.

The way the law is set up, that would only happen when salaries rise much, much faster than the yield on the individual accounts. The fideicomiso deposit obligation is for 60 days’ salary per year at the current rate (with extra days for seniority), whereas the alternative, final-final salary calculation is based on just 30 days’ of the last salary, multiplied by the number of years served.

In practice, that means the fideicomiso will normally cover the labor liability involved, unless you’ve been working somewhere for many, many years and suddenly get a much-bigger-than-usual raise towards the end of your service.

[Update: a keen eyed commenter points out a potential rub. Under Article 144, workers can access up to 75% of the amount deposited on their behalf for certain uses. But Article 142.C doesn’t take such withdrawals into account in the alternative-to-fideicomiso, 30-days’-of-final-salary-per year calculation. So it may be that workers can double-dip: pre-withdraw 75% of the amount accumulated in their trust funds, then qualify for the 30-days’-of-final-salary benefit anyway. If that’s ruled legal, expect everyone to do it!]

Chavismo’s big departure from the Bush reform is to create a kind of “public option” – a government run “National Severance Pay Fund” – that workers can choose to keep their individual accounts in. But the new LOT explicitly mentions that fund as just one of several options: the worker can also choose to keep his personal account in an “individual trust fund” – presumably, one offered by a commercial bank – through his employer.

Articles 142 and 143 are copy-pasted after the jump, so you be the judge. I particularly enjoyed the quiquirigüiqui in the way “final salary” is defined in article 142.A – suddenly, it’s the final salary in a given quarter we’re talking about!

Ah, chavista sophistry, how fun you are…

One final thought: when half the money in the Fondo Nacional de Prestaciones Sociales is embezzled by a bureucrat, pissed away through petty corruption, or otherwise sinks down into a cesspool of mismanagement , who do you think is going to be left holding the bag?

Anyone? Anyone? Bueller? Anyone?


Garantía y cálculo de prestaciones sociales
Artículo 142. Las prestaciones sociales se protegerán,calcularán y pagarán de la siguiente manera:

a) El patrono o patrona depositará a cada trabajador o trabajadora por concepto de garantía de las prestaciones sociales el equivalente a quince días cada trimestre, calculado con base al último salario devengado. El derecho a este depósito se adquiere desde el momento de iniciar el trimestre.

b) Adicionalmente y después del primer año de servicio, el patrono o patrona depositara a cada trabajador o trabajadora dos días de salario, por cada año, acumulativos hasta treinta días de salario.

c) Cuando la relación de trabajo termine por cualquier causa se calcularán las prestaciones sociales con base a treinta días por cada año de servicio o fracción superior a los seis meses calculada al último salario.

d) El trabajador o trabajadora recibirá por concepto de prestaciones sociales el monto que resulte mayor entre el total de la garantía depositada de acuerdo a lo establecido en los literales a y b, y el cálculo efectuado al final de la relación laboral de acuerdo al literal c.

e) Si la relación de trabajo termina antes de los tres primeros meses, el pago que le corresponde al trabajador o trabajadora por concepto de prestaciones sociales será de cinco días de salario por mes trabajado o fracción.

f) El pago de las prestaciones sociales se hará dentro de los cinco días siguientes a la terminación de la relación laboral, y de no cumplirse el pago generará intereses de mora a la tasa activa determinada por el Banco Central de Venezuela, tomando como referencia los seis principales bancos del país.

Depósito de la garantía de las prestaciones sociales
Artículo 143. Los depósitos trimestrales y anuales a los que hace referencia el artículo anterior se efectuarán en un fideicomiso individual o en un Fondo Nacional de Prestaciones Sociales a nombre del trabajador o trabajadora, atendiendo la voluntad del trabajador o trabajadora. La garantía de las prestaciones sociales también podrá ser acreditada en la contabilidad de la entidad de trabajo donde labora el trabajador o trabajadora, siempre que éste lo haya autorizado por escrito previamente.

Lo depositado por concepto de la garantía de las prestaciones sociales devengará intereses al rendimiento que produzcan los fideicomisos o el Fondo Nacional de Prestaciones Sociales, según sea el caso.

Cuando el patrono o patrona lo acredite en la contabilidad de la entidad de trabajo por autorización del trabajador o trabajadora, la garantía de las prestaciones sociales devengará intereses a la tasa pasiva determinada por el Banco Central de Venezuela.

