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Privatization of Social Security: Lessons from Chile

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  • Peter Diamond

Abstract

In Chile, all covered workers must place 10% of monthly earnings in a savings account with a highly regulated intermediary that manages a single fund and provides survivors and disability insurance. Workers pay a commission charge, in addition to the mandatory 10%, to finance this insurance and to cover the costs and profits of the intermediaries. On becoming eligible to receive benefits, a worker can choose between a sequence of phased withdrawals and a real annuity. In addition, there is a sizable guaranteed minimum pension. Unlike the purchased annuities, the minimum pension is not indexed, but adjusted by the government from time to time. The Chilean reform gets high marks for defending the system from political risk and for its effects on capital accumulation and on the functioning of the capital market. The Chilean reform gets low marks for the provision of insurance and for administrative cost. Perhaps the most surprising aspect of the Chilean reform is the high cost of running a privatized social security system, higher than the 'inefficient' system that it replaced. Valdes-Prieto has estimated that the average administrative charge per effective affiliate while active is U.S. $89.10 per year (for 1991) which is 2.94% of average taxable earnings. This is close to 30% of the 10% mandatory savings rate. The cost per person is not far from costs observed in other privately-managed pension systems, such as defined- benefit private pensions in the U.S. However, it compares unfavorably with administrative costs in well-run unified government managed systems. The issue here is the administrative efficiency of reliance

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4510.

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Date of creation: Oct 1993
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Publication status: published as Revista de Analisis Economico, June 1994, pp. 21-33
Handle: RePEc:nbr:nberwo:4510

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  1. Diamond, P. A., 1977. "A framework for social security analysis," Journal of Public Economics, Elsevier, vol. 8(3), pages 275-298, December.
  2. Diamond, Peter, 1992. "Organizing the Health Insurance Market," Econometrica, Econometric Society, vol. 60(6), pages 1233-54, November.
  3. Robert C. Merton & Zvi Bodie, 1992. "On the Management of Financial Guarantees," Financial Management, Financial Management Association, vol. 21(4), Winter.
  4. Valdes-Prieto, Salvador & DEC, 1994. "Earnings-related mandatory pensions : concepts for design," Policy Research Working Paper Series 1296, The World Bank.
  5. Salvador Valdés & Peter Diamond, . "Social Security Reforms in Chile," Documentos de Trabajo 161, Instituto de Economia. Pontificia Universidad Católica de Chile..
  6. Peter Diamond, 2004. "Social Security," American Economic Review, American Economic Association, vol. 94(1), pages 1-24, March.
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Cited by:
  1. Chang-Tai Hsieh & Jonathan A. Parker, 2006. "Taxes and Growth in a Financially Underdeveloped Country: Evidence from the Chilean Investment Boom," NBER Working Papers 12104, National Bureau of Economic Research, Inc.
  2. Casey B. Mulligan & Xavier Sala-i-Martin, 1999. "Social security in theory and practice (II): Efficiency theories, narrative theories and implications for reform," Economics Working Papers 385, Department of Economics and Business, Universitat Pompeu Fabra.
  3. Gruber, Jonathan, 1997. "The Incidence of Payroll Taxation: Evidence from Chile," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages S72-101, July.
  4. Casey B. Mulligan & Xavier Sala-i-Martin, 1999. "Social Security in Theory and Practice (I): Facts and Political Theories," NBER Working Papers 7118, National Bureau of Economic Research, Inc.
  5. Barrientos, Armando & Boussofiane, Aziz, 2001. "The Efficiency of Pension Fund Managers in Latin America," Centre on Regulation and Competition (CRC) Working papers 30696, University of Manchester, Institute for Development Policy and Management (IDPM).
  6. Michael Tucker, 1998. "Asset Allocation Under Partial and Complete Privatization of Social Security Contributions," Journal of Financial Services Research, Springer, vol. 14(1), pages 5-16, July.
  7. Stephen Yeaple & Warren Moskowitz, 1995. "The literature on privatization," Research Paper 9514, Federal Reserve Bank of New York.
  8. David Altig & Jagadeesh Gokhale, 1997. "Social Security privatization: a simple proposal," Working Paper 9703, Federal Reserve Bank of Cleveland.
  9. Alan L. Gustman & Thomas L. Steinmeier, 1998. "Privatizing Social Security: First-Round Effects of a Generic, Voluntary, Privatized U.S. Social Security System," NBER Chapters, in: Privatizing Social Security, pages 313-361 National Bureau of Economic Research, Inc.
  10. Casey Mulligan & Tomas Philipson, . "Merit Motives and Government Intervention: Public Finance in Reverse," University of Chicago - Population Research Center 2000-03, Chicago - Population Research Center.
  11. Solange Berstein & José Luis Ruiz V, 2005. "Sensibilidad de la Demanda con Consumidores Desinformados: El Caso de las AFP en Chile," Working Papers 4, Superintendencia de Pensiones, revised Apr 2005.
  12. Liina Kulu & Janno Reiljan, 2004. "Old-Age Pension Reform In Estonia On The Basis Of The World Bank’S Multi-Pillar Approach," University of Tartu - Faculty of Economics and Business Administration Working Paper Series 34, Faculty of Economics and Business Administration, University of Tartu (Estonia).

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