On the effects of pension reforms

On these days that reforms to the reformed pensions systems have been announced or are being discussed in some countries, we must remember the reasons why pension reforms of the 90s took place. Among the reasons are:

1. Most of the plans were financial unsustainable

2. Important changes to contributions rates and benefits were needed, thus parametric reforms were not politically viable

3. The defined benefits systems (DB) were not providing the right incentives for persons to participate in formal labor markets or to postpone their retirement

4. DB plans were unfunded and thus savings were low in the economy restricting investment and thus economic growth

Those who are in favor of re reforming the systems argue that reforms fail to achieve their objectives, i.e., to reverse the effects of the DB plans mentioned above.

This perception unfortunately is based on the lack of formal evidence to assess the effect of the pension reforms in the 90s. For example, although it is known that private savings accounts have increase internal savings of the countries, the causality between assets under management and higher investment and economic growth has not been robustly proved. Moreover, the effects in workers behavior have been less studied.

At the CISS we have analyzed some of these issues in an effort to provide fact based evidence. In a recent paper, we have found that in Mexico workers entitled to benefits in the new system have higher densities of contributions that those workers entitled to benefits under the DB scheme. This evidence supports the idea that private savings accounts increase formalization in labor markets. A copy of the paper can be requested to nelly.aguilera@ciss.org.mx