Do Individual Accounts Postpone Retirement: Evidence from Chile

57 Pages Posted: 17 Feb 2008

See all articles by Estelle James

Estelle James

Consultant

Alejandra Cox Edwards

California State University, Long Beach - Department of Economics

Date Written: April 2005

Abstract

Postponing retirement will become increasingly important as a means to increase the labor force, its output and old age security, as populations age. Recent research has focused on incentives stemming from the social security system that influence the worker's decision to retire. Defined benefit systems (both public and private) often contain penalties for postponing access to pensions or continuing to work while receiving a pension. In contrast, the tight link between contributions and accumulations and the actuarial conversion of accumulations into pensions in privately managed defined contribution systems may lead workers to postpone pensions or to continue working after withdrawals begin. The experience of Chile, which implemented its new system in 1982, offers an opportunity to test if the change in incentives has indeed produced the expected change in retirement behavior. Using probit analysis of household survey data from 1960 to 2002, we estimate the impact of the pension reform on the probability of 1) becoming a pensioner and 2) dropping out of the labor force, for older workers. We find strong effects of the new system on both propensities, in the aggregate and at the individual level after controlling for individual and macro-economic variables. In particular, restricted access to early pensions and the exemption of pensioners from the pension payroll tax appear to exert a powerful effect on labor force participation rates.

Suggested Citation

James, Estelle and Cox Edwards, Alejandra, Do Individual Accounts Postpone Retirement: Evidence from Chile (April 2005). Michigan Retirement Research Center Research Paper No. WP 2005-098. Available at SSRN: https://ssrn.com/abstract=1093712 or http://dx.doi.org/10.2139/ssrn.1093712

Alejandra Cox Edwards

California State University, Long Beach - Department of Economics ( email )

1250 Bellflower Blvd
Long Beach, CA 90840-4607
United States
562-985-5969 (Phone)
562-985-5804 (Fax)

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