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Do Individual Accounts Postpone Retirement: Evidence from Chile

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  • Estelle James

    (Urban Institute)

  • Alejandra Cox Edwards

    (California State University)

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    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.

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    Bibliographic Info

    Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp098.

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    Date of creation: May 2005
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    Handle: RePEc:mrr:papers:wp098

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    References

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    1. Burtless, Gary, 1986. "Social Security, Unanticipated Benefit Increases, and the Timing of Retirement," Review of Economic Studies, Wiley Blackwell, vol. 53(5), pages 781-805, October.
    2. Monika BÜTLER & Olivia HUGUENIN & Federica TEPPA, 2004. "What Triggers Early Retirement ? Results from Swiss Pension Funds," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 04.04, Université de Lausanne, Faculté des HEC, DEEP.
    3. Edwards, Sebastian & Edwards, Alejandra Cox, 2002. "Social Security Privatization and Labor Markets: The Case of Chile," Economic Development and Cultural Change, University of Chicago Press, vol. 50(3), pages 465-89, April.
    4. Gary Burtless & Robert A. Moffitt, 1986. "Social Security, Earnings Tests, and Age at Retirement," Public Finance Review, , vol. 14(1), pages 3-27, January.
    5. Palacios, Robert & Whitehouse, Edward, 1998. "The Role of Choice in the Transition to a Funded Pension System," MPRA Paper 14176, University Library of Munich, Germany.
    6. Axel Borsch-Supan, 1998. "Incentive Effects of Social Security on Labor Force Participation: Evidence in Germany and Across Europe," NBER Working Papers 6780, National Bureau of Economic Research, Inc.
    7. Gruber, Jonathan, 1997. "The Incidence of Payroll Taxation: Evidence from Chile," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages S72-101, July.
    8. Alan Krueger & Jorn-Steffen Pischke, 1989. "The Effect of Social Security on Labor Supply: A Cohort Analysis of the Notch Generation," Working Papers 635, Princeton University, Department of Economics, Industrial Relations Section..
    9. Courtney Coile, 2003. "Retirement Incentives and Couples' Retirement Decisions," NBER Working Papers 9496, National Bureau of Economic Research, Inc.
    10. Jonathan Gruber & David A. Wise, 2004. "Social Security Programs and Retirement around the World: Micro-Estimation," NBER Books, National Bureau of Economic Research, Inc, number grub04-1, May.
    11. Diamond, Peter A., 2002. "Social Security Reform," OUP Catalogue, Oxford University Press, number 9780199247899.
    12. Hurd, Michael D, 1990. "Research on the Elderly: Economic Status, Retirement, and Consumption and Saving," Journal of Economic Literature, American Economic Association, vol. 28(2), pages 565-637, June.
    13. Axel Borsch-Supan & Reinhold Schnabel, 1997. "Social Security and Retirement in Germany," NBER Working Papers 6153, National Bureau of Economic Research, Inc.
    14. Blau, David M, 1994. "Labor Force Dynamics of Older Men," Econometrica, Econometric Society, vol. 62(1), pages 117-56, January.
    15. Börsch-Supan, Axel, 1998. "Incentive Effects of Social Security on Labor Force Participation: Evidence in Germany and Across Europe," Sonderforschungsbereich 504 Publications 98-29, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
    16. Sebastian Edwards & Alejandra Cox Edwards, 2002. "Social Security Privatization Reform and Labor Markets: The Case of Chile," NBER Working Papers 8924, National Bureau of Economic Research, Inc.
    17. Courtney Coile & Jonathan Gruber, 2000. "Social Security and Retirement," NBER Working Papers 7830, National Bureau of Economic Research, Inc.
    18. James, Estelle & Edwards, Alejandra Cox & Wong, Rebeca, 2003. "The gender impact of pension reform," Journal of Pension Economics and Finance, Cambridge University Press, vol. 2(02), pages 181-219, July.
    19. Peracchi, Franco & Welch, Finis, 1994. "Trends in Labor Force Transitions of Older Men and Women," Journal of Labor Economics, University of Chicago Press, vol. 12(2), pages 210-42, April.
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    Cited by:
    1. Ashok Thomas & Luca Spataro, 2013. "Pension funds and Market Efficiency: A review," Discussion Papers 2013/164, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
    2. Estelle James & Augusto Iglesias Palau, 2006. "How to Integrate Disability Benefits into a System with Individual Accounts: The Chilean Model," Working Papers wp111, University of Michigan, Michigan Retirement Research Center.

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