Do Individual Accounts Postpone Retirement: Evidence from Chile

Postponing retirement will become increasingly important as a means to increase 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 actuarial conversion of accumulations into pensions in privately managed defined contribution systems may lead workers to postpone pensions or to continue working withdrawals begin. The experience of Chile, which implemented its new system 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 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.Social Security Administrationhttp://deepblue.lib.umich.edu/bitstream/2027.42/50521/1/wp098.pd