Pensions Core Course 2013: Measures to Increase Coverage in the 2008 Chilean Pension Reform
MEASURES TO INCREASECOVERAGE IN THE 2008CHILEAN PENSION REFORMGonzalo ReyesSr Social Protection Economist, LCSHSThe World Bank
Contents• The situation in 2006.• Rationale for a reform• Reasons for coverage gap.• Measures of the 2008 Pension Reform• Some initial Results• Conclusions
The situation as of 2006• Private pension system going into its 25th anniversary.• All workers entering the market since May 1981 mandatorilyenrolled in FDC, privately managed pension system.• Existing workers as of May 1981 could choose to join the newsystem with no option to move back to the old PAYG DBpension system.• Historical contributions converted into an initial balance in newindividual account through a “recognition bond”.• Minimum pension guarantee for those with 20 years ofcontributions.• Means – tested Social Assistance Pension for people 65 andolder (PASIS).• Institutional arrangement:• Private PFM New DC system• Public Social Security Institution Legacy DB system• Ministry of Planning (Social Development) Social AssistancePensions
Evolution of membership in the newsystem.Number of total members of the pension system exceeded total LaborForce, but only half of them were making a contribution.Source: Rofman et al. (2008)
Context: High coverage for LAC standards.Total number of contributors as % of employed populationTotal number of contributors as % of wage earnersSource: Rofman et al. (2008)
Coverage of the elderlyLower coverage of the elderly than in other high formality countries, withimportant role played by Social pensions, especially for women.Source: Rofman et al. (2008)
Coverage is relevant in any pensionsystem, but with some differences• In any pension system based on mandatory participation, coverage islimited by the extend of the formal labor market.• In theory a DC system gives better incentives to participation informal employment, but there is weak evidence supporting this.• Consistent and continuous history of contributions, especially early inlife, is relevant for building a better pension in DC system.DB DC
Coverage: Diagnostics.• There is considerable mobility across employment status for people inthe working age group.• On average, people spend close to 50% of their potential working lifein the formal salaried sector• The main reason for men not to contribute is being a self-employedworker, while for women is being out of the labor force.Distribution of Potential labor life Distribution of Periods without contributionsSelf-employed Formal Informal Unemployed Out of LFSourceMale Female Male Female
Coverage: Contribution Density• As a result, the average density of contributions is closeto 50%, with great heterogeneity in its distribution.Source: SAFP based on sample of Contributions historyWomenMenContribution Density for Labor History0510150 20 40 60 80 100densidad de cotizaciones (%)051015%deafiliados0 20 40 60 80 100densidad de cotizaciones (%)Average:56% Average:48%
Coverage: Contribution Density: 19-29 yrs ofageDespite the importance of early contributions, thesituation is worse among the young populationWomen Men
As a Result: Low expected pensions• 40-50% receiving pensions below the minimum pension• Few participants qualify for guaranteed minimum pension
Strategies to Increase Coverage• For individuals with no savings capacity:• Stronger social safety net• Special measures for targeted groups (e.g. women)• For individuals with limited savings capacity• Improve incentives to save• Provide complementary benefits• For individuals with savings capacity, not currently covered:• Mandate participation• Increase complianceIntegrated pension system, since theseare not three disjoint groups: People moveamong them in their working lives!
2008 Pension Reform Measures toIncrease Coverage• Create a New Solidarity Pillar• Basic Solidarity Pension for individuals who could not contribute• Solidarity Complement for individuals who financed small pensions, with claw-backprovision.• Mandate self-employed workers to contribute and improve contributionenforcement• Annual Contribution through tax declaration process for specific portion of self-employed workers (formal)• New methods and attributions to detect non-compliance of contribution payments byemployers.• Strengthen contributory system.• Subsidy for young workers first 24 contributions paid before age 35.• Subsidy for voluntary contributions• Creation of Voluntary Private Occupational Plans• Provide equal conditions for men and women• Bonus per child for women, equivalent to 1 year contributions• Life and Disability Insurance fees separated by gender• Redistribution of savings in case of divorce
New Solidarity Pillar7525525545°(Units are thousand Chilean $ per month)Requirements:- Belong in 60% ofpoorest households.- 20 years residency.Benefits are individuallybased, compatible withother individual in samehousehold receivingbenefit.
Voluntary pillar• Increase voluntary savings• Collective voluntary savings (Occupational plans, like 401k in USA)• Matching contributions paid by employers.• 15% Subsidy to voluntary savings paid by the StateNúmero de cotizantes de Marzo 2008 con saldo por cotizaciones voluntarias odepósitos convenidos, según ingreso imponible-20.00040.00060.00080.000100.000120.000140.000Menos de$100 mil$100 - $200mil$200 - $300mil$300 - $400mil$400 -$500mil$500 -$600mil$600 -$700mil$700 -$800mil$800 -$900mil$900 mil - 1millónMás de 1millónIngreso imponible de los cotizantes (pesos)NúmerodecotizantesBy design, only high income individuals take advantage of tax exemptionsfor voluntary savings.Contributors with Voluntary savings by income level (March2008)
Coverage of the working group.• General positive trend in contributory coverageContributors as a percentage of Employedpopulation.Source: Own calculations based on S.Pensiones and INE
Coverage of Solidarity PillarNumber of Beneficiaries by type ofbenefitBeneficiaries as a proportion ofpopulation 65+
Bonus per childNumber of beneficiaries by type of beneficiary
Fiscal Costs• Solidarity pillar is main driver of fiscal costs.• Important initial expenditure on Maternal Bonus (stock of retired mothers).• Cost of Assistance Pensions in 2007 approx. 0.3% of GDP Additionalcost of Reform: 0.4 – 0.5% of GDP, in line with original estimates.• It is expected that the reform will have a total cost of 1% of GDP by 2025,with 0.8% corresponding to the new solidarity pillar.0.70%0.71%0.72%0.73%0.74%0.75%0.76%0.77%0.78%0.79%0.80%01002003004005006002S 2010 1S 2011 2S 2011 1S 2012 2S 2012Solidarity Pillar: old Age Solidarity Pillar: DisabilityContribution subsidies Bonus per childCost as % GDPBn. Cl$ % ofGDP
Conclusions• Coverage and adequacy gap due to high mobility in andout of formal employment.• Gender inequality exacerbated by DC pension system• Strong rationale for integration between non-contributoryand contributory systems.• Improve incentives to participate voluntarily and provideprotection while maintaining link between contributionsand benefits.• Results underlie relevance of integrated approach andgender equity measures.• Still early for impact of self-employed mandate, butalready clear that occupational plans did not have animpact.