The Impact of Social Security Reform on Occupational and Retirement Behavior: A Quantitative Assessment for Brazil

Brazil is not prepared to cope with population ageing. In fact, the country already spends a high proportion of GDP on retirement benefits given its income level and its still relatively young population. As a consequence, the deficit of the social security system has steadily increased since 1996 and is already approaching 6% of the Brazilian GDP. Several explanations have been provided for this increase such as the generous pensions provided mainly for civil servants whose benefits do not have an upper limit, the lack of a statutory minimum retirement age for those who contribute to the system for a certain period of time, the widespread labor informality which undermines the capability of the system to increase its revenue. Even though some attempts to reform the social security since the 1990s, there is a lot to be done in order to bring the trajectory of deficit back on track. In this paper, we develop, estimate and calibrate a dynamic general equilibrium model of occupational choice and retirement behavior to quantitatively study the social security problem in Brazil. In particular, in our model economy agents choose whether to work in the public, formal or informal sectors or stay home and, at later stages of the life-cycle, they are also allowed to decide the age of retirement. We estimate the parameters of the model by matching data moments on occupational choices, employment transitions, wages, and retirement from the Brazilian Monthly Employment Survey (Pesquisa Mensal de Emprego). Several counterfactual experiments are carried out in order to assess how changes in the rules of the social security affect labor allocation across the sectors, retirement behavior and life-cycle savings.