Is There a Positive Incentive Effect from Privatizing Social Security : Evidence from Latin America
There is increasing concern among policymakers that social security reforms that involve a transition to individual retirement savings accounts may exclude certain groups of workers from coverage against the risk of poverty in old age. While most p...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Online Access: | http://documents.worldbank.org/curated/en/2001/11/1643366/positive-incentive-effect-privatizing-social-security-evidence-latin-america http://hdl.handle.net/10986/19421 |
| Summary: | There is increasing concern among
policymakers that social security reforms that involve a
transition to individual retirement savings accounts may
exclude certain groups of workers from coverage against the
risk of poverty in old age. While most public pay-as-you-go
systems pool the risk of interrupted careers and periods of
low earnings over the covered population, the reformed
systems shift the burden of these risks to the individual.
Adequate coverage under a system of individual retirement
accounts depends critically on accumulating sufficient
savings through regular contributions. In developing
countries where opportunities for unregulated employment
abound and workers can easily escape mandated social
insurance, theory suggests that reforms will increase the
number of contributors to social security by reducing
distortions and improving incentives in the labor market.
Motivated primarily by fiscal pressures stemming from the
deficits of overly generous, poorly administered public
pension systems, many governments are going ahead with
reforms as if this theory is correct. Does a shift to
individual retirement accounts improve the incentives to
contribute to social security? Almost a decade after reforms
to national social security systems in Latin America (two
decades, in the case of Chile), existing evidence is mixed.
Several studies have found that the share of the Chilean
workforce covered by the national pension system has
increased since individual retirement accounts were
installed in 1981; others have shown that there has been no
change in this share. But these studies rely on simulations
or on casual observation of data on the sectoral allocation
of the labor force and relate only to Chile. Sufficient time
has now passed since reforms in several Latin American
countries to allow more rigorous testing of the theory. The
author estimates the impact of social security
reform-specifically, the transition from a purely public
pay-as-you-go system to one with private individual
retirement accounts-on the share of the workforce that
contributes to formal retirement security systems. To test
the predictions of a simple model of a segmented labor
market, he exploits variation in data from a panel of 18
Latin American countries, observed from 1980 to 1999.
Results show that introducing individual retirement accounts
has a positive incentive effect that, other things equal,
increases the share of the economically active population
contributing to the reformed system. But this effect occurs
only gradually as employers and workers become familiar with
the new set of social security institutions put in place by reform. |
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