Wharton Pension Research Council Working Papers

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Working Paper

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This study evaluates the effect of Chile’s pension system rules and regulations on individuals’ contribution and working decisions. In 1980 Chile was the first country to switch from a pay-as-you-go system to a privatized system based on individual investment accounts; then it has since been a model for pension reforms in many other Latin American countries. The Chilean system has also been considered by U.S. policy makers as a possible prototype for reform. This paper develops and estimates a dynamic behavioral model of individual decision-making about formal or informal sector employment and about pension contributions, accounting for regulations that govern the timing and level of pension benefits. Model parameters are obtained by the method of simulated maximum likelihood applied to longitudinal data from a new household survey, the Social Protection Survey (2002 to 2004), and administrative data from the pension regulatory agency. The estimated model is used to simulate the impact on employment and contribution patterns of changing the system rules. Reducing the number of quarters required to obtain the Minimum Pension and increasing the size of that pension increases work in the formal sector and contributions in the informal sector.

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© 2008 Pension Research Council of the Wharton School of the University of Pennsylvania. All rights reserved.


The author is grateful for research support from the National Institutes of Health – National Institute on Aging (grant number P30 AG12836); the Boettner Center for Pensions and Retirement Security at the University of Pennsylvania; and the National Institutes of Health - National Institute of Child Health and Development Population Research Infrastructure Program (R24 HD-044964). The research reported herein was also performed pursuant to a grant from the U.S. Social Security Administration (SSA) through the Michigan Retirement Center (Grant 10-P-98362-5), funded as part of the Retirement Research Consortium. The opinions and conclusions expressed are solely those of the author and do not represent the opinions or policy of the Social Security Administration, any agency of the Federal government, or the Michigan Retirement Center. Helpful comments and guidance were provided by Jere Behrman, Olivia S. Mitchell, Petra Todd, and Kenneth Wolpin, and data assistance from Javiera Vasquez is much appreciated. Opinions and errors are solely those of the author and not of the institutions with whom the author is affiliated.

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Date Posted: 09 August 2019