Capitalizing on the Demographic Transition (Directions in Development)

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The matched data consists of a series of short panel data constructed by matching individual records across adjacent years of the PME. Some patterns I find are not surprising. For example, probability of being retired increases monotonically with age, and the strong dependence of labor transition on other individual characteristics such as education. Some other patterns are more interesting and surprising. The labor force participation rates of older workers in the main metropolitan areas are lower than what is observed in the rest of the country. The main explanation is that workers in the main metropolitan areas had earlier enrollment into the system and they also have better access to early retirement benefits.

I also observed an inverse U-shaped relation between education and retirement. Less and more educated workers have similar retirement patterns during the period studied. Last, I find that more educated workers, and those in the formal sector, have higher retirement probabilities than less educated and those in the informal labor market.

Key words: retirement, labor force participation, social security systems. JEL Classification: J My primary interest is to describe the most interesting aspects of male retirement behavior over a relatively long period of time, to develop stylized facts that will help guide future research on this topic, and by using micro-data to consider individual attributes that may affect retirement decisions.

These data do not show any specific time trend. I interpret this result as an indication that the reforms of the s did not affect retirement of workers in the metropolitan areas.

The determinants of male retirement in urban Brazil

Also, I concentrated on transitions out of the labor force, I am not capturing those who collect benefits but remain working. Liberato identifies an increase in the labor force participation of workers who collected pension benefits in the s. The PME is a very rich source of information to study retirement trends, although not widely used. The matched sample consists of a series of short panel data constructed by matching individual records across adjacent years of the PME. The structure of that data provides me with the opportunity to study the determinants of retirement behavior over time and for different cohorts.

The use of the matched data is one of the main contributions of this paper. The data cover a period of important changes in the labor market and in the public pension system The pension program was expended in to cover most of the excluded rural groups and to establish the minimum wage as the minimum benefit and as the benefit adjustment index. In , the Congress approved a new methodology to calculate pension benefits aiming to reduce incentives to early retirement.

The system has been characterized by high coverage and low contribution rates. In the past two decades, for the whole country, benefits have increased for all age groups. At the same time, contribution rates have declined dramatically. The remainder of the paper is organized as follows.

The next section briefly reviews the literature on the topic. Section 3 provides a short discussion about the public pension system and the labor market in Brazil. Section 4 presents the data and some methodological considerations on estimating the models. Section 5 and Section 6 present the results for the unmatched and matched sample.

Section 7 presents a summary of the main results and provides a discussion of the potential limitations of my analysis. There is widespread concern about how population aging affects macroeconomic variables, and the public sector fiscal balance.

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The rapidly aging population presents one of the greatest public policy challenges in Brazil. A second related question is how the provision of social security benefits affects the retirement behavior of older workers Wise, The literature on the determinants of male retirement in developed countries is extensive [Gruber and Wise , ; Costa ]. The main explanation for early retirement in developed countries is the existence of generous pension programs Gruber and Wise, , and increase in income and wealth of workers Costa, Several studies on the US show the impact of pension regulations, income growth and behavior on labor force participation rates.

Hurd shows the retirement peak at age 62 after the introduction of early retirement provisions in the s. However, Krueger and Pischke find little empirical evidence linking changes in social security wealth and retirement behavior of older workers. The authors argue that the reduction in wealth did not affect downward trend in labor force participation. In other countries, the effects of pension provisions are much larger than in the US. Borsch-Supan analyzes Germany and other OECD countries and finds large disincentives to work in the public pension programs.

Baker, Gruber and Milligan find that the Canadian pension program has significant impacts on retirement, and that public policy can create incentives for workers to stay in the labor force longer. In a different perspective, Profeta shows that the demographic variables are the main determinant of the size of the public pension programs, and of the retirement policies in a series of OECD countries.

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Despite unabated interest among researchers in issues pertaining to the impact of pension programs and economic development on retirement decision, little is known about these issues in emerging economies. Brazil is one example of an important context for developing linkages between pension benefits provision and retirement behavior. Compared to other emerging economies, Brazil differs in that it combines a relatively large pension program with a rapidly aging population and rapidly declining labor force participation of older workers Turra and Queiroz, The age profile of labor force has also changed dramatically.

Despite the growing interest, I am not aware of many studies aiming to examine the determinants of male retirement in Brazil. There are three main areas of research on the Brazilian pension system. The first analyzes the idiosyncrasies of the pension system and its impacts on the society. Alem, Pastoriza and Giambiagi focus on the negative effects of the length of service retirement benefit. They find that the pension scheme does not induce further investments in human capital due to the provision of pension benefits at fairly young ages.

Legrand uses census data to study effects of the social security system and of other variables on men's retirement behavior in Brazil. The results indicate that the system has strong effects on retirement. Self-employed and employers have lower retirement propensities. Education and high levels of income are associated with lower retirement rates. Carvalho-Filho shows that the social security reform of impacted the labor supply of rural workers. The author finds that rural workers leave the labor force as soon as pension benefits become available.

The second field of research studies the impacts of social security on reducing income inequality and reducing poverty levels in some regions of the country. This field concludes that the Brazilian pension system has played its social role. It has elevated average income, especially for the rural population and it guarantees income for the elderly and their family members in urban areas. The last field focuses on understanding the evolution of the components related to the expenditures, and the sustainability of the program e.

This research finds that expenditures, under current conditions, will increase faster than contributions, creating more threats to the system's sustainability Ornelas and Vieira, ; Giambiagi and Alem, ; Giambiagi and Castro, Turra and Queiroz show how the absence of appropriate policies mitigates temporary benefits of population change, and aggravates the effects of population aging on the social security program. The trend in labor force participation for Brazilian male workers shows significant changes in the last decades.

It is clear that the length of working life was reduced over time. Labor force participation rates of young individuals have declined because of the increase in educational attainment. The same rate of decline is observed for younger old workers.

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The fall in economic participation is even greater for older workers. Labor force participation rates fell for workers of different socioeconomic backgrounds. I use years of schooling as a proxy for socioeconomic status and estimate participation rates using census data from to by four different levels of education: 0 to 4, 5 to 8, 9 to 11 and 12 and more years of schooling. This effect reflects the increase in the coverage of the social security system in the country, a move away from agriculture work and increase in levels of income of the older population in the past half-century.

I use the long-term information on labor force participation to study trends in retirement age. I use Brazilian census micro-data from to to estimate median retirement age for males. Following this definition, the retirement age for males declined from 69 years in to 63 years in , an average of 1. Trends in early retirement have occurred at the same time life expectancy is increasing. From to life expectancy at age 65 rose from These two events combined imply an increase in the percentage of one's life spent in retirement.

Table 1 shows median retirement ages for a series of countries. The average retirement age in the United States fell from 74 years in to 63 years in , a drop of 1. In the same period covered by the Brazilian data, the decline in the average retirement age in the U. A slowed down or even reversed. During this period the average age declined 0.

The trend toward early retirement is a common feature of the labor market in developed nations. Sveinbjorn and Scarpetta estimate average retirement ages for a series of OECD countries based on survey data on determinants of retirement.

They estimate retirement ages from to and observed a steady decline in retirement ages over time. The average retirement age for men dropped from about 65 years in to around 60 years in The pension system in Brazil consists of three main segments: the general system private workers , the civil servants system, and the other general private funded systems.