The effect of the Chilean Pension Reform on Wealth Accumulation
Chile went through a major pension system reform in 1981, replacing the state managed pay-as-you-go system by a privately-managed fully funded scheme. The reform implied a rather important increase in the net present value of expected pension wealth for most of those who opted-out to the new arrangement. We investigate the extent to which households substitute this increase by decreasing accumulation of other wealth. As the decision to either stay in the old system or to opt-out to the new one was not random, we follow an instrumental variable approach that allow us to overcome the unobserved heterogeneity problem. Using data from the Social Protection Survey we find two suitable instruments that we apply to two different subsamples. The displacement effect between expected pension wealth and non-pension wealth is estimated to be in the range of 30%. Among the possible reasons for the incomplete offset are imperfect information, the desire to compensate for new risks faced and habit formation..
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