The Long-Run Impact of Social Security Reform in Brazil

Abstract

In most countries, the rules governing public and private pension systems are different, and so are hiring procedures, and job contracts. The tenures of government employees are longer and their wages, in general, higher. In this sense, social security reforms will affect not only the decision to leave the labor force, but also the choice of which sector to work. In this article, we study the impact of social security reforms on retirement and occupational behavior. We develop a life-cycle model with three sectors - private formal, private informal and public - and endogenous retirement to evaluate what are the macroeconomic and occupational impacts of social security reforms in an economy with multiple pension systems. In a model calibrated to Brazil, we simulate and quantitatively assess the long-run impact of reforms being discussed and/or implemented in different economies. Among them, the unification of pension systems and the increase of minimum retirement age. These reforms are found to affect the decision to apply to a public job, savings during the life cycle and skill composition across sectors. On the long run, they lead to higher output and capital, less informality and to average welfare gains. They also drastically reduce social security deficit.