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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

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

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



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).

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
  • 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