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The Impact of Chile’s Pension System on Work Propensities of Men and Women: Alejandra Cox Edwards and Estelle James, MRRC Workshop 2011 1.

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Presentation on theme: "The Impact of Chile’s Pension System on Work Propensities of Men and Women: Alejandra Cox Edwards and Estelle James, MRRC Workshop 2011 1."— Presentation transcript:

1 The Impact of Chile’s Pension System on Work Propensities of Men and Women: Alejandra Cox Edwards and Estelle James, MRRC Workshop 2011 1

2 Chile’s 1981 changed saving and financial markets. Changed work incentives; did workers respond? Shifted from DB plan to actuarially fair DC plan Reduced contribution rate to pensions Exempted all pensioners and non-pensioners over 60/65 from pension payroll tax Tightened early retirement restrictions Allowed women to keep own pension + survivor’s benefit—eliminated implicit tax Old system members remained subject to old-system rules except pensioners over 65 became exempt from pension payroll tax (same as in new system) Workers already in old system could switch to new system but new entrants to labor force had to enter NS 2

3 Questions about impact on work propensities Do new system members have higher work propensities than old system members? Was this due to payroll tax exemption, actuarial fairness or tighter early pension constraints? Did women react differently from men because of elimination of implicit tax on their contributions? 3

4 Our data and approach In previous paper (Edwards and James 2010) we found strong effect on labor force participation of older men. We didn’t know system affiliation but used birth cohort to identify cohorts with larger proportion of new-system members In present paper we use a 2006 data set which identifies individuals’ system affiliation and contains their work histories We construct a panel and compare behavior of individuals age 50-70 in new and old systems. – 42,641 observations of 4054 men and women – 63% of individuals and 50% of all obs. were in new system We predict probability of work as function of system affiliation, controlling for many individual, family and time- specific variables – This is work in progress. We present linear probability model. 4

5 Co-variates besides New System (NS) Age Pension status (pen, nonpen) Interactions of NS with age and pen status Affiliation after 1981 (no choice) Education Birth cohort Marital status, # children, spouse’s age For pensioners only--years since pension started, pension amount Unemployment rate Separate analysis for men and women 5

6 New System members are more likely to work, especially tax-exempt pensioners 60/65, women 6

7 Results of econometric analysis Significant positive difference in work for groups that got exemption from pension payroll tax in new system but not in old (pen 60/65) Pooled effect of pen & nonpen 40% greater than sum of separate effects—because % of nonpen increased due to tighter early pension rules Actuarial fairness at payout stage reduced pensions for early retirees and later cohorts, so they remained nonpen, worked longer Increase greatest for married women (survivors ben. and other changes that affected short careers) Knowledge about system increased work (espec women)

8 Impact of NS on Workprob of pensioners and non-pensioners, by age 8 MenWomen NS coefficient As % of OS mean NS coefficient As % of OS mean All.11*16%.21*57% Increment to NS effect for members who are married.046%.07*19% all pensioners.06***15%.0624% all non-pensioners.06*7%.24*56% pensioners<60/65.10***23%.0927% pensioners>60/65-.03-9%00% non-pensioners<60/65.045%.15*31% non-pensioners>60/65.18*36%.20*77% * p<.01, ***p<.1, based on robust standard errors

9 Potential problems 1) Larger increase for women could be due to their increased education or change in social norms toward women’s work. We segmented sample by schooling and found same strong effect in high and low schooling groups We also segmented by early vs. late cohorts and got same effects 9

10 Potential problems 2) Could large NS for pensioners under 60/65 be due to differential selection into pensioner status? Easier to start pension early in OS, in new system had to meet replacement rate target which favored those with persistent contributions. But if selection were explanation, workprob would have fallen for nonpen and wouldn’t have risen for all pension groups pooled, in NS. We found work rose slightly for nonpen<60/65 and over-all average rose substantially. Consistent with behavioral change, not simply rearrangement of people between pen & nonpen 10

11 Potential problems 3) Could results be due to selection of those with high taste for work into new system? We included dummy variable for new entrants who had no choice (also dummy for 1 st 3 years of affiliation). No-choice group not significantly different from choice group. We plan to expand sample to age 40-70 In previous paper we found higher lfpr in post-reform cohorts, including NS+OS members—so aggregate work rose, not simply rearrangement of workers people into NS and OS. 11

12 Policy implications: work of older individuals sensitive to taxes, can be increased by-- Exemption from pension payroll tax Raising allowable pension age or tightening early pension rules Tying pension age or size to life expectancy at retirement on actuarially fair basis Removing implicit tax on contributions by married women (keep own+survivor’s benefit) Increasing information about rewards for longer work and postponed pensioning 12

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