JobMarket Seminar

Anna Tkhir

University of Konstanz

20-Jan-2020

Seminar 3 – 14:30

Abstract

This paper quantifies the aggregate effects of alternative pension system reforms in the presence of informality. I develop an overlapping-generation life-cycle model with incomplete markets in which heterogeneous agents choose whether to work in the formal or informal sector. Working informally reduces the current tax burden but comes at the cost of lower pension benefits in the future. I calibrate my model to Brazil and evaluate alternative pension system reforms which are designed to cover the additional deficit induced by the projected demographic change: 1) an increase of the individual payroll tax from 11% to 18.9%; 2) a reduction of the pension benefits by 16%; 3) a rise of the required years of contribution from 15 to 22 years; 4) a retirement age increase from 60 to 65 years. Increasing the minimum required years of contribution by 7 years minimizes informality and inequality. Raising the retirement age by 5 years maximizes the welfare gain and minimizes the pension expenditure to GDP ratio. The presence of informality requires stricter pension reforms in response to the projected demographic change. Informality reduces the long-run welfare gains of pension reforms, except for the payroll tax hike.

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