Defined Contribution Funded Social Security and Labor Supply: Focus on Mexican Social Security Reform in 1997

Abstract

Countries adopting a defined benefit pay-as-you-go (DB PAYG) regime have two options to solve the issue of financial unsustainability:

(1) a parametric reform, which alters policies within DB PAYG regime, and

(2) a structural reform, which changes the regime from DB PAYG to a defined contribution funded (DC) system.

In this study, focusing on the structural reform of Mexico in 1997, I investigate whether structural social security reform affects labor supply. The findings suggest that the change in the social security regime increased both labor force participation and work hours per week. However, in the case of the elderly, the intensive margin effect on labor supply was not statistically significant.

Keywords: Social security reform, Structural reform, Labor supply

JEL Classification: H55, J20