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

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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.

Key Findings

We study the effects on labor supply and well-being of a major reform to the Chilean, privately managed pension system in 2008, which introduced means-tested, noncontributory pensions and contribution incentives to workers. The new set of reforms were intended to guarantee a minimum level of consumption upon retirement, prevent old-age poverty and reduce gender inequalities, while at the same time provide the right incentives to increase the density of contributions.

  • Our preliminary results suggest that an increase of $100,000 Chilean pesos (US$150) in expected pension wealth induced by the reform would not change labor market participation among males, but would reduce female labor market participation by 3 percent, due to a negative income effect.
  • Conditional on participation, reform would reduce labor informality among males and females, using different measures of informality such as contributing to the pension system, having a contract, or self-employment rates. These changes are larger among older individuals near retirement and are amplified by the effect of accrued pension wealth, demonstrating that the new incentives to contribute operate in the right direction.
  • We observe significant increases in aggregate household expenditures, in the number of dental care visits among females, and some improvements in subjective well being measures among males such as self-perceived health, feeling depressed, or feeling sad. We do not find significant impacts in more objective measures of physical health or in medical expenditures among males and females.
  • While most of the new reforms were targeted to females, we do not detect significant improvements in subjective well-being among them. While our results are only based on the sub-sample of individuals that were still not retired in 2008, where the reforms were implemented, the results in outcomes other than labor supply may change when we add to the sample the pool of individuals that were already retired in 2008, and that were also benefited by the reforms.

Citation

Lopez Garcia, Italo, and Andrés Otero. 2017. “The Effects of Means-tested Non-contributory Pensions on Poverty and Well-being: Evidence from the Chilean Pension Reforms.” Ann Arbor, MI. University of Michigan Retirement Research Center (MRRC) Working Paper, WP 2017-358. https://mrdrc.isr.umich.edu/publications/papers/pdf/wp358.pdf

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Paper ID

WP 2017-358

Publication Type

Working Paper

Publication Year

2017