PensionReforms' summary and comments
There is one very significant way of reducing pension costs to taxpayers - increase the State Pension Age.  Not only does this directly reduce costs (each year of increase, reduces the lifetime cost of a pension by about 5%) but it also encourages/forces older people to work longer.  That contributes to the country's economic output and potentially makes the pensions that state does pay even more affordable.

In many countries, older people are tending to work more anyway either from necessity or because they want to.  With improving mortality and morbidity statistics, a natural increase in 'retirement' as opposed to 'pension' ages might be expected.  The state can encourage that through its pension and work-related public policies.

The report suggests that a compulsory Tier 2 scheme has its own impact on retirement ages.  Delaying the retirement age has a direct impact on Tier 2 pension entitlements so that employees can see an immediate impact on pensions that is less visible in a Defined Benefit environment that prevails with most Tier 1 state pensions and also with Tier 2 and Tier 3 Defined Benefit schemes.

"Pre-reform Chile looked like many European countries today-with early and declining age of pension and withdrawal from the labor force. These incentives, constraints and trends were sharply reversed in 1981, when a new pension system with pro-work incentives and constraints was adopted."

The report suggests there are five possible ways that Chile's pension arrangements will contribute to a change in the behaviour of older workers:
"We hypothesize that participation rates of older workers will increase due to: 1) Greater incentives for pensioners to continue working because the new system eliminates restrictions that existed previously and exempts pensioners from the pension payroll tax; 2) Greater actuarial fairness, which may lead to postponed pensioning and higher participation rates of non-pensioners on a voluntary basis because of the smaller implicit tax; 3) Tighter early pension preconditions, which constrain more individuals to remain non-pensioners and to continue working because of liquidity constraints; 4) Tighter eligibility conditions for the [Minimum Pension Guarantee], which induce low earners to work longer; and (5) new treatment of survivors' benefits, which allowed recipients to also keep their own-benefit and thereby induce widows and women more broadly to work longer."

The report then tests these hypotheses by looking at ".a retrospective sample of new and old system affiliates" ['members'] under both the old and the new systems.

"Our results are consistent with these hypotheses. We estimate an increase of 10 percentage points or 15% in the participation rates of older men, and 20 percentage points or 55% in participation rates of older women, who are new-system members."

The new rules implemented in 2004 make it more possible for people to both work and receive a Tier 2 pension.  This has helped the new system's impact on participation rates:
"Pensioners experience the largest impact; the effect on nonpensioners is also significant, but much smaller. This suggests that the removal of work restrictions and exemption from the pension payroll tax is a more potent incentive than the move toward actuarial fairness."

As the report notes,  "[a]ctuarial fairness is difficult concept for workers to understand and calculate."

Other rule changes that have made early retirement more difficult have also contributed to the change in patterns.  Changes in survivor benefits have also helped:
"Particularly noteworthy is the huge (140%) increase in work propensities by new-system recipients of survivors' benefits, as the 100% implicit tax that many of them previously faced on own-pension has now been eliminated."

The report acknowledges that wider influences might also be at work, such as changes in the economy.  But, based on the Chilean example, the authors suggest that other countries might draw some lessons from the report's findings:
"They suggest that, regardless of other features of the system, the labor supply of older individuals can be increased substantially by 1) raising the reward that older individuals receive for working, for example by exempting them from the pension payroll tax; 2) raising the earliest allowable age for pensioning or doing so automatically and gradually by tying pension age to life expectancy; and 3) financing survivors' benefits in a way that makes it feasible for women who have worked and contributed to keep their own-pensions as well."

PensionReforms agrees that a country's pension policies have a direct impact on the retirement patterns of its workers.  Citizens do tend to respond in predictable ways to the work/retirement 'signals' sent by the system.  Individuals will often make mistakes about the financially optimal retirement age but whole populations of older people are likely to respond rationally.  However, PensionReforms cautions readers from drawing the conclusion that a compulsory Tier 2 scheme, such as Chile pioneered, is a necessary part of those policies.  Other countries (such as New Zealand) without a compulsory Tier 2 scheme are experiencing large increases in working rates amongst older employees.   In New Zealand in 2006, 23.9% of all males and 11.6% of all women over age 65 participated in the workforce (up from 9% and 3% respectively in 1993): see here.

The report's conclusions, more narrowly drawn, are this - if a country has lots of rules about when employees can start to receive their pension and a clear work/retirement 'divide' then relaxing those rules (including paying pensioners more to work) will see a improvement in participation rates.  Reducing entitlements under the new system will also help.  Extending this, perhaps, to its logical conclusion, if the country had no, or minimal rules, people would retire when it best suited their needs and financial capacity to survive in retirement.  And, in PensionReforms' view, the total impact of all those individual decisions is more likely to be in the country's overall economic interests than a prescriptive regime driven from the centre. 

Given the favourable outcome of the Chilean changes covered in the report, local regulators should now think about other ways of making the Tier 2 regime even more flexible - perhaps to the extent of making it voluntary?  PensionReforms notes that this will then solve the other problem with Chile's 'compulsory' regime - its participation rate (only 78% of eligible employees; 22% of the self-employed for whom participation is voluntary but which constitute a significant proportion of the work force: see here.  Those are the highest participation rates in South America. (File size 266 KB; 57 pp) 359