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PENSION DESIGN WITH A LARGE INFORMAL LABOR MARKET: EVIDENCE FROM CHILE
Author(s) -
Joubert Clement
Publication year - 2015
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12118
Subject(s) - pension , earnings , welfare , economics , rationing , labour economics , pension system , informal sector , finance , market economy , economic growth , health care
This article investigates the fiscal and welfare trade‐offs involved in designing a pension system when workers can avoid contributing by working informally. Using a life‐cycle model of labor supply and saving decisions, I structurally estimate preferences and earnings opportunities in the formal and informal sectors using data on Chilean households. I find limited support for formal jobs rationing. Instead, mandatory pension contributions significantly encourage informality. Policy experiments show that Chile could lower minimum pension spending by 23%—while guaranteeing the same income to retirees—if the minimum pension's implicit tax rate was increased to 60%.