How the Design of a Pension System Influences Old Age Poverty and Gender Equity: A Study of Chile’s Private Retirement Accounts System

This paper develops and estimates a dynamic model of individual’s and couples’ labor supply and saving decisions to analyze the effects of a recent pension reform in Chile. Chile has one of the longest-running nationwide private retirements accounts systems in the world, operating since 1980, and its pension system served as a model for many other countries. In 2008, Chile undertook a major reform of the system, which introduced new features designed to reduce old-age poverty and to reduce gender gaps in pension accumulations and benefits. We estimate the model using data collected prior to the reform and assess the out-of-sample fit of the model using one year of post-reform data. After finding that the model fits many features of the data well, we use it to simulate the short and long term effects of the pension reform as well as alternative reform designs. JEL Classification: J240, J260, E210, E260, O170 ∗Petra E. Todd is the Alfred L. Cass Term Professor of Economics at the University of Pennsylvania and Clement Joubert is an Assistant Professor of Economics at the University of North Carolina at Chapel Hill. This paper builds on an initial report that Todd and Joubert wrote an initial version of as consultants to the Budget Office (Direccion de Presupuestos) in the Chilean government. The paper was presented at the LACEA meetings in Santiago, Chile, Nov., 2011. We would like to thank Alberto Arenas, David Bravo, Santiago Levy, Evelyn Matthei, Beatriz Moraga, Roy Rogers, and the Superintendencia de Pensiones for very helpful comments. We also are grateful for funding for research assistants 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 National Institutes of Health National Institute of Child Health and Development Population Research Infrastructure Program R24 HD-044964, all at the University of Pennsylvania.