Are there positive incentives from privatizing social security? A panel analysis of pension reform in Latin America
The paper estimates the impact of social security reform – specifically, the transition from a purely public pay-as-you-go (PAYGO) system to one with private individual retirement accounts – on the share of the workforce that contributes to formal retirement security systems. Using a simple model of a segmented labor market, the paper exploits variation in data from a panel of eighteen Latin American countries, observed from 1980 to 1999. Results show a positive incentive effect after the introduction of individual retirement accounts that, ceteris paribus, increases the share of the economically active population who contribute to the reformed system. However, this takes place only gradually as employers and workers become familiar with the set of new social security institutions that reforms put in place.
1 While data are also available for Colombia, they are suspect and have thus been removed from the panel. See discussion of the data, in section 4.2.This research was conducted as part of a study on social security reform financed by the World Bank's Regional Office for Latin American and the Caribbean. I would like to thank Abigail Barr for extensive comments and suggestions, as well as Jan Dehn and Shanaka J. Peiris for their guidance on panel estimation methods. Comments from Robert Holzmann, Anita Schwarz and Aniruddha Bonnerjee, the participants at Oxford University's Latin America Economic Research Network (LAERN) Workshop on June 4, 2001, and the Gorman Research Workshop on June 8, 2001, are also greatly appreciated. I would also like to thank Enrique Mezzanotte and Elizabeth Dahan for their help in gathering the data used in this paper. All remaining errors are mine.