Post on 03-Jan-2016
Do Individual Accounts Postpone Retirement?
Evidence from ChileAlejandra C. Edwards and Estelle James
2
Work disincentives in old Chilean system
Like other DB countries--Gruber & Wise Early pension easy & not decreased on
actuarial basis so taking pension at first eligible age max PV of lifetime benefits
Public sector--pensioners couldn’t work Private sector—could work but
incremental benefit small (50%,1%,70%)
3
Chilean reform of 1981 Replaced DB with DC—contributions go into
individual accounts, pension depends on accumulation, on actuarial basis
Cut payroll tax, especially for pensioners Raised retirement age and made it more difficult to
retire early Most workers under 50 (born>1931) switched We expect this to raise lfpr of older workers
through 2 channels:– Postponed pensioning, so liquidity constrained workers
must work– Increased work propensities among pensioners
4
1) Postponed pensioning required=> raises lfpr through liquid income effect
Normal pension set at age 65 and 60 for men and women respectively
Early pension not permitted until 1987 Tighter conditions for early pension—pension must
be 50% of own-wage and 110% of minimum pension guarantee
If pension is postponed, it increases on actuarial basis (50% in 5 years because larger accumulation, fewer retirement years)
Therefore we expect postponed pensioning, which should increase work propensities of credit-constrained workers--liquidity effect
5
2) Reduced work disincentives, espec. for pensioners (substitution effect)
Payroll tax fell from 23-25% to 12.5% so net wage rises
Pensioners exempt from pension payroll tax No penalty for work after pension These positive effects should be greater for
workers who were younger on date of reform and should be phased in over time as more older workers in new system
6
Data set from Greater Santiago Area Household Surveys 1960-2002
Individual level data on– Labor force participation– Demographic characteristics– Labor and pension income
We link to official macroeconomic data Shortcomings:
– Not longitudinal, no retrospective data– We don’t know retirement age or type pension,
new or old system affiliates or no affiliation– This leads us to underestimate impact of reform
on new system affiliates
7
Aggregate trends are consistent with our hypotheses. We observe: a decrease in pensioning after mid-80’s an increase in labor force participation of 50+
after mid-eighties1981 higher participation rates among cohorts born
after 1931 these effects are stronger for pensioners Our strategy: do these trends pre and post
reform remain after adding individual and macro-economic variables? Answer: they do
8
Pension probabilities were rising, but fell after reform
pension probabilities by age group over time
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
1957-61 62-66 67-71 72-76 77-81 82-86 87-91 92-96 1997-2002
year observed
pens
ion
prob
abili
ties
40 - 44
45 - 49
50 - 54
55 - 59
60 - 64
65 - 69
70 - 74
9
Male 50+ lfp rates were falling, go up after the reform
labor force participation rate by age groups
0
0.2
0.4
0.6
0.8
1
1.2
1957-61 62-66 67-71 72-76 77-81 82-86 87-91 92-96 1997-2002
year observed
labo
r for
ce p
artic
ipat
ion
rate
s
40 - 44
45 - 49
50 - 54
55 - 59
60 - 64
65 - 69
70 - 74
10
Changes in lfp are more dramatic for pensioners
Participation rates by age groups, pensioners and non-pensioners compared
0
0.2
0.4
0.6
0.8
1
1.2
67-71 72-76 77-81 82-86 87-91 92-96 1997-2002
years observed
labo
r for
ce p
artic
ipat
ion
rate
s
NP50 - 54
NP55 - 59
NP60 - 64
NP65 - 69
Pen50 - 54
Pen55 - 59
Pen60 - 64
Pen65 - 69
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We use probit analysis to see if these results hold after controlling for
other variables, : 2 dependent variables: probability of being
pensioned, probability of being in labor force Individual characteristics: age, education, real
hh income, marital status, # children, spousal age, etc.
Macro-economic variables: unemployment rate, real annual GDP growth, deviations from trend GDP
Pension status and amount 3 reform indicators
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We model impact of reform in 3 alternative ways:
1) Change in time trends of pension rates and lfpr rates for 50+ and 65+ groups pre- and post-reform (reform effects start in 1987)
2) Change in cohort trends pre- and post-reform (1931 birth cohort is the first exposed to reform)
Time and cohort trends are interacted with pension status to allow for differences in trends
3) Dummies for groups of individuals exposed to post-reform incentives.
We expect an increasing fraction of 50+ individuals to respond to the new system’s incentives each year, starting in 1987
13
The data set: men 30+ Series of 40 annual cross-sections from
1960 to 2002 (1963-64 missing). Sample representative of Greater
Santiago (most urban 1/3 of country’s population)– 95,000 individual cases organized by year
of observation– 93,000 individual cases organized by birth
cohort starting in 1900
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Trends in other variablesUnemployment Rate
0
0.05
0.1
0.15
0.2
0.25
Hodrick -Prescott filter and ln(realGDP)Year
lGDP Hodrick-Prescott filter
60 64 68 72 76 80 84 88 92 96 100
5.23164
6.92551
GDP deviations from trend
-0.2
-0.15
-0.1
-0.05
0
0.05
0.1
0.15
0.2
Median schooling
56789
10111213
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Explanatory power increases when co-variates are added, but
reform effect remains Pension prob higher and work prob lower for more
educated workers over 50– this increases gap explained by reform
Pension prob rise and lfp falls with UnE– there is a full cycle after 1987
Adding pensioner status into lfp equation raises R2, cuts pure age effect, and reduces negative impact of macro effects
Virtually entire downward trend in lfp before reform and upward trend after reform is due to pensioners
16
Main reform effects, after controlling for co-variates:
Pension probability, age 50-64– fell 15 percentage points, cut in half by 2002– shift to non-pensioner status increased
aggregate work, since lfpr > for non-pensioners LFP among pensioners, age 50-64
– rose >2% per year, >30 percentage points by 2002, compared to pre-reform trend line
– more than doubled mid-1980’s to 2002
– Smaller effects for older groups, age 65+ These effects are increasing for retirees who
were younger on date of reform All 3 reform indicators give consistent results
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Estimated per year change in lfp (percentage points) at means
non-pensioners pensionersAge 50-64
Before reform .32 -.92After reform -.11 1.47Net change -.43 2.39
Age 65+Before reform .11 -.22After reform .07 .56Net change -.04 .78
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Estimated per year change in lfp (percentage points)
non-pensioners pensionersAge 60 in 1990
Before reform .22 -1.45After reform -.08 2.32Net change -.30 3.77
Age 66 in 1990Before reform .19 -.50After reform .12 1.30Net change -.07 1.80
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Policy implications and future research
Incentives from shift to DC system have had positive effects on supply of older workers
Which is more important—actuarial fairness or system constraints and taxes?– Larger drop in pension prob before 65 suggests that
early retirement constraints play major role– Larger lfpr effect among pensioners suggests that
exemption from payroll tax plays key role Future research using new longitudinal data:
– Do workers take pension as soon as eligible?– Has lfpr also increased among old system and no-
system affiliates (or does lfpr of those in new system increase more when we identify them)?