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The payout stage in Chile: who annuitizes and why?

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  • JAMES, ESTELLE
  • MARTINEZ, GUILLERMO
  • IGLESIAS, AUGUSTO
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    Abstract

    In 1981 Chile adopted its new multi-pillar system, which featured privately managed individual accounts. Starting in 1983 payouts from the accounts were permitted and detailed rules about payouts were put in place. The Chilean scheme therefore gives us an opportunity to examine how pensioners and pension providers react when individual accounts replace DB systems, and how detailed regulations shape these reactions.Retirees in Chile have a choice between early versus normal retirement (before or after age 65M 60W) and between annuitization versus programmed withdrawals; lump sum withdrawals are largely ruled out. Almost two-thirds of all retirees have annuitized a very high proportion compared with other countries. This paper argues that this high rate of annuitization is the result of guarantees and regulations that constrain payout choices, insure retirees through the minimum pension guarantee, eliminate other DB components, and give a competitive advantage to insurance companies selling annuities. The minimum pension financed by the government provides insurance to workers with small accumulations, who retire at the normal age with programmed withdrawals, while those with large accumulations retire early and must purchase annuities to acquire longevity and investment insurance. Insurance companies further induce annuitization by marketing aggressively, facilitating early retirement for those who annuitize and offering a high money s worth ratio for price-indexed annuities. We find evidence of adverse selection based on asymmetric information about short-run health status, but this does not seem to deter the high rate of annuitization.

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    Bibliographic Info

    Article provided by Cambridge University Press in its journal Journal of Pension Economics and Finance.

    Volume (Year): 5 (2006)
    Issue (Month): 02 (July)
    Pages: 121-154

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    Handle: RePEc:cup:jpenef:v:5:y:2006:i:02:p:121-154_00

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    Cited by:
    1. Rocha, Roberto & Rudolph, Heinz P., 2010. "A summary and update of developing annuities markets : the experience of Chile," Policy Research Working Paper Series 5325, The World Bank.
    2. Estelle James & Augusto Iglesias Palau, 2006. "How to Integrate Disability Benefits into a System with Individual Accounts: The Chilean Model," Working Papers wp111, University of Michigan, Michigan Retirement Research Center.
    3. Estelle James & Alejandra CoxEdwards & Augusto Iglesias, 2007. "The Impact of Private Participation on Disability Costs: Evidence from Chile," Working Papers wp161, University of Michigan, Michigan Retirement Research Center.
    4. Alberto Arenas de Mesa & David Bravo & Jere R. Behrman & Olivia S. Mitchell & Petra E. Todd, 2006. "The Chilean Pension Reform Turns 25: Lessons From the Social Protection Survey," NBER Working Papers 12401, National Bureau of Economic Research, Inc.
    5. Alejandra Cox-Edwards & Estelle James, 2006. "Crowd-out, Adverse Selection and Information in Annuity Markets: Evidence from a New Retrospective Data Set in Chile," Working Papers wp147, University of Michigan, Michigan Retirement Research Center.
    6. Heinz Rudolph & Hela Cheikhrouhou & Roberto Rocha & Craig Thorburn, 2007. "Financial Sector Dimensions of the Colombian Pension System," World Bank Publications, The World Bank, number 6785, March.
    7. Estelle James & Alejandra Cox Edwards & Rebeca Wong, 2012. "The Gender Impact of Pension Reform," World Bank Other Operational Studies 13046, The World Bank.
    8. Heidler, Matthias & Raffelhüschen, Bernd & Leifels, Arne, 2006. "Heterogenous life expectancy, adverse selection, and retirement behaviour," FZG Discussion Papers 13, Research Center for Generational Contracts (FZG), University of Freiburg.

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