En caso de que el patrono o patrona no cumpliese con los depósitos establecidos, la garantía de las prestaciones sociales devengará intereses a la tasa activa determinada por el Banco Central de Venezuela, tomando como referencia los seis principales bancos del país, sin perjuicio de las sanciones previstas en la Ley.

El patrono o patrona deberá informar semestralmente al trabajador o trabajadora, en forma detallada, el monto que fue depositado o acreditado por concepto de garantía de las prestaciones sociales. La entidad financiera o el Fondo Nacional de Prestaciones Sociales, según el caso, entregará anualmente al trabajador los intereses generados por su garantía de prestaciones sociales. Asimismo, informará detalladamente al trabajador o trabajadora el monto del capital y los intereses.

Las prestaciones sociales y los intereses que éstas generan, están exentos del Impuesto sobre la Renta. Los intereses serán calculados mensualmente y pagados al cumplir cada año de servicio, salvo que el trabajador, mediante manifestación escrita, decidiere capitalizarlos.

32 thoughts on “Chávez severance-pay reform turns out to be a lot like W’s Social Security privatization!

  1. It appears to me that the money is placed in an interest-bearing account, either individual or otherwise, until separation occurs. In the quoted paragraphs of the law, I don’t see any reference to the employee being able to access the money in the account before separation occurs.


  2. I am no expert either, but here is my 2cents: fideicomisos existed in the last lawand they dont yield too much at least not as much as salary rise. The other thing is that the worker can withdraw a part (trust me they always do) bringing that yield a lot lower. Also disposiciones transitorias say you should take in account from 1997. So if you have a 1997 employee you have to pony up 18months worth of salary. At the end companies are going to have huge liabilities because no fideicomiso is going to yield 32.5% yearly and for old companies the starting balance is huge already


    • It’s not quite like that: the employer has to deposit 15 days’ salary per quarter to the Fideicomiso – that’s two months’ salary per year in the Trust Fund.

      The alternative calculation – the one based on the final, final salary – works on the basis of 30 days’ salary per year.

      So the Trust fund would need to perform much, much worse than the pace of salary increases to create an unfunded liability. I just did a little back-of-the-envelope excel sheet to model this: even if salaries rise at 32.5% per year and the yield on Prestaciones Sociales is just 15%, there’s no unfunded liability until 14 years out.

      The fideicomisos would have to really underperform for this to come into play.


      • Except they can take out 75% of the fondo. Also fideicomisos yield are around 5%annually and best case scenario for yield which is contabilidad de la empresa is tasa pasiva which is 14.5%.


        • Wait, are you saying if they take out 75% under article 144, they’re still entitled to the full amount under 142.C!?

          Oh shit, that’s so crazy it hadn’t even occurred to me!


          • OdayIt is carefully worded. It says garantia. And of course you substract any payment but is apples to oranges companies pays “days” but have to substract a payment in year 2000 which might be back then a month of salary today might be a week or less


            • You’re a lot more familiar with this stuff than me. The interpretation of the word “Garantía” will be contentious, but the word doesn’t appear in 142.C

              Actually, nothing in 142.C suggests that any withdrawal made under 144 will affect the calculation of Final-Final Salary based Prestaciones at all. It’s just 30-days-final-salary per year worked…so it looks to me like no matter how depleted your “garantía” is by withdrawals, you still qualify for the full payment under 142.C.



            • It does say is “anticipo” which means payment in advance. But anticipos are not inflation indexed as salary days are.


            • Besides the alternative provision of one month per year salary , which was the regime before 1997, they new regime its pretty much the same.
              142.C only means that if you work for example 2 year and 7 months you are entitled to 60 days for the last 7 months which already existed in the last LOT and the national fund created.
              As it was mentioned it might not have such a great impact in the private sector were most workers withdraw the 75 per cent each year, so when the severance pay is calculated, pretty much there is almost nothing left to pay. Probably is going to affect more the government itself where people tend to work for many years and there is no trust where they can withdraw money from. Probably they might force public employees to deposit theirs in the national fund.
              When they talk about garantía its simply that instead of depositing the seniority benefit in a trust, the employer can keep its accounting books the item for prestaciones and pay interest at the end of the work relationship, this interest is calculated using a special rate for prestaciones sociales that the BCV has. In this case the rate is higher than the fideicomisos. They create the fund and who knows how they are going to calculate the interest there.
              Thank god labor Courts in Venezuela are the only ones that work well and have some decent judges, so they might be sensible interpreting this.
              They pretty much messed the language, which is the result of drafting that without consulting anyone. In labor law, a prestación social is any labor benefit that you get, vacations, profit sharing. The term for this is prestación de antigüedad which was usually translated as seniority benefit.


