Title: Reforming successful reforms: The case of the Chilean pension system
1Reforming successful reforms The case of the
Chilean pension system
Presentation prepared for the IADB Washington
December 6 2004
2Chilean Pension Funds have grown steadily and
impressively
3Macroeconomic 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
4Macroeconomic impact of pension funds estimates
5Two general considerations about the Chilean model
- Demographics
- 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
6Two general considerations about the Chilean model
- Transitional costs
- 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
7Exogenous 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.
8Exogenous 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
9Exogenous problems women a special case
- Start working later
- Earn less (for same skills)
- Retire earlier
- Live longer
- HOW COULD PENSIONS BE HIGHER
- Chile has lowest female participation rates
catching up slowly. - That requires
- reevaluation of the role of man at home
- support for working woman
- flexibility in labor contracts etc
10Exogenous 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!
11Endogenous problems accumulation and disbursement
12Endogenous 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.
13Reforming the reform 1 Multifondos
- At the beginning there was only one portfolio
- Strict regulation on limits
- Minimum relative return
14Reforming 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
15Reforming the reform 1 Multifondos
16Reforming the reform 1 Multifondos
17Reforming the reform 2 The Scomp
18Reforming 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.
19- 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.
20Reforming successful reforms The case of the
Chilean pension system
Presentation prepared for the IADB Washington
December 6 2004
21(No Transcript)