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

Published: 2009


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.

Key Findings

    • Prior to its 1981 social security reform, Chile had early withdrawal from the labor force comparable to that of many European countries.
    • Chile’s 1981 reform increased labor force participation among older workers, especially pensioners and women, and postponed the age of pensioning.
    • Reform included restrictions on early pensions, adoption of a defined contribution plan, pensioner exemption from the payroll tax, and widows retained their pensions along with the survivor benefit.