How Pension Rules Affect Work and Contribution Patterns: A Behavioral Model of the Chilean Privatized Pension System

Abstract

Chile has been at the forefront of pension reform, having switched in 1980 from a pay-as-you-go system to a fully funded privatized accounts system. The Chilean system served as a model for reform in many other Latin American countries and has also been considered by U.S. policy makers as a possible prototype for social security reform. Some of the criticisms of the Chilean system are low coverage rates and contributions rates among certain segments of the population. In 2006, the Chilean government proposed some reforms aimed at increasing coverage and contribution rates and expanding the safety net provided by the system to poor households. This study evaluates how changes in pension system rules affect working behavior and pension contribution patterns using data from a new Chilean household survey administered in 2002 and 2004 linked with administrative data from the pension regulatory agency. It develops and estimates a dynamic model of decision-making about working in the covered or uncovered sectors of the economy and studies implications for pension accumulations. The estimated model is used to simulate behavior under different pension system rules, such as a change in the number of years of contributions required for the minimum pension or a change in pension plan fees.