Changing Retirement Ages: The Welfare Effects

Abstract

Nowadays, many countries are facing severe problems to finance their Social Security Systems. Most systems are financed on a pay-as-you-go basis, where financial problems come from two main sources. On the one hand, most of them are now reaching maturity. This means that an important part of the retired population is now entitled to receive full pensions. On the other hand, the decline in birth rates, together with a higher life expectancy, increase the dependency rate, and, therefore, the active generations have to sustain a growing number of retired persons. A standard method to confront these two situations is to raise the retirement age. This increases the number of years individuals contribute to the system and decreases the number of years they receive benefits from it. This paper evaluates the welfare impact of the change in retirement ages that took place in Chile in 1979. This evaluation also considers the reform in the system's financing method, from pay-as-you-go to full funding. We find that the negative impact on the welfare of older workers of an increase in retirement ages can be reduced or increased, depending on how the transition from a pay-as-you-go system to a fully funded one is financed.