Pension benefits in Chile: Is it possible to improve adequacy and solidarity? ILO / IZA Conference Assessing the effects of labor market reforms a global perspective Geneva 10-11 March 2016 Fabio Bertranou ILO
Chile s pension reforms: summarized time-table 1979 Pinochet s military government unifies about 35 pension funds with approximately 150 different schemes in terms of financing rules and entitlement conditions. These schemes operated under as pay-as-you-go defined benefit rules. 1980-1981 The military government enacted the Decree Law 3.500 (1980) privatizing the pension system by creating a fully funded individual account defined contribution scheme. 1990 Chile returns to a democracy 2006 First President Bachelet advisory committee for pension reform, known as Marcel Commission 2008 Comprehensive reform is passed. Law 20.255 is enacted in 2008 by ample consensus 2014-2015 Second President Bachelet advisory committee for pension reform, known as Bravo Commission (**) Report was delivered in 2015
Main problems at the beginning of 2000s The 2008 pension reform 1. Fragmentation and insufficient guarantees for basic economic security. 2. Lack of solidarity, high inequalities and inequities. 3. High costs of administering the private system 1. A social protection floor was established. 2. The non-contributory and the contributory components were combined in an integrated system. 3. A significant increase in benefits coverage was reached, particularly by the noncontributory component
Persisting problems post-2008 reform 1. Adequacy: the system continues paying low benefits 50% of retirees, between years 2007 and 2014, receive monthly benefits that were equal or less than $ 82.650 (approximately US$ 150, or about 40% of the minimum wage, in 2014). These benefits already include the tax-financed additional solidarity benefit. 50% of retirees received benefits that, at most, were equal to 34% of their average last ten years wages. 2. Coverage gaps have not been eliminated Of the total population employed, 69.3% make wage contributions, however, contribution densities are below 50% for the population affiliated to the pension system. Self-employed workers continue being excluded from the mandate to contribute. Their mandatory inclusion was postpone until 2018. 3. Insufficient (contributory) financing The wage contribution rate for social security-pensions (10% of taxable income) is relatively low compared to countries with similar or higher development. 4. Significant benefit inequities remain For those receiving old age benefits, the risk borne by the insured depends on the modality of benefit chosen. Those that opt for the phased withdrawals have pensions benefits decreasing over time, which goes against the objective of consumption smoothing and exposes affiliates to two major risks, fund investment and longevity. The pension system includes rules that affect men and women differently. One of these is the mortality tables differentiated by sex used to calculate annuities which are separately built based on the life expectancy of men and women, i.e. annuities for women are substantially lower than for men.
Median replacement rates Ten last wages; 2007 2014 and projected 2025 2035; in percentages Actual replacement rates (2007-2014) Total Men Women - Self-financed pension (*) 34 48 24 - Self-financed pension + public benefit (APS) 45 60 31 Projected replacement rates (2025-2035) - Self-financed pension (*) 15 24 8 - Self-financed pension + public benefit (APS) 37 41 34 (*) Obtained from the individual pension savings account. Source: Mesa-Lago and Bertranou (2016) based on data from CAPSP (2015).
The 2015 Pension Reform Advisory Commission Report: Two distinct proposals (Proposals A and B )
The debate on what is a mixed system? Status quo Proposal A Mixed system Proposal B First tier Non-contributive component Non-contributive component Second tier Mandatory contributions into individual pension savings accounts Mandatory contributions into social insurance Third tier Voluntary contributions into individual pension savings accounts Mandatory and voluntary contributions into individual pension savings accounts
Current and proposed structure of benefits PSS: social insurance benefit Current structure of benefits (Proposal A ) Non-contributory Contributory (only fully funded individual accounts) Proposed structure of benefits (proposal B ) Noncontributory Social insurance Contributory Fully funded individual accounts Benefits No contributions required Eligibility: poorest 60% Some contributions required Eligibility: Poorest 60% PBS - APS PCI Fully contributory - PCI PBS: basic non-contributory pension benefit ( pension básica solidaria ) Benefits No contributions required Workers with wages up to the median earnings distribution ($ 350.000) Workers with wages above the median earnings distribution PBS - - PBS PSS - PBS (affluence test to exclude richest 20%) PSS PCI APS: tax financed supplementary or additional pension benefit (aporte provisional solidario) PCI: pension benefit derived from individual pension savings or the so-called self-financed pension benefit ( pensión autofinanciada )
Proposal B consists in moving towards a mixed system with a social insurance component The social insurance component is transformed in the core part of the pension system Financing is tripartite: 10% workers; 3-4% employers; and matching contributions by the state It is organized based on citizenship social security accounts; witch could take the form of notional accounts The proposal keeps two current components: the basic solidarity pension (non-contributory), increasing its horizontal and vertical coverage the individual fully funded scheme for about 50% of workers contributing to the system, covering earnings above the median income.
Beyond differences between Proposal A and B, there was agreement in recommending: 1. An increase in coverage and the amount of the non-contributory benefit (PBS); 2. Maintain the contribution mandate for self-employed workers and accelerate their inclusion in the pension system; 3. A gradual equalization of the legal retirement age for men and women, and periodically review the age of retirement; 4. The elimination of gender specific life tables for pension annuities; 5. The introduction of a state subsidized contribution mechanism for caregivers of children and seniors; 6. Changes in pension fund investment and portfolio alternatives in order to reduce the excessive insured exposure to market risks.
Conclusion 1. There is a call for further reforms in order to continue rebalancing the risk that is borne individually and socially by the insured population. 2. Putting the system into a track to improve not only solidarity but also adequacy is crucial to allow socially acceptable parametric reforms, much needed in the short run. 3. A structural reform seems to be necessary as maintaining the present structure of the system gives little room for tangible changes. 4. It seems that within the current configuration, it would be difficult to pass legislation for a parametric reform to make the system financial and socially sustainable.
Thank you!