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Earnings-related mandatory pensions : concepts for design

Listed author(s):
  • Valdes-Prieto, Salvador
  • DEC

The author offers a framework for economic policy on mandatory earnings-related pensions. He does not discuss the gains and losses from mandating insurance and savings, nor the use of this policy as a vehicle for income redistribution. Instead, he concentrates on areas that are less well understood: the microeconomics, the macroeconomics, and the political economy of mandatory pensions. His analysis focuses on three main areas: insurance design, privatization, and degree of funding. In each area, he provides a checklist of design issues, drawn from international experience and economic analysis. For insurance, there are two sets of choices: between flat actuarial factor or individual actuarial factor and between defined benefit or defined contribution (in the sense of financial guarantee). For privatization, the essential choices are between private or nationalized provision, and between private or national demand. For funding, the choices are between funding or not funding, and between apparent funding or pay-as-you-go financing. Some combinations can be discarded. Privatization should not be combined with flat actuarial factors, for example, because private suppliers will compete for access to rents that accrue to workers who are awarded implicit subsidies. Privatization is compatible with apparent funding, but not with pay-as-you-go financing, because in the latter there are no funds to invest in the capital market. The policy choice is ultimately between two coherent designs whose relative advantages and drawbacks the author discusses. One, is an individual actuarial factor with privatized production and demand, with risk explicitly allocated to pensions, and with partial funding. Two, is a flat actuarial factor coupled with nationalized production, pay-as-you-go financing, and statutory promises of fixed real pensions (defined benefit).

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1296.

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Date of creation: 30 Apr 1994
Handle: RePEc:wbk:wbrwps:1296
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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. Brugiavini, Agar, 1993. "Uncertainty resolution and the timing of annuity purchases," Journal of Public Economics, Elsevier, vol. 50(1), pages 31-62, January.
  4. Salvador Valdés & Peter Diamond, "undated". "Social Security Reforms in Chile," Documentos de Trabajo 161, Instituto de Economia. Pontificia Universidad Católica de Chile..
  5. Eduardo Walker, 1993. "Desempeño Financiero de las Carteras Accionarias de los Fondos de Pensiones en Chile ¿Ha Tenido Desventajas ser Grandes?," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 30(89), pages 35-76.
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