The actual 2019 reform of the Brazilian pension system, which corrected the fiscal deficit induced by the demographic change, by reducing the replacement rate (from 70% to 60%), increasing the required years of contribution (from 15 to 20 years) and raising the retirement age (from 60 to 65 years) led to a drop in informality of 4 percentage points and an increase in welfare.

The economic effect of specific pension policy tools also interacts with the level of informality. Abstracting from an extensive margin of labor adjustments may lead to wrong conclusions about the magnitude and the direction of necessary fiscal interventions (Tkhir, 2021). In the absence of informality: (1) the government could have reached the long-term sustainability goal at a much lower tax rate, without severe economic repercussions; (2) the reallocation of workers from the informal to the formal sector—arising after the reduction of the replacement rate and the increase of the required years—amplified the positive effects of these reforms; (3) informality does not seem to play a big role in the context of the retirement age increase.

There is also evidence that the extent of the lag between the announcement and the implementation of structural pension reforms matters for employment. Bi and Zubairy (2021) show across 10 OECD countries that prolonged phase-in periods lead to employment reductions of those close to retirement. The longer the lag, the stronger the decline in labor force participation rates, if fundamental policy changes are introduced and for citizens who might have lower trust in the government.

# **4.5.5 Pension System: Impact on Productivity**

The specificities of the pension system have implications for productivity, first, since they affect the levels of formal work, with greater levels of formal work positively associated with the level of productivity; and second, since pension systems (dis)incentivize savings and capital accumulation. Tkhir (2021) shows that the actual 2019 Brazil pension system reform—which reduced the replacement rate, increased the required years of contribution and raised the retirement age—led to a drop in the share of informal workers as well as to an increase in capital accumulation, both with likely positive productive effects. Reforms involving rises in payroll taxes, increase informal work and disincentivize capital accumulation, likely leading to negative effects on productivity. Reforms involving a reduction in the replacement rate or a rise in the required years of contribution or an increase in the retirement age, reduce informal employment and stimulate capital accumulation with likely positive effects on productivity.

Carta et al. (2021) show another mechanism through which raising the retirement age might increase productivity, i.e. maintaining productive older workers at work. The authors exploit a policy-induced sharp increase in retirement ages on workers of different ages using Italian matched employer-employee data to find that an increase in employment of older workers (as a consequence of the reform) leads to a precisely estimated rise in value-added. The findings suggest rising institutional retirement ages can help firms to retain valuable older employees.

69