SOCIALPROTECTIONDISCUSSIONPAPERNo.2519|FEBRUARY2025Who participates in definedcontribution pension systems when informality is high?Evidence from 20 years of administrative recordsfrom the Dominican RepublicClement Joubert. Thiaao Scot, Isaac Rafael. MariezPietter Jose Renalado Tationa Flores ondNicolas Garces Rodriguez,WORLDBANKGROUP
Who participatesin defined contribution pensionsvstemswhen informalitv is high?Evidence from 20 vears of administrativerecordsfromthe DominicanRenuibli-1Februarv20251.IntroductionIn a context of accelerated aging and stagnatingsocial insurance coverage, securing adequateincomes in old age without stymieing growth is becoming a primary concern for virtually allcountries around the world.One policy option often considered is the adoption of privatizeddefined-contribution pension svstems. A wave of pension privatizations through the 1990s andearly 2000s, inspired by the Chilean example, promised to improve participation incentives,reduce informality, and raise pension levels . The Dominican Republic - the context of this note-- privatized its pension system in 2003, moving to a unified defined contribution system vs. aoreviouslv fragmentedmeshof severaldefinedbenefit schemes.Proponentsofpensionprivatization reforms hoped incentives to contribute would improve in privately managed, fully,funded svstems: pavroll contributions would be perceived as savings ratther than taxes (CorsettTatiana Flores and Nicolas Garces Rodriguez. We extend our gratitude to Antonio Maria Giraldi, RoscelSavery, and the Superintendency of Pensions (SIPEN) for theirinvaluable supportthroughoutthe projectWe also acknowledge the generousfunding provided by The World Bank's Research SupportBudget,2Examplesofullprivatizationinclude Chile(19831),Bolia (1997,Mevico(1997), EISsavador(198),Kazakhstan 1983Nicaragua (2000, Dominican Rebpublic( 2003). Nigera (2004); ar tial orivatization cases include Argentina 1994ruguay (1996), Hungary/(1998),Poland (199),Costa Rica(2001), Latvia(2001), Bulgaria (2002),Croatia(1999), Estonia,(2002), the Russian Federation (2002), Lithuania(2004),Romania (2004), Slovakia (2005), Macedonia (2006, Ghana(2010)
1994); private pension funds would compete and deliver better returns; and public coffers wouldbe relievedfromever-growing pension liabilities Designing private pension systerns s particularly challenging in high-informality countries. Theexistence of a large informal economy is often associated with imited savings accumulation inprivate pension svstems. as individuals transition into and out of formal emplovment andtherefore, can have incomplete contribution histories (Berstein, et al, 2006) Pension,privatizations did not prevent pension coverage from dropping throughout Latin America duringthe 90s and 2000s (Rofman, Apell and Vezza 2015) though the exact impact of the reforms isdifficult to identifv seoarately from the other macroeconomic forces at plav in the periodStagnating coverage and the strong link b...