  3. Good intentions, bad outcomes, a book by Santiago Levy is a worthy reading. This will end up being a huge tax on formal employment, promoting in equilibrium an increase on the unproductive, inneficient and socially unprotected informal sector. It probably will promote a suboptimally small size of the firms obliged to act in the formal sector, also hindering productivity. The effect will be on the rate of underemployment and total labor productivity, not unemployment per se as some talking heads are saying.


  4. I think the withdrawals will be subtracted from the warranty at the end. No double dip there. This is following what has happened until now. But what withdrawals will do is to make the alternative calculation always higher. So if the worker withdraws 75% of her warranty funds every year, at the end of the relationship shed will be due the alternative 30 days @ the last salary per year calculation.


    • Sorry, it will be kind of double dipping as I see it, but we’ll have to wait and see how the withdrawals are counted.


  5. I wonder if this is why the public response to the reform has been so tepid. It’s probably not as bad as people expected.


    • No, I think the overreaction is typical of not knowing what is in the law, and what the chose to tell you: we’ll give workers their prestaciones back, retroactivas… When in reality it seems to be something in between, and for the Government employees that are not allowed to withdraw their prestaciones in practice, it will be the same. At the end it is all politics.


    • The 1997 reforms were made under a tripartite agreement in spite of public opinion. That’s why many Venezuelans have assumed for the last 15 years they got screwed when in reality they didn’t. This time reforms, albeit unilateral, seem to have been carefully made according to both overt and covert public opinion. In one word, sugarcoating.

      Let’s wait and hear what Fedecamaras has to say about it.


      • One evidence that not all people got screwed by the 1997 reforms if that they kept both systems because people can actually get more money in some cases from the 1997 system than from the retroactive one. But to be fair, the retro-activity regime was mandated by the Constitution, so even if from a cost analysis point of view is bad, if we complain when the government violates the constitution in other cases, we should be consistent and recognize that there was a constitutional mandate to do this.
        the real serious and unconstitutional part of the law, apart that it was enacted through an enabling law is the part about the Consejos de Trabajadores, pretty much killing the figure of unions.


        • Well, it’s arguable, because the constitution mandates a severance pay system based “on the final salary earned by the worker” and here they’re smuggling in the continuation of the 1997 system saying it’s based on the final salary a worker earns in any given quarter!



          • Thee drafting of the law is unclear, but I think that the law its recognizing that the 1997 regime was not as bad as they said it was.
            c) Cuando la relación de trabajo termine por cualquier causa se calcularán las prestaciones sociales con base a treinta días por cada año de servicio o fracción superior a los seis meses calculada al último salario.(This is the old retroactive regime mandated by the Constitution).
            d) El trabajador o trabajadora recibirá por concepto de prestaciones sociales el monto que resulte mayor entre el total de la garantía depositada de acuerdo a lo establecido en los literales a y b, y el cálculo efectuado al final de la relación laboral de acuerdo al literal c.(At the end of the working relationship if the retro-activity regime gives less money to the worker you apply the old regime to benefit him or the new one if it gives him more money)
            OK, if you interpret textually the Constitution says that it has to be calculated using as a basis the last salary then its not constitutional, but at the same time the Constitution says that labor reforms can only benefit the worker(ARt. 89). So its not so illogical if the government argues that they drafted the article like this because it turns out that the old regime benefits some workers in some cases and that the drafters of the Constitution did not realized that. I’m not arguing that this is a sound policy, its a time bomb for the state, but I think that at least legally there is some rational to it.


            • Of course the other option would be calculating under the same conditions of the 1997 law (60 days) with the last salary, but that would have really bankrupt everyone.


    • I think it can be an age issue. Being Venezuela a young country, most people under 35 never has been under the pre 1997 system. Add this fact that the issue is complex and the lack of understanding of most workers of the law. Also 50% or so are in the informal sector so this law does not applies.


