Social Security Coverage and the Labor Market in Developing Countries

This paper examines the reasons behind the low rates of participation in old age pension programs in developing countries. Using a large set of harmonized household surveys from Latin America we assess how much of the low participation can be explained by involuntary rationing out of jobs with benefits versus how much can be instead explained by workers’ low willingness/ability to contribute towards such programs. We compare contribution patterns among wage employees, for whom participation is compulsory, with contribution patterns among self-employed workers, for whom participation is often voluntary. For both types of workers the probability of contributing to old age pension programs is similarly correlated with education, earnings, size of the employer, household characteristics and age. Our results indicate that on average at least 20-30 percent of the explained within-country variance in participation patterns can be accounted for by individuals’ low willingness to participate in old-age pension programs. Nonetheless, we also find evidence suggesting that some workers are rationed out of social security against their will.