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Does Social Security Affect Retirement and Labor Supply? Using the Chilean Experience as an Experiment

The paper explores the effects of the social security system over retirement and labor supply decision of individuals aged 55 to 65 in Chile. We use the 1998 CASEN survey elaborated by the Chilean government. Due to regulations established by the current social security law, two social security systems coexist on 1998: the .Pay-as-you-go. and the individual account system. This property of the dataset, allows us to disentangle the effects of those two systems over retirement and labor supply. The results show that social security may significantly affect retirement and labor supply decisions. The effects are mainly twofold. First, larger benefits may induce earlier retirement and lower labor supply and second, larger variance of benefits may induce later retirement and larger labor supply, due to a precautionary motive. This last effect seems to be important when analyzing the path of the Chilean retirement rates on the nineties.