I examine the impact of pension systems in economies with large informal labor markets using Peru as a case study. In these economies, mandatory participation in contributory pension systems can only be enforced on formal-sector workers.As a result, the design of the pension system can have an important impact on workers’ decisions to work in the formal sector. To understand the effects of the pension system design on workers's decisions, I develop a heterogeneous agent life-cycle, overlapping generations (OLG) model where informality arises endogenously as workers choose their optimal working sector each period.