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Earnings-related mandatory pensions : concepts for design


  • 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).

Suggested Citation

  • Valdes-Prieto, Salvador & DEC, 1994. "Earnings-related mandatory pensions : concepts for design," Policy Research Working Paper Series 1296, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1296

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    References listed on IDEAS

    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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    Cited by:

    1. Vittas, Dimitri, 1997. "The Argentine pension reform and its relevance for Eastern Europe," Policy Research Working Paper Series 1819, The World Bank.
    2. Peter Diamond, 1993. "Privatization of Social Security: Lessons from Chile," NBER Working Papers 4510, National Bureau of Economic Research, Inc.
    3. Arrau, Patricio & Schmidt-Hebbel, Klaus, 1995. "Pensions systems and reform : country experiences and research issues," Policy Research Working Paper Series 1470, The World Bank.
    4. Shah, Hemant, 1997. "Toward better regulation of private pension funds," Policy Research Working Paper Series 1791, The World Bank.
    5. Vittas, Dimitri, 1997. "Private pension funds in Argentina's newintegrated pension system," Policy Research Working Paper Series 1820, The World Bank.


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