# I. **Introduction**

There is increasing concern among policy makers 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-asyou-go (PAYGO) 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 onto the individual. Adequate coverage under a system of individual retirement accounts depends critically on accumulating sufficient savings through regular contribution. 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 brought by 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? Can governments that partially privatize retirement security systems expect an increase in the number of workers who contribute? Almost a decade - in the case of Chile, two decades - after reforms to national social security systems in Latin America, existing evidence in the literature is mixed. Corsetti and Schmidt-Hebbel, (1994), and Schmidt-Hebbel (1998) find evidence that there has been an increase in the share of the workforce covered by the national pension system since individual retirement accounts where installed in Chile in 1981. However, Edwards and Edwards (2000) find that in 1997, only 62% of the labor force in Chile was contributing to the reformed national system - about the same share of workers who contributed to the PAYGO system prior to reform. Cortazar (1997) and Arenas de Mesa (2000) similarly find no change in the portion of contributing workers. However, the findings of these studies rely either on simulations or casual observation of the available data on sector allocation of the labor force and relate only to Chile. Sufficient time has now passed since reforms in several Latin American countries to allow for more rigorous testing of the theory.

This paper tests the implications of a simple model developed by Edwards and Edwards (2000) of a labor market undergoing a transition away from a purely PAYGO social security system to one with individual retirement accounts. The objective of the paper is to estimate the impact of these reforms that were intended to lower labor market distortions and correct incentives at the aggregate level. To do this, I exploit variation in the data from a panel of eighteen Latin American countries over the 1980's and 1990's, of which seven have undergone the transition to a national system of individual retirement accounts.<sup>1</sup> The next section provides a brief background on social security reform in Latin America. Section III reviews the relevant literature on the impact of reforms on the labor market, and presents the model. Section IV discusses the methodology, the data used in the estimation, and the hypotheses that are tested. Section V presents the results of regressions using pooled OLS, fixed and random effects estimators, and discusses the robustness of these findings. Section VI concludes.

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