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How to Integrate Disability Benefits into a System with Individual Accounts: The Chilean Model

  • Estelle James

    (Urban Institute)

  • Augusto Iglesias Palau

    (PrimAmerica)

Registered author(s):

    Chile offers an innovative approach to disability insurance within a multi-pillar social security system. The individual’s retirement savings account is used as part of his disability insurance, but if he becomes disabled the account is topped up enough to finance a defined benefit annuity that pays 70% of the reference wage. This is accomplished primarily through the private insurance market, but with government providing regulations and back-up guarantees. The private pension funds and insurance companies that participate in the assessment process have a pecuniary interest in keeping costs low, unlike most public systems that are run by agencies without a personal incentive to contain costs. The individual accounts, used for old age retirement savings, help to finance the disability and survivors’ insurance as a joint product. This further keeps costs down and makes the system less sensitive to demographic shocks than a public pay-as-you-go system would be. However, pre-funding a defined benefit makes system costs much more sensitive to interest rate shifts. The defined benefit reduces risk to the worker but non-differentiated pricing creates cross-subsidies and, in a competitive market, incentives for creaming. Some of the cost reductions to the private insurance may imply a larger future public obligation, due to the minimum pension guarantee. This study examines the potential successes and pitfalls of this mixed public-private funded system of disability insurance and evaluates whether it provides a useful model for the US and other countries.

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    File URL: http://www.mrrc.isr.umich.edu/publications/Papers/pdf/wp111.pdf
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    Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp111.

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    Length: 60 pages
    Date of creation: Feb 2006
    Date of revision:
    Handle: RePEc:mrr:papers:wp111
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    1. Alberto Arenas de Mesa & Jere Behrman & David Bravo, 2001. "Characteristics of and determinants of the density of contributions in a Private Social Security System," Working Papers wp077, University of Michigan, Michigan Retirement Research Center.
    2. Estelle James & Alejandra Cox Edwards, 2005. "Do Individual Accounts Postpone Retirement: Evidence from Chile," Working Papers wp098, University of Michigan, Michigan Retirement Research Center.
    3. James, Estelle & Martinez, Guillermo & Iglesias, Augusto, 2006. "The payout stage in Chile: who annuitizes and why?," Journal of Pension Economics and Finance, Cambridge University Press, vol. 5(02), pages 121-154, July.
    4. Salvador Valdés & Eduardo Navarro, 1992. "Subsidios Cruzados en el Seguro de Invalidez y Sobrevivencia del Nuevo Sistema Previsional Chileno," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 29(88), pages 409-442.
    5. Grushka, Carlos O. & Demarco, Gustavo, 2003. "Disability pensions and social security reform : analysis of the Latin American experience," Social Protection Discussion Papers 29139, The World Bank.
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