Pension Reform in Chile

Paper Session

Friday, Jan. 6, 2017 2:30 PM – 4:30 PM

Hyatt Regency Chicago, Regency C
Hosted By: American Economic Association
  • Chair: Nicholas Barr, London School of Economics and Political Science

Reforming Pensions in Chile

Peter Diamond
,
Massachusetts Institute of Technology
Nicholas Barr
,
London School of Economics and Political Science

Abstract

This paper argues that experience in Chile demonstrates (a) problems with fully-funded defined-contribution individual accounts that were both predictable and predicted, and (b) Chile’s mostly rational evolutionary approach to addressing those problems. Section 2 briefly outlines the 1981 system and its problems. Section 3 discusses strategic reform in 2008 which addressed some of those problems. Section 4 – the main focus of the paper – discusses the unfinished business left by the 2008 reforms and sets out the main proposals of the 2015 Bravo Commission, including its 58 specific proposals, which commanded majority support from the Commissioners, and its three very different Global Proposals, about organizing and financing the system, which are highly controversial.

The Chilean Pension System: Evidence and Proposals From a Presidential Advisory Commission

David Bravo
,
Catholic University of Chile
Nicholas Barr
,
London School of Economics and Political Science

Abstract

The Presidential Advisory Commission on the Chilean Pension System was established in April 2014 and delivered its Report in September 2015. The Commission comprised 24 national and international members with the objectives of assessing the system and setting out proposals to improve matters. A significant part of the Commission’s efforts was a process of public consultation. This paper summarizes the work done by the Commission, the main features of its evaluation of the Chilean Pension System and its proposals – 58 specific proposals that commanded majority support and three global proposals about how to finance benefits. The paper concludes by analyzing future prospects of current discussion within government.

Optimal versus Default Longevity Income Annuities

Vanya Horneff
,
Goethe University Frankfurt
Raimond Maurer
,
Goethe University
Olivia Mitchell
,
University of Pennsylvania

Abstract

Most defined contribution pension plans pay benefits as lump sums, yet US regulators have recently encouraged firms to protect retirees from outliving their assets by converting a portion of their plan balances into longevity income annuities (LIA). These are deferred annuities which initiate payouts not later than age 85 and continue for life, and they provide an effective way to hedge systematic (individual) longevity risk for a relatively low price. Using a life cycle portfolio framework, we measure the welfare improvements from including LIAs in the menu of plan payout choices, accounting for mortality heterogeneity by education and sex. We find that
introducing a longevity income annuity to the plan menu is attractive for most DC plan participants who optimally commit 8-15% of their plan balances at age 65 to a LIA that starts paying out at age 85. Optimal annuitization boosts welfare by 5-20% of average retirement plan accruals at age 66 (assuming average mortality rates), compared to not having access to the LIA.
We also compare the optimal LIA allocation versus two default options that plan sponsors could implement. We conclude that an approach where a fixed fraction over a set threshold is invested in LIAs will be preferred by most to the status quo, while enhancing welfare for the majority of workers.
Discussant(s)
James Poterba
,
Massachusetts Institute of Technology
Sergio Urzua
,
University of Maryland
JEL Classifications
  • G1 - Asset Markets and Pricing
  • H5 - National Government Expenditures and Related Policies