Is there a positive incentive effect from privatizing social security : evidence from Latin America

There is increasing concern among policymakers that social security reforms that involve a transition to individual retirement savings accounts may exclude certain groups of workers from coverage against the risk of poverty in old age. While most public pay-as-you-go systems pool the risk of interrupted careers and periods of low earnings over the covered population, the reformed systems shift the burden of these risks to the individual. Adequate coverage under a system of individual retirement accounts depends critically on accumulating sufficient savings through regular contributions. In developing countries where opportunities for unregulated employment abound and workers can easily escape mandated social insurance, theory suggests that reforms will increase the number of contributors to social security by reducing distortions and improving incentives in the labor market. Motivated primarily by fiscal pressures stemming from the deficits of overly generous, poorly administered public pension systems, many governments are going ahead with reforms as if this theory is correct. Does a shift to individual retirement accounts improve the incentives to contribute to social security? Almost a decade after reforms to national social security systems in Latin America (two decades, in the case of Chile), existing evidence is mixed. Several studies have found that the share of the Chilean workforce covered by the national pension system has increased since individual retirement accounts were installed in 1981; others have shown that there has been no change in this share. But these studies rely on simulations or on casual observation of data on the sectoral allocation of the labor force and relate only to Chile. Sufficient time has now passed since reforms in several Latin American countries to allow more rigorous testing of the theory. The author estimates the impact of social security reform-specifically, the transition from a purely public pay-as-you-go system to one with private individual retirement accounts-on the share of the workforce that contributes to formal retirement security systems. To test the predictions of a simple model of a segmented labor market, he exploits variation in data from a panel of 18 Latin American countries, observed from 1980 to 1999. Results show that introducing individual retirement accounts has a positive incentive effect that, other things equal, increases the share of the economically active population contributing to the reformed system. But this effect occurs only gradually as employers and workers become familiar with the new set of social security institutions put in place by reform.Health Economics&Finance,Labor Policies,Environmental Economics&Policies,Pensions&Retirement Systems,Public Health Promotion,Environmental Economics&Policies,Pensions&Retirement Systems,Health Economics&Finance,Banks&Banking Reform,Health Monitoring&Evaluation

Revealed preference and self-insurance - Can we learn from the self-employed in Chile?

Financial sector development is a critical area of effective social protection policy. A well-regulated financial sector can complement government efforts to keep households from falling into poverty - by supplying the instruments needed to pool risks, or to self-insure against losses because of the death, or disability of a household member, unexpected loss of employment, or inability to work in old age. But many of the policy recommendations that can be drawn from the social risk management framework, rest on the strong assumption that risk, and time preferences are uniform across individuals, or households. Policies meant to encourage participation in public pension systems, and to reduce evasion where such systems are mandatory (by more closely aligning benefits with payroll contributions, or introducing individual retirement accounts) implicitly attempt to emulate the savings behavior of individuals, and households faced with fully functioning capital markets, and perfect information. If no allowance is made for variation in preferences, however, the welfare effects of policy reforms will vary across the target population. Mandated social security, even if actuarially fair for most, is likely to impose welfare losses on those less inclined to save, and insure. That said, a clearer picture of individual and household preferences, and how they vary across the population, can help governments design social security systems that complement private savings, and insurance instruments. The authors present the results of a field experiment, designed to produce an empirical measure of risk aversion, and time preferences of selected groups in Chile, which in 1981 pioneered social security reform with a transition to individual retirement accounts. The experiment was designed primarily to establish whether the time, and risk preferences of the self-employed differ significantly from those of wage, and salaried workers. They find no significant differences in mean risk, and time preferences between the self-employed, and employees, or between the contributing, and non-contributing employees. But they find significant differences in these preferences between the contributing, and non-contributing self-employed. Among the self-employed, those who are more patient choose to contribute to the pension system. However, the contributing self-employed are significantly more tolerant of risk than the non-contributing self-employed, a finding that conflicts with the assumption that the formal pension system is the only source of insurance against poverty in old age. The Chilean pension system may be viewed with some trepidation by its pool of potential clients. Since risk aversion declines with education, the participation of the economically active who are free to choose, could be enhanced by a campaign carefully designed to raise awareness, allay fears, and inform people of the benefits of saving for retirement in the formal pension system.Health Economics&Finance,Payment Systems&Infrastructure,Labor Policies,Environmental Economics&Policies,Banks&Banking Reform,Environmental Economics&Policies,Health Economics&Finance,Insurance&Risk Mitigation,Banks&Banking Reform,Health Monitoring&Evaluation

Are health care payments in Albania catastrophic? Evidence form ALSMS 2002, 2005 and 2008

