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The Chilean Pension Reform: A Pioneering Program

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  • Sebastian Edwards

Abstract

In the mid-1970s Chile initiated a deep market-oriented reform program aimed at opening up the economy, privatizing state owned enterprises and stabilizing the macroeconomy. In the 1980s Chile began to grow at increasingly rapid rates -- between 1986 and 1995 the average rate of growth bordered 7% --, becoming a star performer. Perhaps one of the most admired aspects of the Chilean program has been the reform of the pension system, which replaced an inefficient pay-as-you-go system with a privately administered defined contribution one. " This reform has been credited with helping develop Chile's capital market, with reducing government contingent liabilities and with helping boost Chile's traditionally anemic savings rate. The purpose of this paper is to analyze the most salient aspects of the Chilean program and to evaluate its achievements to date. The paper provides a brief background of the Chilean reforms effort and deals with Chile's old pay-as-you-go system, including its degree of (in)efficiency, its distributive characteristics and its fiscal consequences. The functioning of the new privately managed system is discussed in detail, and the system's results up to date are evaluated. I also discuss transitional issues, including the fiscal consequences of the reforms. Finally, the analysis also deals with the reforms effects on labor markets and savings.

Suggested Citation

  • Sebastian Edwards, 1996. "The Chilean Pension Reform: A Pioneering Program," NBER Working Papers 5811, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:5811
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    1. Vittas, Dimitri & Iglesias, Augusto, 1992. "The rationale and performance of personal pension plans in Chile," Policy Research Working Paper Series 867, The World Bank.
    2. Edwards, Sebastian & Edwards, Alejandra Cox, 1991. "Monetarism and Liberalization," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226184890, April.
    3. Ping-Lung Hsin & Olivia Mitchell, 1994. "The Political Economy of Public Pensions: Pension Funding, Governance, and Fiscal Stress," Revista de Analisis Economico – Economic Analysis Review, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines, vol. 9(1), pages 151-168, June.
    4. Salvador Valdés, 1994. "Cargos por Administración en los Sistemas de Pensiones de Chile, los Estados Unidos, Malasia y Zambia," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 31(93), pages 185-228.
    5. Rodrigo Cifuentes, 1995. "Reforma de los Sistemas Previsionales: Aspectos Macroeconómicos," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 32(96), pages 217-250.
    6. Peter Diamond, 2004. "Social Security," American Economic Review, American Economic Association, vol. 94(1), pages 1-24, March.
    7. Morande, Felipe G., 1998. "Savings in Chile. What went right?," Journal of Development Economics, Elsevier, vol. 57(1), pages 201-228, October.
    8. Haindl Rondanelli, Erik, 1996. "Chilean pension fund reform and its impact on saving," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 34299, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    9. José Pablo Arellano, 1982. "Efectos Macroeconómicos de la Reforma Previsional Chilena," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 19(56), pages 111-122.
    10. Salvador Valdés & Peter Diamond, "undated". "Social Security Reforms in Chile," Documentos de Trabajo 161, Instituto de Economia. Pontificia Universidad Católica de Chile..
    11. McGreevey, W., 1990. "Social security in Latin America: issues and options for World Bank," World Bank - Discussion Papers 110, World Bank.
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    Cited by:

    1. David Blake, 2004. "The impact of wealth on consumption and retirement behaviour in the UK," Applied Financial Economics, Taylor & Francis Journals, vol. 14(8), pages 555-576.
    2. Chang-Tai Hsieh & Jonathan A. Parker, 2007. "Taxes and Growth in a Financially Underdevelopped Country: Evidence from the Chilean Investment Boom," ECONOMIA JOURNAL, THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION - LACEA, vol. 0(Fall 2007), pages 1-54, August.
    3. Samwick, Andrew A., 1998. "Discount rate heterogeneity and social security reform," Journal of Development Economics, Elsevier, vol. 57(1), pages 117-146, October.
    4. Attanasio, Orazio & Kitao, Sagiri & Violante, Giovanni L., 2007. "Global demographic trends and social security reform," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 144-198, January.
    5. Casey B. Mulligan & Xavier Sala-i-Martin, 1999. "Gerontocracy, retirement, and social security," Economics Working Papers 383, Department of Economics and Business, Universitat Pompeu Fabra.
    6. Johannes Jäger, 1998. "Die Privatisierung des Pensionssystems in Lateinamerika: Ursachen und Folgen des Experiments in Chile," SRE-Disc sre-disc-60, Institute for Multilevel Governance and Development, Department of Socioeconomics, Vienna University of Economics and Business.
    7. Glismann, Hans H. & Horn, Ernst-Jürgen, 1997. "Towards a funded system of social security: Design and implications - The case of Germany -," Kiel Working Papers 836, Kiel Institute for the World Economy (IfW).
    8. Robert Holzmann & Edward Palmer & David Robalino, 2012. "Nonfinancial Defined Contribution Pension Schemes in a Changing Pension World : Volume 1. Progress, Lessons, and Implementation," World Bank Publications, The World Bank, number 9378, April.
    9. Maria Ogonek, 2003. "Transformation of the Repartition Pension System into a Mixed System," Ekonomia journal, Faculty of Economic Sciences, University of Warsaw, vol. 10.
    10. Peter Diamond, 1998. "The Economics of Social Security Reform," NBER Working Papers 6719, National Bureau of Economic Research, Inc.
    11. Damjanovic, Tatiana, 2003. "The possibility of Pareto-Improving Pension Reform: More Arguments," Royal Economic Society Annual Conference 2003 53, Royal Economic Society.
    12. Olivia S. Mitchell & Flavio Ataliba Barreto, 1997. "After Chile, What? Second-Round Pension Reforms in Latin America," NBER Working Papers 6316, National Bureau of Economic Research, Inc.
    13. repec:eee:hapoch:v1_311 is not listed on IDEAS
    14. World Bank, 2002. "Brazil : The New Growth Agenda, Volume 1. Policy Briefing," World Bank Other Operational Studies 15289, The World Bank.
    15. Sebastian Edwards & Alejandra Cox Edwards, 2000. "Economic reforms and labour markets: policy issues and lessons from Chile," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 181-230, April.
    16. C. Alan Garner, 1997. "Social Security privatization: balancing efficiency and fairness," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 21-36.
    17. Jäger, Johannes, 1998. "Die Privatisierung des Pensionssystems in Lateinamerika. Ursachen und Folgen des Experiments in Chile," SRE-Discussion Papers 1560, WU Vienna University of Economics and Business.
    18. Raddatz, Claudio & Schmukler, Sergio L., 2008. "Pension Funds And Capital Market Development:How Much Bang For The Buck?," Policy Research Working Paper Series 4787, The World Bank.
    19. Joshua Aizenman, 1998. "Privatization in Emerging Markets," NBER Working Papers 6524, National Bureau of Economic Research, Inc.

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