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The effect of the Chilean Pension Reform on Wealth Accumulation

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  • Ximena Quintanilla

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    (Studies Division, Chilean Pension Supervisor)

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    Abstract

    Chile went through a major pension system reform in 1981, replacing the state managed pay-as-you-go system by a privately-managed fully funded scheme. The reform implied a rather important increase in the net present value of expected pension wealth for most of those who opted-out to the new arrangement. We investigate the extent to which households substitute this increase by decreasing accumulation of other wealth. As the decision to either stay in the old system or to opt-out to the new one was not random, we follow an instrumental variable approach that allow us to overcome the unobserved heterogeneity problem. Using data from the Social Protection Survey we find two suitable instruments that we apply to two different subsamples. The displacement effect between expected pension wealth and non-pension wealth is estimated to be in the range of 30%. Among the possible reasons for the incomplete offset are imperfect information, the desire to compensate for new risks faced and habit formation..

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    File URL: http://www.spensiones.cl/redirect/files/doctrab/DT00047.pdf
    File Function: Revised version, 2011
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    Bibliographic Info

    Paper provided by Superintendencia de Pensiones in its series Working Papers with number 47.

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    Date of creation: Sep 2011
    Date of revision: Sep 2011
    Handle: RePEc:sdp:sdpwps:47

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    Web page: http://www.spensiones.cl/
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    Related research

    Keywords: pension wealth; private wealth;

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    1. Raquel Carrasco & José M. Labeaga & J. David López-Salido, 2002. "Consumption And Habits: Evidence From Panel Data," Economics Working Papers we023415, Universidad Carlos III, Departamento de Economía.
    2. Feldstein, Martin S, 1974. "Social Security, Induced Retirement, and Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 905-26, Sept./Oct.
    3. Jonathan Gruber & David A. Wise, 2004. "Social Security Programs and Retirement around the World: Micro-Estimation," NBER Books, National Bureau of Economic Research, Inc, number grub04-1.
    4. James Banks & Carl Emmerson & Gemma Tetlow, 2005. "Estimating pension wealth of ELSA respondents," IFS Working Papers W05/09, Institute for Fiscal Studies.
    5. Orazio P. Attanasio & Susann Rohwedder, 2003. "Pension Wealth and Household Saving: Evidence from Pension Reforms in the United Kingdom," American Economic Review, American Economic Association, vol. 93(5), pages 1499-1521, December.
    6. Samwick, Andrew A., 1998. "Discount rate heterogeneity and social security reform," Journal of Development Economics, Elsevier, vol. 57(1), pages 117-146, October.
    7. Jody Overland & Christopher D. Carroll & David N. Weil, 2000. "Saving and Growth with Habit Formation," American Economic Review, American Economic Association, vol. 90(3), pages 341-355, June.
    8. Orazio P. Attanasio & Agar Brugiavini, 2003. "Social Security And Households' Saving," The Quarterly Journal of Economics, MIT Press, vol. 118(3), pages 1075-1119, August.
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