Impact of Social Security Reform on Labor Force Participation Rates of Pensioners and Nonpensioners: Evidence from Chile

Recent research argues that pension systems influence the worker's decision to retire. The experience of Chile, which radically changed its pension system in 1981, offers an opportunity to test this hypothesis. Chile shifted from a defined-benefit plan to an actuarially fair defined-contribution plan, exempted pensioners from the pension payroll tax, and tightened early retirement restrictions. We estimate the impact of the 1981 reform on the probability of dropping out of the labor force. We find large effects: Labor force participation rose dramatically among older men who approached retirement age after 1981, in contrast to the decline observed before.