Into the Light: Encouraging Employment Formalization in Costa Rica

A government agency meant to help Costa Ricans, or “ticos” as they call themselves, has spent nearly two decades keeping over a million people out of the formal economy.

Starting in 2005, independent workers were required to contribute to the Costa Rican Social Security Fund (CCSS). Since then, it kept a ledger of what each independent worker in the informal sector owed in unpaid payroll taxes, often based on assumptions and rough estimates of each worker’s income. Interest and fees drove the debts even higher.

According to government estimates, there are about one million informal workers that make up roughly 20% of the Costa Rican total population and half of all workers in the country. Since most informal workers receive low incomes, these debts were far beyond their ability to pay, and they actively worsened the lives of over a million ticos.

Because independent workers were required to first pay off their debts before entering the legal or “formal” job market, they were stuck doing work that was underpaid, often unstable, and sometimes dangerous. These jobs offered them little hope of paying off their taxes or of escaping poverty, creating a vicious cycle. Even worse, the CCSS publicly listed individuals not registered with the system, creating a stigma that hindered their access to credit and government contracts.

The path to a better life started with formalization, but they couldn’t take even the first step.

Determined not to let the abuse of thousands of Costa Rican workers continue, Atlas Network partner IDEAS Labs began a campaign to slash the tax debts levied by the CCSS. Backed by grant support and professional development opportunities from Atlas Network, they worked closely with members of congress, the CCSS board, the Costa Rican Chamber of Commerce, and the Costa Rica Bar Association to craft and advance reforms.

IDEAS Labs faced opposition from policymakers who believed that lightening the debt burden on informal workers would reduce the CCSS’s future potential income. In response, the organization pointed out that creating debts that workers would never pay did nothing to contribute to the CCSS’s financial sustainability, but only hurt the most vulnerable Costa Ricans. They argued that better solutions might include broadening the tax base by allowing more workers to become formal, and thus tax paying, members of the economy—a natural result of the very reform IDEAS Labs was proposing.

Thanks to their efforts, the Independent Workers Law was passed in 2023, which created a realistic path for informal workers to address their debts with the CCSS. The law requires that the statute of limitations for debt recovery for the CCSS be reduced from ten years to four. This means informal workers can only be charged for the last four years of their debts, without fines or interest, making it more feasible for workers to pay their contributions.

“Before the approval of this law, if an informal worker visited the CCSS with the intention of becoming a formal worker, the CCSS inspectors could start a process to collect debts. They estimated the amount owed, sometimes based on arbitrary assumptions of income, and, in some cases, totaling debts all the way back to 2005, making it virtually impossible for the informal workers to pay,” explained Luis E. Loria, president of IDEAS Labs. “This is a very important reform that opens the possibility for workers in the informal sector to cancel their debts with the Costa Rican Social Security Fund and, eventually, become formal workers.”

The formal sector is made up of individuals and businesses that follow labor laws and pay their taxes regularly. In addition, most of them offer consistent pay and benefits and stable jobs, which are not available to informal workers. In other words, entering the formal, legal marketplace gives workers access to better job opportunities and the basic legal protections many people take for granted. In Costa Rica, workers in the formal sector also means access to healthcare services and the state-managed pension system.

IDEAS Labs’s “Freedom to Work” campaign has continued to advocate for further reforms, including securing dedicated seats for independent workers on the CCSS board, to end the current situation of “taxation without representation,” and the reduction of labor taxes.

With their debt obligations to the CCSS reduced to a more manageable level, nearly a million ticos now have easier access to the full benefits of the formal economy. “The Independent Workers Law will have a profound impact on the lives of thousands of individuals who will have access to more opportunities for achieving greater prosperity and leading more fulfilling lives,” Luis noted.

Ester Méndez, a Senior Policy Analyst with IDEAS Labs, stressed that this victory is a great example of how educating and working with policymakers can improve the lives of many.

“Coalition building and working with strategic allies in different phases is a key for achieving the results, and it’s what made this reform possible,” Méndez said. “We worked with Congress, made a clear and solid proposal, and convinced them to do the right thing!”