Pension Coverage, Private Saving Decisions and Mandatory Contributions in Chile

Twenty-seven years after switching to a fully-funded privately-managed pension system, Chilean lawmakers are concerned that only 58% of the labor force made contributions in 2000. I develop a dynamic model of the joint husband and wife labor and saving decisions to study whether mandatory contributions affects incentives to choose self-insurance over social insurance. Households face a dual labor market with a covered sector, subject to pension contributions, and an uncovered sector of self-employment and informal jobs. I calibrate the model to a representative sample of Chilean married couples using linked administrative and self-reported panel data on accepted wages, labor sector choices and savings. The model is used to quantify the elasticity of pension coverage to the contribution rate. I find that the sensitivity of pension coverage is low for rates below 12.5% and significant thereafter. JEL Classification: J26, J08, E21, E26 ∗Ph.D. Candidate, Department of Economics, University of Pennsylvania, E-mail for correspondence and comments: [email protected] †I thank Petra Todd, Ken Wolpin, Dirk Krueger, and the participants at the Penn Macro Club and the Empirical Micro Lunch. I gratefully acknowledge financial support from the Trio (PARC/Boettner/NICHD) Pilot Project Competition.