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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

Suggested Citation

  • Peter Diamond, 1993. "Privatization of Social Security: Lessons from Chile," NBER Working Papers 4510, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:4510
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    References listed on IDEAS

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    1. Diamond, Peter, 1992. "Organizing the Health Insurance Market," Econometrica, Econometric Society, vol. 60(6), pages 1233-1254, November.
    2. Peter Diamond, 2004. "Social Security," American Economic Review, American Economic Association, vol. 94(1), pages 1-24, March.
    3. Robert C. Merton & Zvi Bodie, 1992. "On the Management of Financial Guarantees," Financial Management, Financial Management Association, vol. 21(4), Winter.
    4. Salvador Valdés & Peter Diamond, "undated". "Social Security Reforms in Chile," Documentos de Trabajo 161, Instituto de Economia. Pontificia Universidad Católica de Chile..
    5. Diamond, P. A., 1977. "A framework for social security analysis," Journal of Public Economics, Elsevier, vol. 8(3), pages 275-298, December.
    6. Valdes-Prieto, Salvador & DEC, 1994. "Earnings-related mandatory pensions : concepts for design," Policy Research Working Paper Series 1296, The World Bank.
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    Cited by:

    1. Chang-Tai Hsieh & Jonathan A. Parker, 2007. "Taxes and Growth in a Financially Underdevelopped Country: Evidence from the Chilean Investment Boom," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2007), pages 1-54, August.
    2. Casey Mulligan & Tomas Philipson, "undated". "Merit Motives and Government Intervention: Public Finance in Reverse," University of Chicago - Population Research Center 2000-03, Chicago - Population Research Center.
    3. 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.
    4. Gruber, Jonathan, 1997. "The Incidence of Payroll Taxation: Evidence from Chile," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages 72-101, July.
    5. Warren Moskowitz & Stephen Yeaple, 1995. "The literature on privatization," Research Paper 9514, Federal Reserve Bank of New York.
    6. Shunfeng Song & George S‐F Chu, 1997. "Social Security Reform In China: The Case Of Old‐Age Insurance," Contemporary Economic Policy, Western Economic Association International, vol. 15(2), pages 85-93, April.
    7. 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).
    8. 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.
    9. 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).
    10. Bielecki, Marcin & Goraus, Karolina & Hagemejer, Jan & Makarski, Krzysztof & Tyrowicz, Joanna, 2015. "Small assumptions (can) have a large bearing: evaluating pension system reforms with OLG models," Economic Modelling, Elsevier, vol. 48(C), pages 210-221.
    11. Casey B. Mulligan & Xavier Sala-i-Martin, 1999. "Social Security in Theory and Practice (II): Efficiency Theories, Narrative Theories, and Implications for Reform," NBER Working Papers 7119, National Bureau of Economic Research, Inc.
    12. Michael Tucker, 1998. "Asset Allocation Under Partial and Complete Privatization of Social Security Contributions," Journal of Financial Services Research, Springer;Western Finance Association, vol. 14(1), pages 5-16, July.
    13. Casey B. Mulligan & Xavier Sala-i-Martin, 1999. "Social security in theory and practice (I): Facts and political theories," Economics Working Papers 384, Department of Economics and Business, Universitat Pompeu Fabra.
    14. Lok Sang Ho, 1997. "A Universal Fully Funded Pension Scheme," Contemporary Economic Policy, Western Economic Association International, vol. 15(3), pages 13-20, July.
    15. David E. Altig & Jagadeesh Gokhale, 1997. "Social Security privatization: a simple proposal," Working Papers (Old Series) 9703, Federal Reserve Bank of Cleveland.
    16. J. Ignacio Conde-Ruiz, 2019. "¿Qué haríamos si hubiese que reinventar las pensiones?," Policy Papers 2019-02, FEDEA.

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    More about this item

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination

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