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Title: |
Pension reforms and employment |
| Author: |
Alejandra Cox Edwards |
| Author
Affiliation: |
Department of Economics, California State University – Long Beach, USA |
| Source: |
International Economic Journal, June 2005, v. 19, no. 2, pp. 305-319 |
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Publication Date: |
June 2005 |
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Abstract: |
The Chilean social security reform became effective in November of 1980. It replaced a traditional pay-as-you-go system composed of a multitude of funds attending groups of workers of different sectors or qualifications, and with varying contribution rates, with a system based on a minimum required contribution towards an individual account. After two decades, researchers are able to examine the many effects of this reform on the economy. This paper focuses on the effects on the labor market.The closer link between individual benefits and individual contributions fundamentally changed labor market incentives. Individuals began to see payroll contributions as a deferred payment rather than a tax. Furthermore, the reform lowered the combined rates towards old age and disability pension contribution for all active workers that chose to switch the new system. In addition, the new law exempted from contributions all women above 60 and all men above 65. In short, obligatory contributions for all workers fell with the reform, and they became zero for workers above the minimum pension age.
Estimates of “money’s worth” ratios are used to compare the old and new systems and to establish differential effects across specific types of workers. Based on these estimates, the payroll tax was substantially reduced with the reform. It is expected that a reduction in payroll taxes will have a positive effect on labor demand and supply to the extent that labor costs fall and net wages increase.
I use aggregate data on employment and output from 1960 to 2002, to estimate the link between the social security tax rate and aggregate labor demand and supply. The results imply that a 10% reduction in the payroll tax would lead to a 2% increase in employment, and to a 0.7 points expansion in labor force participation. In short, the evidence is consistent with the theoretical predictions. A reduction in the payroll tax leads to a more active labor market. In addition, institutional data on contributors to the social security system suggests that there has been an increase in the fraction of the labor force that makes contributions to social security.
Finally, the paper examines repeated cross section data for Chile, to examine patterns of labor force participation among older individuals The micro data suggests some important changes in the retirement behavior of Chileans after the reform. In particular, both men are women are staying in the labor force until a later age.
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