Pension eligibility criteria in a setting with informality

• In Event: Impact of Pension Reforms

Abstract

In countries with robust informal labor markets and established retirement systems, minimum required years of contribution can influence formal and informal employment choices throughout the lifetime. We study this phenomenon in the context of Brazil, which offers two pathways to retirement pension eligibility: reaching the statutory retirement age conditional contributing for a minimum number of years, or contributing to the social security system for a (larger) number of years. Using administrative data that details individuals' formal work history, two household surveys that shed light on informal work history, and various regression discontinuity specifications that exploit age and policy variation, we document contemporaneous employment responses to age-eligibility requirements, and clear forward-looking employment responses to minimum contribution requirements. These adjustments between the formal and informal sector have important implications for the solvency of the social security system. We next develop a theoretical life-cycle model that incorporates these labor supply dynamics in economies with informality and, through counterfactual analysis, evaluate how changes to PAYG pension eligibility criteria impact workers' preference for formality and government finances. Although easily attainable pensions make the formal sector more attractive, expanding the tax base and increasing tax revenue, they also raise government pension expenditures with mixed results over the government budget.

Author

• Margaret Lay, Mt. Holyoke College