# **V. Conclusions**

There is increasing concern in countries where single-pillar PAYGO social security systems have been replaced by private individual retirement accounts, that a large number of workers will be excluded from coverage. Whereas PAYGO systems pay benefits according to a defined formula and pool the risk of interrupted careers and periods of low earnings over the covered population, the new systems shift the burden of these risks onto the individual. Therefore, adequate coverage under a system of individual retirement accounts depends critically on accumulating sufficient savings through regular contribution. Reforms are expected to increase regular contribution by eliminating distortions and improving incentives in the labor market.

In this paper I have estimated the impact of a transition from a single-pillar PAYCGO system to one with individual retirement accounts, on the share of the workforce flhat contributes to social security. Using a theoretical framework developed by Edwards and Edwards (2000), I exploit variation in data from a panel of eighteen Latin Ameri.an countries to test the implication of the simple model. The results show evidence **(o.** a positive incentive effect after the introduction of individual retirement accounts iliat increases the share of the economically active population who contribute to the reforrmed system. However, this takes place only gradually. Employers and workers may n2ed time to overcome uncertainty, and become familiar with the set of new social secu-ity institutions that reforms put in place. While these results cannot be used to deny the expected improvement in incentives that may arise from aligning contributions and benefits within a PAYGO system - as with the establishment of "notional" definedcontribution retirement accounts (NDCs) in several countries - they do indicate thiat workers respond to improvements in individual incentives to contribute to forinnal retirement security system.

Do these results indicate that policy makers in countries that introduce individual retirement accounts have nothing to worry about? The relatively low numbers of workers who contribute to formal retirement security systems in the Latin America - even in countries that have undertaken reforms - provide the best argument against complacency. Further, the low share of regular contributors in reformed systems - in Chile averag.ng 50%, and in Argentina as low as 39% in 1999 - indicate that the wedge created by the payroll tax is just one of many possible barriers separating certain groups of workers from formal protection. This said, since the data on contribution to social security ignore other forms of insurance and savings that individuals and households make engage in on their own, they may over-state the degree of vulnerability to the risk of poverty in old age, and should not be a cause of undue panic.

The results reported in this paper, indicate that agents respond to changes in labor market incentives. However, while elimination of the pure-tax component of payroll deductionls may be a necessary condition to increase the level of regular contribution, it may not be sufficient. Coverage under a formal social security system is often nested deeply witlin the broader regulatory and taxation framework of the economy. Even in the less centralized systems based on individual retirement accounts, participation may require compliance with regulations and labor standards unrelated to income security in old-age.

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