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.