Behavioral responses to Social Security privatization: Evidence from the Chilean reform

In this dissertation I examine some of the issues raised by social security privatization using evidence from the Chilean reform, concentrating on the impact of privatization at the individual and household level. In 1980, Chile privatized its social security system. The reform replaced a pay-as-you-go (PAYG) system with a fully-funded system in which the contributions of workers are placed in personal accounts in private financial institutions selected by the individual. This dissertation employs several micro data bases to explore the effects of social security reform on the labor supply and savings decisions of system participants. I begin with an examination of the extent to which the old PAYG system insured the consumption streams of the elderly. I find that, despite much rhetoric to the contrary, the system prior to reform served its participants surprisingly well. I then look at the impact of privatization on pre-retirement labor supply decisions. I employ a dynamic life-cycle model and develop a framework for analyzing the extent to which participants value their social security contributions under each system. The value participants place on their contributions is a measure of the distortionary impact of each system. I find that privatization significantly decreased the distortionary impact of the social security payroll tax on the labor supply decisions of participants. Finally I examine the impact of the transition to a fully-funded system on household savings rates. I separate the effects of privatization and tax incentives for savings. I find that privatization itself has a negligible impact on household savings rates, however there is a strong positive response to tax incentives for savings. The issues illuminated in this dissertation are relevant for the many countries currently considering reforming their social security systems.