Chile s 2008 re reforms what are they and what are the implications
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Chile’s 2008 re-reforms: what are they and what are the implications?. By Estelle James, Alejandra Cox Edwards & Augusto Iglesias MRRC Research Workshop, April 2010. Chile is well-known for its 1981 social security reform.

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Chile’s 2008 re-reforms: what are they and what are the implications?

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Chile s 2008 re reforms what are they and what are the implications

Chile’s 2008 re-reforms: what are they and what are the implications?

By Estelle James, Alejandra Cox Edwards & Augusto Iglesias

MRRC Research Workshop, April 2010


Chile is well known for its 1981 social security reform

Chile is well-known for its 1981 social security reform

  • Mandatory individual accounts—10% of wagesinvested by private pension companies

    • Pre-funded, so avoids implicit pension debt

    • Benefit depends on contributions + investment earnings so reduces implicit payroll tax and encourages work

  • Tax-financed public pillar:

    • Min. pension guarantee (MPG) for contributors,

    • means-tested social assistance (PASIS—12% av. wage) for those with no other retirement income


High returns but problems developed

High returns but problems developed

  • Close linkage between benefits and contributions meant that those who didn’t contribute much got little if any pension.

  • Studies showed low contribution density—typical for low and middle-income countries. Many workers self-employed or informal—contributions not required or enforced

  • Special problems for women because of their low lfpr and wages—their benefits 1/3 males’


Remedies in 1981 system

Remedies in 1981 system

  • MPG and PASIS provided public safety net

  • Survivors benefits and joint annuities covered married women (keep own+joint).

  • But:

    • MPG didn’t help those with < 20 years of contributions & posed work disincentives once 20 year eligibility was met

    • PASIS had long waiting list and low pension

    • Women had lower D&S rates than men, but paid same insurance fees (as % of W)

  • In 2006 presidential candidate Bachelet promised to solve these problems, help women


2008 reform

2008 reform

  • Some expected elimination of IA system but this didn’t happen

  • Instead, tax-financed public benefits expanded, replaced MPG & PASIS, reach 2/3 elderly

  • Incentives to contribute to IAs also increased

  • New policies designed to help women

  • What is the impact on pension distribution, work incentives, fiscal costs, system sustainability? We use CASEN 2006 data and simulations


Chile s 2008 re reforms what are they and what are the implications

Main change--larger public benefit

  • New flat basic benefit for elderly with no own-pension (19% av. wage)—replaces PASIS

  • Phased out at 29.4% rate against person’s pvt pension, =0 when pvt pension=$425 (65% av w)

    • No contributory requirement; replaces MPG

  • These benefits go only to elderly in bottom 60% of households—almost all in bottom 60% get some public benefit

    • Most elderly in top 40% have private pensions < $425 but get no public benefit

6


Chile s 2008 re reforms what are they and what are the implications

Basic benefit = CH$75,000 if private pension = 0

APS = supplemental pension = basic benefit - .294 private pension

PAF = private pension

Total pension = basic benefit or (APS + private pension)


Measures to increase contributions

Measures to increase contributions

  • Contributions mandatory for some self-employed

  • Contributions subsidized for young low earners

  • Private pension is only benefit for top 2 quintiles and for retirees < 60W/65M

  • But public benefit is more than half total pension for bottom 3 quintiles >60/65


Policies designed to help women

Policies designed to help women

  • Major beneficiaries of new public benefits, espec. basic benefit for noncontributors

  • Rebate for D&S insurance into their accounts

  • New baby bonus into pension account

  • Still benefit from survivors insurance + joint annuity

  • Still can start public + private pension at 60 instead of 65 like men—missed opportunity for trade-off


Some impacts consistent with goals

Some impacts consistent with goals

  • Increases pension coverage in bottom 60%; also raises av. pension amount

    • Lowers coverage and av. pension for top 40%

  • Large redistribution to bottom 60% of hh, to noncontributors and women

  • Decreases elderly poverty, but little impact on poverty over-all (would transfers to young families be more equitable?)

  • Provides insurance against financial market risks and longevity growth


But some potential impacts are problematic

But some potential impacts are problematic

  • Disincentive for formal work and contributions

  • Long run fiscal costs may be high

  • Retirement age for men and women too low

  • Dividing line between top 2 and bottom 3 quintiles ambiguous


Impact on contributions

Impact on contributions

  • Non-contributors get much larger public benefit than before

  • Private pension faces 29.4 % implicit tax in bottom 3 quintiles (Negative impact of MPG was concentrated in much smaller group)

  • Inc and subst effect might discourage work, encourage self-employment and informality

  • Pure flat ben would have avoided disincentive

  • High-income countries with phased-out flat benefit have greater enforcement /collection capacity, less danger of informality


Fiscal impact

Fiscal impact

  • Ministry of Finance did not make fiscal projections until after law was passed, did not spell out assumptions, no sensitivity analysis

  • Expected fiscal impact small (1% GDP 2020)

  • But costs could rise in long run due to policy and behavioral changes: if

    • wage indexation replaces price indexation

    • more elderly shift to bottom 3 quintiles

    • public benefits extended to top 2 quintiles

    • contributions fall due to disincentives

    • population ages due to longevity growth

  • Our simulations show that fiscal cost in 2050 could be 3-4% GDP or 8% of wages (in addition to 13% of wages for private accounts, admin costs and D&S insurance).


Chile s 2008 re reforms what are they and what are the implications

Estimated fiscal costs of Chile’s new public pillar (as % of GDP)

Source: Authors’ calculations based on estimates of numbers of PBS and APS old age recipients in bottom 6 deciles of households, using 2006 CASEN data up-dated to 2008 $s


Lost opportunity to link starting age to longevity and equalize for m w

Lost opportunity to link starting age to longevity and equalize for M&W

  • Women can start their pensions at 60, men 65

  • If start of private pension were delayed to 65, it would increase by 50%--greater gender equality & potential output, smaller pub. ben.

  • If public pension were delayed to 65, this would save treasury money

  • But age 60 was retained for women

  • Tax burden will grow as longevity increases unless starting age for public pension is linked to life expectancy


Conclusions

Conclusions

  • Increased coverage to virtually 100%

  • Exclusion of top 2 quintiles and phase-out of public benefit designed to save fiscal costs

  • Will private pensions decline as more workers become informal due to new implicit tax?

  • Will work by women be discouraged?

  • Can mandate for self-employed be enforced?

  • Will fiscal costs rise due to wage indexation, extension of public benefits to top 40%?

  • Cost trade-off could be improved if starting age were linked to longevity, same for W&M

  • Economic sustainability unclear but political acceptance by broad l-r coalition increased


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