Job Market Paper
The Unequal Protection of Social Security in the Presence of Informality: Theory and Evidence from Chile
In the presence of high employment informality, public pension systems are dysfunctional: they provide little average retirement protection, and the protection is unequally given; concentrated on high-income households. In this paper, I study theoretically and empirically how high informality influences the optimal design of public pensions on its two core attributes: the pension contribution rate and the relationship between lifetime formal earnings and benefits. I start with a novel framework that gauges the welfare effects of reforms to these attributes, which are characterized by the trade-off between social insurance and efficiency. Employing Chilean administrative data merged with a panel survey and two quasi-experimental variations on the pension system design, I empirically estimate this trade-off. On the one hand, I find that increasing the benefits of workers with low lifetime earnings —by flattening the earnings-benefit link— improves the social insurance provided by the system because these workers are the most vulnerable and the least protected; reducing their consumption upon retirement thrice as much as that of high earners. On the other hand, I find that flattening the earnings-benefit link generates significant efficiency costs by distorting workers' formal earnings and their private savings for retirement. However, the trade-off weighs in favor of more progressive benefits. Thus, under larger informality, the earnings-benefits link of pension systems should be weaker.
Industry Adaptation to Population Aging: the Case of the Long-Term Care Industry in the US
(with Mateus Dias)
We use data on the price of nursing home private rooms to estimate the effects of aging on long-term care (LTC) prices. We exploit regional variation in the dynamics of elderly population growth rates generated by the demographic composition in the distant past. We estimate a cross-region elasticity of LTC prices to the number of people aged 75 and more of 0.6. We argue that this cross-sectional estimate is robust to the presence of heterogeneous treatment effects and is a lower bound for the national estimate; thus, population aging explains at least 38\% of the last decade's real increase in LTC price, and we project that it will increase in 18\% during the next decade. We study the mechanism behind our results and find evidence that market power, not the inelastic supply of nurses, is driving the increase in LTC prices.
The Missing Response to Taxes: Informality
This paper estimates the formal earnings responses to the net-of-tax rate using a natural experiment of the Chilean pension system. The variation in the net-of-tax rate is the same for workers with different earnings, which, jointly with rich administrative data, allows me to estimate the heterogeneity of the response across workers. I find that the earnings response to the change in the net-of-tax rate is driven mainly by low-earners, and this response is through the extensive margin of formal labor participation. This extensive margin response generates a tension between coverage and funding of social security programs.
Age-dependent Taxes and Optimal Liquidity Across the Life Cycle in the Presence of Self-Controls Problems
(with Sebastian Guarda)
We study optimal household liquidity throughout the life cycle in the presence of incomplete markets and self-control issues in consumption/savings, e.g. due to present bias or costly temptation. In a deterministic setting, we provide a simple theory using age-dependent taxes/transfers with zero present value. Under just incomplete markets households always prefer front-loaded disposable income profiles, but if they additionally have overconsumption issues a paternalistic government will not want to provide young households too much liquidity. We characterize the unique optimal policy: the Euler equation holds with equality but households are Hand-to-Mouth. In a stochastic setting, we build a quantitative life-cycle model, match the age profile of borrowing constrained households in the data, and calculate welfare gains from a policy experiment following a simple rule. We find that front-loading disposable income can increase average welfare by 0.04% in consumption-equivalent terms, and 0.06% for Hand-to-Mouth households.
Work in Progress
The 40-quarter Credit Rule of Old-Age Social Security: An Enhancer of the Racial and Gender gaps
(with Ole Agersnap)
Pension Funds, Economic Growth, and Limits in Foreign Investment
(with Carlos Burga)
Shrinking Pension Funds and Asset Devaluation Risk: Evidence from Ageing Population in South Korea
(with Jiwon Lee and Don Noh)
The Destabilizing Effect of Migration on Population Aging