Employment Effect of Means-Tested Program : Evidence from a Pension Reform in Chile

I study the employment effects of a 2008 policy reform in the Chilean pension system. The reform i) increased pension benefits, ii) changed the accrual rates, iii) relaxed eligibility criteria for low-savings retirees. I estimate the labor supply responses using two datasets. The first one is a representative cross-sectional survey with 12 waves between 1992 and 2017. The second is a unique database that combines monthly administrative records with a representative panel survey. Using a Difference in Differences (DID) approach with multiple time periods, I find that, on average, the reform increased labor force participation and hours worked for men between 60-64 years old by 15% and 4%, respectively. I find heterogeneous effects, depending on how their accrual rate changes, which depends on where they are in the distribution of pension wealth and years of contribution. I find that lack of pension knowledge is crucial in ex- plaining heterogeneity within different groups of workers. People with similar levels of pension wealth and monthly contributions behave differently depending on what they believe their pension assets and number of contributions are. I then develop a three-period model where workers decide consumption, non-pension assets and labor supply. I conclude that the net impacts on labor decisions depend on pension wealth, and the knowledge about the pension system. These findings are consistent with the empirical results and suggest that more access to relevant information regarding pension system may facilitate people to make well-educated decisions when facing a massive pension reform, especially in the case of a country with a high level of informality