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Disability insurance with pre-funding and private participation : the Chilean model

Author

Listed:
  • James, Estelle
  • Iglesias, Augusto
  • Cox Edwards, Alejandra

Abstract

This paper asserts that the disability insurance system in Chile is much less well-known than the pension part, but it is equally innovative. It differs from traditional public disability insurance in two important ways: 1) it is largely pre-funded--through the accumulation in the retirement account and later through an additional payment made when the person becomes permanently disabled, sufficient to cover a lifetime defined benefit annuity; and 2) the disability assessment procedure includes participation by private pension funds (AFPs) and insurance companies, who finance the benefit and have a direct pecuniary interest in controlling costs. Survivors'insurance is handled in the same way, through a combined D&S fee. The authors argue that pre-funding will raise disability fees in the early years of a new system as funds are built up but reduce them in the long run as benefits are covered out of accumulated funds. They further hypothesize that the participation of private pension funds in the assessment procedure will keep system costs low, by cutting the incidence of successful disability claims. Finally, the paper expects that these incentives will also lead to cost-shifting-to other AFP's by selection and to the public treasury via the minimum pension guarantee (MPG). Using simulations based on a special data set that was provided to the authors by the Association of AFPs and applying the Cox proportional hazard model to a retrospective sample of new and old system affiliates (ESP 2002), they conclude that these hypotheses are broadly consistent with observed behavior.

Suggested Citation

  • James, Estelle & Iglesias, Augusto & Cox Edwards, Alejandra, 2008. "Disability insurance with pre-funding and private participation : the Chilean model," Social Protection and Labor Policy and Technical Notes 42268, The World Bank.
  • Handle: RePEc:wbk:hdnspu:42268
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    References listed on IDEAS

    as
    1. Alberto Arenas de Mesa & David Bravo & Jere R. Behrman & Olivia S. Mitchell & Petra E. Todd, 2006. "The Chilean Pension Reform Turns 25: Lessons From the Social Protection Survey," NBER Working Papers 12401, National Bureau of Economic Research, Inc.
    2. Francisco Pino & Solange Berstein & Guillermo Larraín, 2006. "Chilean Pension Reform: Coverage Facts and Policy Alternatives," ECONOMIA JOURNAL, THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION - LACEA, vol. 0(Spring 20), pages 227-279, January.
    3. David H. Autor & Mark G. Duggan, 2006. "The Growth in the Social Security Disability Rolls: A Fiscal Crisis Unfolding," Journal of Economic Perspectives, American Economic Association, vol. 20(3), pages 71-96, Summer.
    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. Rubén Castro, 2005. "Seguro de invalidez y sobrevivencia: Qué es y qué le está pasando," Working Papers 5, Superintendencia de Pensiones, revised May 2005.
    6. 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.
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