Employment Effect of Means-Tested Program: Evidence from a Pension Reform in Chile

Employment Effect of Means-Tested Program: Evidence from a Pension Reform in Chile

Authors: Pablo Troncoso

Abstract: I study the employment effects of a 2008 policy reform of the Chilean pension system. The reform increased pension benefits, changed the accrual rates, and relaxed the eligibility criteria for low-savings retirees. I estimate the labor supply responses using two data sets. The first one is a representative cross-sectional survey with 12 waves between 1992 and 2017. The second is a unique database that combines monthly administrative records with a representative panel survey. Using a difference-in-differences approach with multiple time periods, I find that on average, the reform increased labor force participation and hours worked for men aged 60–64 years by 15% and 4%, respectively. The effects are heterogeneous and depend on how workers’ accrual rate changes, which depends on where workers are in the distribution of pension wealth and years of contribution. I find that a lack of pension knowledge is crucial in explaining the heterogeneity within different groups of workers. People with similar levels of pension wealth and monthly contributions behave differently depending on what they believe their pension assets and contributions are. I then develop a three-period model where workers decide consumption, non-pension assets, and labor supply. I conclude that the net impacts of the reform on labor decisions depend on pension wealth and workers’ knowledge about the pension system. These findings are consistent with the empirical results and suggest that better access to relevant information about the pension system may help workers make well-informed decisions when faced with a massive pension reform, especially in the case of a country with a high level of informality.

Seminar Notes

Venue

MEA 2022

Objective

What is the effect of Chilean retirement reform on employment of people close to retirement age?

Background

2008 Reform targeted those with low pension income

1950 Pay as you go system - both civilian & military

1981 Switch to fully funded for civilian

Military not affected by 2008 reform

Data & Key Variables

SPS-APH: Panel survey + Pension history

Methodology

Diff-in-diff with armed forces as a control group

Results

LFP and hours worked increase 11-14% for males 60-64, no effect for women (positive, not significant for ages 55-59)

Heterogeneous effect- only affect those newly eligible

Key Table/Figure