  6. Quico, my back of envelope gives 180 days per year for someone working 15years, from a) 60 days per year, plus b) 2 days per year up to 30. So for someone working 15 years, the average of b is 2+4+6+…+26+28+30 / 2 = 120days. Did I misunderstand b?


    • silly, me. **2+4+6+…+26+28+30 / 15 (not 2) = 16. So the rule of thumb is 76days per year.


  7. I studied a little more and came to the conclusion interest are just noise. They must be payed annually and it seems to me they does not affect the severance pay. Severance only comprises (142.a + 142.b) or 142.c. Interests are article 143. Anticipos I think are substracted at the end. I did some spreadsheet calculations with an hypothetical worker with last year condition repeated through 2024. It turns out 142.C catches up with 142.A+B almost ten years later.

    My calculation is in historical bs not present day value which would alter it a lot in favor of the worker since anticipos are not inflation indexed. For example a company gives anticipo in year 2012 of Bs 1000 lets say in year 2022 anticipo of Bs 1000 can be something like Bs 8000 but the company can only substract Bs 1000. On the other hand 142.c says you should pay last month salary times years in service. So if calculated in a inflation adjusted way the workers get a whole lot more.


    • Wow, I didn’t understand any of that.

      I’m guessing a little cottage industry of compliance advisors, workshop leaders and general get-your-prestaciones-straight consultants is going to spring up around this one.


  8. It looks to me like this system could be very vulnerable to “pension spiking” (a practice we are very familiar with here in public-pension-bankrupted Illinois).

    The pension is calculated on the person’s final salary or salary for the last year. This value can be inflated in several ways:

    The employee “cashes in” unused accumulated vacation time, sick time, or holidays.

    The employee gets a fat last minute raise in pay.

    The employee jumps to a second job with a different agency.

    The employee is credited with a lot of overtime work in the last few months before retirement. (This “overtime work” is often participation in a “task force” or “planning group” organized by management; or makework assignments granted to management favorites.)

    Expect all of these methods to be used by chavistas at state agencies or state-owned enterprises.

    Also watch out for something like this: the Ilinois constitution states that no pension benefit may ever be diminished. So even the most outrageous pension giveaways are immune to revision.


  9. Bush’s reform was VOLUNTARY and limited to a percentage of the total SS contribution. The money would have been invested through a bokerage firm of your choice (Fidelity, Ameritrade etc.), where many people have there IRAs and 401ks already and, while regulated by the government mostly as to withdrawals, it wouldn’t have been able to get it’s hands on it, spend it and give you an IOU in return which of course is how the current SS system functions.

    Quite frankly, I don’t see anything equivalent to the Bush proposal and we haven’t even touched on where the money will end up in Venezuela, although we all know what will happen to it.


  10. Quico

    Doing a simple spreadsheet calculation the Retroactive model will be better than the Trustfund depending on inflation. For instance with 10% inflation after 19 years retroactive is better, with 20% inflation after 10 years retroactive is better and with 30% after 7 years. But that is only assuming that there is no real salary increase just keeping up with inflation. If somebody after 10 years of work is promoted to manager his severance increases as if he had been a manager for all those 10 years. Which means it would be cheaper to find a manager than to promote internally.

    Regarding the 75% advance withdrawal I do not think that affects the bottom line at all, because, withdrawn or not, they still account for the final calculation, after all, is an advanced severance payment so it counts as a severance payment. Put another way is not how much is in the Trust fund at the moment of termination but how much has the company deposited in total in the fund. Interest earned shouldn’t count at all because in the end the money in the fund always belongs to the worker. No double dipping on that side.

    For all intents and purposes this is really equivalent to the pre 1997 law because it creates incentives for not keeping personnel for more than 10 years since Liabilities increase exponentially with longevity. For instance with 30% inflation after 20 years an employee would receive more in potential severance payment than what he receives in salary for the whole year.


    • Sorry, I need to correct that last statement. The severance payment and liability increase after 20 years with 30% inflation is actually close to 50% of the salary payment for that year.


    • Ok, another correction. In my first estimate I didn’t take into account the 2 days per year that need to be added to the trust fund. If we add them the comparison is like this:

      – With 10% inflation retroactive is better after 30 years
      – With 20% inflation retroactive is better after 15 years
      – With 30% inflation retroactive is better after 10 years


      • When you say 2 days per year, are you meaning 2 accumulating days per year, as in 2 the first year, 4 the second, etc.?


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