NCPA - National Center for Policy Analysis

How To Keep Seniors Working: Lessons From Chile

August 24, 2010

Prior to 1981, Chile had a traditional pay-as-you-go defined benefit system, like Social Security in the United States.  Workers had strong incentives to start their retirement benefits as soon as possible, because postponing pensions and adding contributions did not increase benefits commensurately.  Labor force participation dropped dramatically when workers became eligible for pensions. 

This changed with reforms in 1981 that replaced the defined benefit system with a defined contribution system, says Estelle James, a senior fellow with the National Center for Policy Analysis. 

For instance: 

  • All new workers were required to join the defined contribution system while existing workers had a choice.
  • Most workers are now in the new system and are required to contribute 10 percent of their wages to an individual account.
  • Contributions are invested in a pension fund chosen by the worker and accumulate a market rate of return.
  • Payouts take the form of inflation-protected annuities or gradual withdrawals during retirement.
  • The new system increased incentives for older workers to postpone retirement and continue working.  

Following the 1981 policy changes and reforms, and after controlling for other sources of change in retirement behavior, the percentage of individuals receiving early benefits fell significantly, says James: 

  • The proportion who received benefits before age 65 decreased by about 8 percentage points.
  • The proportion of individuals who started receiving retirement benefits by their early 60s fell by about a quarter.
  • The proportion that started receiving benefits by their 50s was cut in half. 

More older workers kept working following the reform, after controlling for other factors: 

  • Labor force participation rates for individuals in their 50s rose 12 percentage points.
  • Labor force rates rose 13 percentage points for those aged 65-70.
  • Individuals aged 60-64 increased their labor force participation the most -- by 19 percentage points. 

The biggest change in labor force participation was for individuals who had started receiving benefits from their retirement accounts: 

  • Participation rates rose by 15 percentage points for pension recipients in their late 60s.
  • Rates rose by 28 percentage points for those in their 50s and early 60s.
  • Among all pension recipients under age 70, the proportion who continued working more than doubled. 

Source: Estelle James, "How to Keep Seniors Working: Lessons from Chile," National Center for Policy Analysis, Brief Analysis No. 718, August 24, 2010. 

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