Title: Reforming successful reforms: The case of the Chilean pension system
1 Reforming successful reforms The case of the Chilean pension system
Guillermo Larrain Rios
Presentation prepared for the IADB Washington December 6 2004 2 Chilean Pension Funds have grown steadily and impressively 3 Macroeconomic impact of pension funds analytics The Corbo/Schmidt-Hebbel model Formalization Labour Market Total employ-ment Growth Pension Reform Financial Developmt TFP Note these causalities! Public financing of transition Saving Investment 4 Macroeconomic impact of pension funds estimates 5 Two general considerations about the Chilean model
The old Chilean PAYG system was in crisis
The AFP model started before the current demographic transition appeared
From an actuarial point of view DC systems are better prepared to adapt to the new demographic paradigm than DB systems for the simple reason than in the latter benefits are defined according to the dynamic of politics not of demographics and obviously they need not coincide
6 Two general considerations about the Chilean model
New workers to new system strong incentives to older workers real wage increased for workers and employers contribution ceased.
Fiscal deficit persistent and long lasting
Expenditure cuts in other areas to accommodate it.
Specific political situation of Chile
7 Exogenous problems Labour Markets
Lifetime employment is over more job rotation more frequent unemployment episodes.
This does not affect people equally as employability differ according to education economic sector family linkages etc
Poorer workers are more exposed to that uncertainties.
One important characteristic of the emerging labor market is its duality.
8 Exogenous problems Labour Markets
natural reluctance of many workers to contribute for pensions
proliferation of formal self employed workers require savings to be liquid in case of need while pension assets are extremely illiquid
9 Exogenous problems women a special case
Start working later
Earn less (for same skills)
HOW COULD PENSIONS BE HIGHER
Chile has lowest female participation rates catching up slowly.
reevaluation of the role of man at home
support for working woman
flexibility in labor contracts etc
10 Exogenous problems Life expectancy
For given savings now must finance more years
Consequence pensions are smaller
Two contradictions people live longer
and retires earlier
and feel better old age jobs!
11 Endogenous problems accumulation and disbursement 12 Endogenous problemscompetition and concentration
Two design problems impact competition
Inelasticity of demand mostly explained by the mandatory character of the product sold. The pension market is artificial there is no spontaneous demand for it and thats why people do not pay much attention to relevant variables in this market specially while they are young.
Economies of scale typical in financial sectors but more present here due to the necessary exclusive nature of the commercial firm that distribute pensions.
13 Reforming the reform 1 Multifondos
At the beginning there was only one portfolio
Strict regulation on limits
Minimum relative return
14 Reforming the reform 1 Multifondos
Herd behaviour appeared (more than elsewhere)
Two opposing views on that
minimize likelihood of individual errors of judgement safety element.
as portfolios do not vary nor do returns. AFPs offered only one portfolio very similar to each other.
From the perspective of the affiliate
the benefit of being informed was smaller compared to the cost of doing it. The management of pension savings started to look more as a commodity inducing further indifference.
People received statements but it was useless desinformation
93 declared they did not know the price
56 declared ignorance of the balance of their personal accounts
54 of men and 64 of women declared that they have never changed from one AFP to another
15 Reforming the reform 1 Multifondos 16 Reforming the reform 1 Multifondos
Herd amplified 5 times.
17 Reforming the reform 2 The Scomp 18 Reforming the reform 2 The Scomp
information is spread among all companies. At a given date the pensioner will receive back all offers available to her or him in the whole market.
Once the person receives the sheet she has five options. She may
choose one of the offers in the sheet
postpone any decision without time limit
bargain with a salesperson for another offer but this is difficult ies
ask the system for another round of offers
call for an auction. Person is forced to choose the best offer.
information is spread anonimously among all companies that participate in the market that is all life insurance companies (that offer different kinds of annuities) and all AFPs (that offer programmed withdrawals). At a given date the pensioner will receive back all offers available to her or him in the whole market.
20 Reforming successful reforms The case of the Chilean pension system
Guillermo Larrain Rios
Presentation prepared for the IADB Washington December 6 2004 21 (No Transcript)
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