The absent or poorly functioning risk pooling mechanisms and high amounts of out-of-pocket payments for health care expose households to financial risks associated with major illnesses or accidents. The aim of this paper is to analyse the extent to which out-of-pocket health spending impoverish the households in Albania. The study augments the existing evidence by analysing the dynamics of such payments over different years and the weight that informal payments have in the total out-of-pocket health spending. The data used in this study come from Albania Living Standard Measurement Survey (ALSMS) for 2002, 2005 and 2008. We measure headcount catastrophic payments using different thresholds and the decomposition of indicators by expenditure quintiles to understand better their effects. We find that out-of-pocket and informal payments have increased in real value throughout the years. Even though their catastrophic effect has gone down (due also to declining trends in absolute poverty), the effect for the poorest expenditure quintiles remains high. Out-of-pocket payments deepen the poverty headcount and also enlarge the poverty gap and again the effect is larger for the poorest quintiles. Future policy interventions should provide better protection mechanisms for the poor by providing exemption criteria or subsidised transport and should seek to address the widespread informal payments in the country.informal payments, out-of-pocket payments, health care expenditure, impoverishment, Albania LSMS, Albania, living standard, poverty

Seeking solutions to Vulnerability in Old Age: Preferences, constraints, and alternatives for coverage under Peru's pension system

Exploiting new data from a survey and behavioral experiment conducted in Peru we analyze individuals?preferences for securing income in old age. We identify a group that is unrationed by the mandate to save in Peruç—´ pension system, and draw insights from their affiliation and contribution behavior. Among the unrationed, those who are more tolerant of risk, have more children, and have a greater share of housing in their accumulated assets are less likely to affiliate and/or contribute to the formal pensions system. Further, the less risk tolerant choose private individual retirement accounts over a publicly administered pension system.Pensions, vulnerability, risk preferences, Latin America

Extending coverage in multi-pillar pension systems : constraints and hypotheses, preliminary evidence and future research agenda

This report provides a set of preliminary hypotheses and exploratory econometric testing to explain low rates of participation in reformed social security systems, with special emphasis on two Latin American countries. The hypotheses claim that the working poor and self-employed continue to have a specific and strong rationale for avoiding participation in the multi-pillar pension ysstem and that transaction costs, system design issues, and problems of credibility negatively influence the decision of all members of the labor force to participate. Some of the established hypotheses have been subjected to exploratory econometric testing using available household survey data for Chile and Argentina. The results support the conjecture that socioeconometric characteristics matter for non-participation, and that the poor, the uneducated, and the self-employed pose a special challenge to the extension of pensions coverage. The paper outlines a research strategy, including a more social security-focused survey and comparative analyses, to confirm the results presented in this paper, and to test those hypotheses related to the different pension institutions reforming governments have chosen to put in place. Work in this vein has already begun.Environmental Economics&Policies,Banks&Banking Reform,Insurance&Risk Mitigation,Pensions&Retirement Systems,Economic Theory&Research

Pooling, savings, and prevention - mitigating the risk of old age poverty in Chile

Using data collected in a survey on risk, and social insurance in Chile, the author funds that workers who entered the labor market after the pension reform of 1981, have a greater"contribution density"than those who contributed to the previous social security system. Further, the expectation of care from children, and the amount spent on their education, significantly lowers the likelihood of contribution to the pension system. Workers who have met the contributory requirements to qualify for the minimum pension guaranteed by the government, are significantly less likely to continue making contributions. The likelihood of contributions beyond the eligibility threshold being lowered further, the greater the market rental value of respondents'homes. Furthermore, individuals with a greater tolerance for risk contribute, suggesting that there are retirement security investments in Chile, that are perceived as relatively less risky than saving in the reformed pension system. The results indicate that housing could beone such investment.Banks&Banking Reform,Payment Systems&Infrastructure,Labor Policies,Insurance&Risk Mitigation,Environmental Economics&Policies,Insurance&Risk Mitigation,Banks&Banking Reform,Environmental Economics&Policies,Health Economics&Finance,Safety Nets and Transfers

Participatory accountability and collective action: experimental evidence from Albania

It has been argued that accountability is a public good that only citizens can provide. Governments can put institutions in place that allow citizens to hold public servants to account, but citizens must participate in those institutions if accountability is to be achieved. Thus, citizens face a social dilemma — participate in holding public servants to account at a cost in terms of time and effort or free ride, i.e. do not participate, while benefiting from the efforts of those who do. If this characterization of accountability is valid, we would expect more cooperatively inclined citizens to participate in account¬ ability institutions, while the less cooperatively inclined do not. We test the validity of this characterization by investigating the correlation between individual behavior in a simple public goods game and their participation in local and national accountability institutions in Albania. We involve a nationally representative sample of 1800 adults with children in primary school. We find significant correlations between cooperativeness and participa¬ tion in school accountability institutions and national elections, both at the individual level and the district level. These correlations are robust to the introduction of many controls in the analysis and, in the case of national elections, to the use of official election turn-out statistics in place of self-reported turn-out