Payout Choices by Retirees in Chile: What Are They and Why?
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 to individual account systems during the payout stage and how regulations shape these reactions. We use aggregate time series data obtained from the pension fund and insurance industry regulators, individual-level data on all annuitants in the system, and interviews with pension providers and regulators for this analysis. Retirees in Chile have a choice between early versus normal retirement from the system and between annuitization versus programmed withdrawals (PW); lump sum withdrawals are largely ruled out. These choices determine the time stream of benefits and the eventual financial burden that will be placed on the public treasury. Almost twothirds of all retirees have annuitized, but this proportion differs greatly between early and normal age retirees. Currently 60% of all retirees have chosen to retire early, many before age 55. (Early retirement means that they stop contributing and start withdrawing; it does not mean that they stop working). Most (85% of) early retirees have annuitized, while most (66% of) normal age retirees have taken PW. We present evidence that this disparate behavior is explained by incentives and constraints stemming from guarantees and regulations on pensioners and pension providers. These rules have lead workers with small accumulations to take PW at the normal age, with the minimum pension guarantee providing longevity and investment insurance. They lead workers with large accumulations to retire early, with annuities providing insurance. Regulations have given insurance companies selling annuities a competitive advantage in marketing to this group, and they do so aggressively. Early access to retirement saving through early retirement or front-loaded PW imposes a potential financial burden on the government because of the minimum pension guarantee, which has been rising in real value through time. As a result, the expected public share of the total pension payout grows with a cohort’s age and may exceed expectations as cohorts that retired under the new system grow very old. Annuitization mitigates (but does not completely eliminate) this cost to the public treasury. This analysis suggests that, with appropriate incentives, a high proportion of pensioners will purchase annuities in countries with individual account systems. But these countries need to coordinate early withdrawal conditions with minimum pensions and other safety nets, in order to avoid moral hazard problems and unexpected public liabilities.
|Date of creation:||Jan 2004|
|Date of revision:|
|Contact details of provider:|| Postal: P.O. Box 1248, Ann Arbor, MI 48104|
Phone: (734) 615-0422
Fax: (734) 647-4575
Web page: http://www.mrrc.isr.umich.edu/publications/papers/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- James, Estelle & Edwards, Alejandra Cox & Wong, Rebecca, 2003. "The gender impact of pension reform : a cross-country analysis," Policy Research Working Paper Series 3074, The World Bank.
- Amy Finkelstein & James Poterba, 1999. "Selection Effects in the Market for Individual Annuities: New Evidence from the United Kingdom," NBER Working Papers 7168, National Bureau of Economic Research, Inc.
- Gert Wagner, 1991.
"La seguridad social y el programa de pensión mínima garantizada,"
Estudios de Economia,
University of Chile, Department of Economics, vol. 18(1 Year 19), pages 33-91, June.
- Gert Wagner, . "La Seguridad Social y el Programa de Pensión Mínima Garantizada," Documentos de Trabajo 133, Instituto de Economia. Pontificia Universidad Católica de Chile..
- Estelle James & Xue Song, 2001. "Annuities Markets Around the World: Money’s Worth and Risk Intermediation," CeRP Working Papers 16, Center for Research on Pensions and Welfare Policies, Turin (Italy).
- James, Estelle & Edwards, Alejandra Cox & Wong, Rebeca, 2003. "The gender impact of pension reform," Journal of Pension Economics and Finance, Cambridge University Press, vol. 2(02), pages 181-219, July.
- Amy Finkelstein & James Poterba, 2004.
"Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market,"
Journal of Political Economy,
University of Chicago Press, vol. 112(1), pages 183-208, February.
- Amy Finkelstein & James Poterba, 2000. "Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market," NBER Working Papers 8045, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:mrr:papers:wp068. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (MRRC Administrator)
If references are entirely missing, you can add them using this form.