The Effects of Means-tested, Noncontributory Pensions on Poverty and Well-being: Evidence from the Chilean Pension Reforms

Abstract

Chile initiated in 1981 a privately managed, individual-account pension system that inspired similar reforms in many Latin American countries, and that has been considered as a possible model for Social Security in the United States. After 30 years in place, the Chilean pension system has been criticized for replicating existing inequalities in labor markets and increasing the risk of old-age poverty; for achieving lower levels of coverage; and for providing low pension benefits. Aiming at guaranteeing a minimum level of consumption upon retirement and increasing the incentives to contribute, in 2008 Chile reformed the Pension System, widening the welfare tier and improving the contributory tier through a means-testing scheme. This paper examines the impact of the 2008 Chilean pension on labor supply and well-being, using a version of the difference-in-difference estimator that assesses the effects of the reform through exogenous changes in pension wealth. Using longitudinal data from 2006 through 2012, and a sample of individuals that were not retired by the time of the implementation of the reforms, our preliminary estimates suggest that the pension reforms induced an increase in the probability of working formally, but at least among females, they reduced labor market participation. However, we find limited impacts of the reform on nonlabor outcomes. Besides some improvements in aggregate household expenditures and in measures of subjective well-being measures among males, we do not detect robust changes in health and well-being among individuals near retirement.