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Job Market Paper

The Unequal Protection of Social Security in the Presence of Informality: Theory and Evidence from Chile

Public pension systems rely on formal earnings to provide old-age social insurance. However, in the presence of low levels of formal earnings, pervasive in the undeveloped world, these systems provide insufficient retirement protection, and that protection is concentrated in high-income households. This paper studies theoretically and empirically how the presence of low formal earnings affects the optimal design of public pensions on its two core characteristics: the pension contribution rate and the link between lifetime formal earnings and benefits. I introduce a framework to capture the welfare effect of these reforms by combining the social insurance with the optimal linear-income literature, identifying the sufficient statistics that govern the trade-off between more retirement insurance and more incentive distortion of private savings and formal earnings. I then estimate these statistics in Chile, a country with low levels of formal employment and a pension system with a strong earnings-benefits link, using administrative data merged with a panel survey. I find that low earners are the most vulnerable at retirement and are less protected by the public system. Consequently, low earners drop their consumption three times more than high earners at retirement. I then estimate the distortions of reforming the contribution rate and the earnings-benefits link by leveraging two quasi-experimental variations on the design of the Chilean pension system. I find that formal earnings respond to the design of the pension system, but this response is driven mainly by the earnings-benefits link, not the future pension payments. Furthermore, there is a large marginal propensity to consume out benefits at retirement, implying a minor distortion on retirement private savings. Overall, the trade-off is weighted in favor of more progressivity but not of more contribution: there are large social gains from flattening the earnings-benefits link, while the social gains of increasing the pension contribution rate are modest. 

Working Papers

Industry Adaptation to Population Aging: the Case of the Long-Term Care Industry in the US

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 

Using a natural experiment generated by the Chilean pension system, I estimate labor responses to payroll taxes. The variation affected high and low-income workers in the same magnitude. I found that vulnerable workers -low-income, less attached to the formal sector- exhibit a large elasticity, while high-income workers show no response. In addition, middle-age workers are the ones that respond more. This pattern of the elasticity of taxable income has important consequences for pension systems design.


Work in Progress

Age-dependent Taxes and Optimal Liquidity Across the Life Cycle in the Presence of Self-Controls Problems

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