Transcript Chile`s 2008 re-reforms: what are they and what are

Chile’s 2008 re-reforms: what are
they and what are the implications?
By Estelle James, Alejandra Cox
Edwards & Augusto Iglesias
MRRC Research Workshop, April 2010
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Chile is well-known for its 1981 social
security reform
• Mandatory individual accounts—10% of
wages invested by private pension companies
– Pre-funded, so avoids implicit pension debt
– Benefit depends on contributions + investment
earnings so reduces implicit payroll tax and
encourages work
• Tax-financed public pillar:
– Min. pension guarantee (MPG) for contributors,
– means-tested social assistance (PASIS—12% av.
wage) for those with no other retirement income
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High returns but problems developed
• Close linkage between benefits and
contributions meant that those who didn’t
contribute much got little if any pension.
• Studies showed low contribution density—
typical for low and middle-income countries.
Many workers self-employed or informal—
contributions not required or enforced
• Special problems for women because of their
low lfpr and wages—their benefits 1/3 males’
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Remedies in 1981 system
• MPG and PASIS provided public safety net
• Survivors benefits and joint annuities covered
married women (keep own+joint).
• But:
– MPG didn’t help those with < 20 years of
contributions & posed work disincentives once 20
year eligibility was met
– PASIS had long waiting list and low pension
– Women had lower D&S rates than men, but paid
same insurance fees (as % of W)
• In 2006 presidential candidate Bachelet
promised to solve these problems, help women
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2008 reform
• Some expected elimination of IA system but
this didn’t happen
• Instead, tax-financed public benefits expanded,
replaced MPG & PASIS, reach 2/3 elderly
• Incentives to contribute to IAs also increased
• New policies designed to help women
• What is the impact on pension distribution,
work incentives, fiscal costs, system
sustainability? We use CASEN 2006 data and
simulations
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Main change--larger public benefit
• New flat basic benefit for elderly with no ownpension (19% av. wage)—replaces PASIS
• Phased out at 29.4% rate against person’s pvt
pension, =0 when pvt pension=$425 (65% av w)
– No contributory requirement; replaces MPG
• These benefits go only to elderly in bottom
60% of households—almost all in bottom 60%
get some public benefit
– Most elderly in top 40% have private pensions
< $425 but get no public benefit
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Chile´s Solidarity Pension Program
275.000
PAF
250.000
225.000
Total Pension ($)
200.000
175.000
150.000
Total Pension
125.000
100.000
75.000
50.000
APS
25.000
0
0
25.500
51.000
76.500
102.000 127.500 153.000 178.500 204.000 229.500 255.000 280.500 306.000
Self financed pension (PAF)
PAF
APS
Total Pension
Basic benefit = CH$75,000 if private pension = 0
APS = supplemental pension = basic benefit - .294 private pension
PAF = private pension
Total pension = basic benefit or (APS + private pension)
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Measures to increase contributions
• Contributions mandatory for some selfemployed
• Contributions subsidized for young low
earners
• Private pension is only benefit for top 2
quintiles and for retirees < 60W/65M
• But public benefit is more than half total
pension for bottom 3 quintiles >60/65
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Policies designed to help women
• Major beneficiaries of new public benefits,
espec. basic benefit for noncontributors
• Rebate for D&S insurance into their accounts
• New baby bonus into pension account
• Still benefit from survivors insurance + joint
annuity
• Still can start public + private pension at 60
instead of 65 like men—missed opportunity
for trade-off
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Some impacts consistent with goals
• Increases pension coverage in bottom 60%;
also raises av. pension amount
– Lowers coverage and av. pension for top 40%
• Large redistribution to bottom 60% of hh, to
noncontributors and women
• Decreases elderly poverty, but little impact on
poverty over-all (would transfers to young
families be more equitable?)
• Provides insurance against financial market
risks and longevity growth
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Population Aged 65 Years and Older Receiving a Pension
(by household income)
Pre-2008
Post-2008
100%
100%
100%
86%
80%
74%
81%
73%
76%
76%
71%
68%
Men
Women
Total
Bottom
Three-Fifths
Top
Two-Fifths
Bottom
Three-Fifths
Top
Two-Fifths
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But some potential impacts are
problematic
•
•
•
•
Disincentive for formal work and contributions
Long run fiscal costs may be high
Retirement age for men and women too low
Dividing line between top 2 and bottom 3
quintiles ambiguous
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Impact on contributions
• Non-contributors get much larger public
benefit than before
• Private pension faces 29.4 % implicit tax in
bottom 3 quintiles (Negative impact of MPG was
concentrated in much smaller group)
• Inc and subst effect might discourage work,
encourage self-employment and informality
• Pure flat ben would have avoided disincentive
• High-income countries with phased-out flat
benefit have greater enforcement /collection
capacity, less danger of informality
Fiscal impact
• Ministry of Finance did not make fiscal
projections until after law was passed, did not
spell out assumptions, no sensitivity analysis
• Expected fiscal impact small (1% GDP 2020)
• But costs could rise in long run due to policy
and behavioral changes: if
– wage indexation replaces price indexation
– more elderly shift to bottom 3 quintiles
– public benefits extended to top 2 quintiles
– contributions fall due to disincentives
– population ages due to longevity growth
• Our simulations show that fiscal cost in 2050
could be 3-4% GDP or 8% of wages (in
addition to 13% of wages for private accounts,
admin costs and D&S insurance).
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Estimated fiscal costs of Chile’s new public pillar (as % of GDP)
Source: Authors’ calculations based on estimates of numbers of PBS and APS old age recipients in
bottom 6 deciles of households, using 2006 CASEN data up-dated to 2008 $s
Sensitivity analysis: 2028
PBS APS
Total
Start (based on initial pd)
0.47
0.42
0.89
+
imputed
cost
of
disability PBS+APS <65
0.52
GDP grows 100%
0.26
0.46
0.98
0.23
0.49
Wage growth leads to
higher pensions
0.26
65+ group grows 115%
0.56
0.20
0.46
0.42
0.98
0.64
1.47
0.91
2.03
0.91
2.35
If public benefit is wageindexed
0.83
If expanded to top 4
deciles
1.12
Total including other new
public benefits
1.12
Projection to 2048
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1.80
1.26
3.40
Lost opportunity to link starting age to
longevity and equalize for M&W
• Women can start their pensions at 60, men 65
• If start of private pension were delayed to 65,
it would increase by 50%--greater gender
equality & potential output, smaller pub. ben.
• If public pension were delayed to 65, this
would save treasury money
• But age 60 was retained for women
• Tax burden will grow as longevity increases
unless starting age for public pension is linked
to life expectancy
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Conclusions
• Increased coverage to virtually 100%
• Exclusion of top 2 quintiles and phase-out of
public benefit designed to save fiscal costs
• Will private pensions decline as more workers
become informal due to new implicit tax?
• Will work by women be discouraged?
• Can mandate for self-employed be enforced?
• Will fiscal costs rise due to wage indexation,
extension of public benefits to top 40%?
• Cost trade-off could be improved if starting
age were linked to longevity, same for W&M
• Economic sustainability unclear but political
acceptance by broad l-r coalition increased
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