Monday, September 28, 2009

New paper: Social Security Rules and Labor Force Participation of Older Workers: Evidence from Chile

This paper from Alexandra Cox Edwards and Estelle James just popped up on my SSRN email. Titled "Social Security Rules and Labor Force Participation of Older Workers: Evidence from Chile" it looks at how the shift from a traditional DB pension to a DC system of personal accounts has influenced incentives to delay retirement.

Here's the abstract to the Edwards/James paper:

Recent research has argued that incentives stemming from social security systems influence the worker's decision to retire. The experience of Chile, which radically changed its system in 1981, offers an opportunity to test this hypothesis. The new system tightened access to early pensions, replaced an actuarially unfair defined benefit plan with an actuarially fair defined contribution plan, exempted pensioners from the pension payroll tax and allowed widows to keep their own pension in addition to their survivor's benefit. Although the old system is being phased out, since 1981 the two systems have co-existed. Using probit analysis of the behavior of a retrospective sample of new and old system affiliates, we estimate the impact of the new social security rules on the probability of dropping out of the labor force, for older workers. We find large effects. Age of pensioning has been postponed. Labor force participation is much higher among affiliates of the new system compared with the old, especially for pensioners and women. This is not simply due to selection: Aggregate participation rates have increased as the new system's share of total affiliates has risen.

As I and my co-authors showed in this paper, incentives to remain in the workforce under the U.S. Social Security program are quite poor. The typical person who chooses to work and pay Social Security taxes an additional year receives only around 2.5 cents in additional lifetime benefits for each dollar of additional taxes they pay. If we wish people to delay retirement we need to give them reasonable incentives to do so.


WilliamLarsen said...

We now come full circle. The purpose of SS was to encourage older workers to leave the work force to make room younger workers. This was the main reason for reducing benefits to those who worked after retiring.

Now the shift is to keep the worker to beneficiary ratio high and that requires more workers to stay working after retirement age, thus negating the need for SS.

The problem now is high unemployment. How do you increase the workers while freeing up jobs?

SS has artificially stimulated our economy beyond the means to keep it going. We consumed the savings of 45 cohorts or more by taking it and giving it to retirees who spent it instead of producing the means to provide future benefits.

Higher SS taxes reduce the savings rate and future ability to retire. It increases dependency as well. When a down turn occurs families are less able to withstand the change due to lower accumulated resources.

Some think SS is the savior when in fact it was and is the opposite.

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