1. MEASURES TO INCREASE
COVERAGE IN THE 2008
CHILEAN PENSION REFORM
Gonzalo Reyes
Sr Social Protection Economist, LCSHS
The World Bank

2. Contents
• The situation in 2006.
• Rationale for a reform
• Reasons for coverage gap.
• Measures of the 2008 Pension Reform
• Some initial Results
• Conclusions

3. The situation as of 2006
• Private pension system going into its 25th anniversary.
• All workers entering the market since May 1981 mandatorily
enrolled in FDC, privately managed pension system.
• Existing workers as of May 1981 could choose to join the new
system with no option to move back to the old PAYG DB
pension system.
• Historical contributions converted into an initial balance in new
individual account through a “recognition bond”.
• Minimum pension guarantee for those with 20 years of
contributions.
• Means – tested Social Assistance Pension for people 65 and
older (PASIS).
• Institutional arrangement:
• Private PFM  New DC system
• Public Social Security Institution  Legacy DB system
• Ministry of Planning (Social Development)  Social Assistance
Pensions

4. Evolution of membership in the new
system.
Number of total members of the pension system exceeded total Labor
Force, but only half of them were making a contribution.
Source: Rofman et al. (2008)

5. Context: High coverage for LAC standards.
Total number of contributors as % of employed population
Total number of contributors as % of wage earners
Source: Rofman et al. (2008)

6. Coverage of the elderly
Lower coverage of the elderly than in other high formality countries, with
important role played by Social pensions, especially for women.
Source: Rofman et al. (2008)

7. Coverage is relevant in any pension
system, but with some differences
• In any pension system based on mandatory participation, coverage is
limited by the extend of the formal labor market.
• In theory a DC system gives better incentives to participation in
formal employment, but there is weak evidence supporting this.
• Consistent and continuous history of contributions, especially early in
life, is relevant for building a better pension in DC system.
DB DC

8. Coverage: Diagnostics.
• There is considerable mobility across employment status for people in
the working age group.
• On average, people spend close to 50% of their potential working life
in the formal salaried sector
• The main reason for men not to contribute is being a self-employed
worker, while for women is being out of the labor force.
Distribution of Potential labor life Distribution of Periods without contributions
Self-employed Formal Informal Unemployed Out of LF
Source
Male Female Male Female

9. Coverage: Contribution Density
• As a result, the average density of contributions is close
to 50%, with great heterogeneity in its distribution.
Source: SAFP based on sample of Contributions history
WomenMen
Contribution Density for Labor History
05
1015
0 20 40 60 80 100
densidad de cotizaciones (%)
05
1015
%deafiliados
0 20 40 60 80 100
densidad de cotizaciones (%)
Average:56% Average:48%

10. Coverage: Contribution Density: 19-29 yrs of
age
Despite the importance of early contributions, the
situation is worse among the young population
Women Men

11. As a Result: Low expected pensions
• 40-50% receiving pensions below the minimum pension
• Few participants qualify for guaranteed minimum pension

12. 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 compliance
Integrated pension system, since these
are not three disjoint groups: People move
among them in their working lives!

13. 2008 Pension Reform Measures to
Increase 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-back
provision.
• Mandate self-employed workers to contribute and improve contribution
enforcement
• 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 by
employers.
• 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

14. New Solidarity Pillar
75
255
255
45°
(Units are thousand Chilean $ per month)
Requirements:
- Belong in 60% of
poorest households.
- 20 years residency.
Benefits are individually
based, compatible with
other individual in same
household receiving
benefit.

15. 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 State
Número de cotizantes de Marzo 2008 con saldo por cotizaciones voluntarias o
depósitos convenidos, según ingreso imponible
-
20.000
40.000
60.000
80.000
100.000
120.000
140.000
Menos de
$100 mil
$100 - $200
mil
$200 - $300
mil
$300 - $400
mil
$400 -$500
mil
$500 -$600
mil
$600 -$700
mil
$700 -$800
mil
$800 -$900
mil
$900 mil - 1
millón
Más de 1
millón
Ingreso imponible de los cotizantes (pesos)
Númerodecotizantes
By design, only high income individuals take advantage of tax exemptions
for voluntary savings.
Contributors with Voluntary savings by income level (March
2008)

16. SOME RESULTS.

17. Coverage of the working group.
• General positive trend in contributory coverage
Contributors as a percentage of Employed
population.
Source: Own calculations based on S.Pensiones and INE

18. Coverage of Solidarity Pillar
Number of Beneficiaries by type of
benefit
Beneficiaries as a proportion of
population 65+

19. Bonus per child
Number of beneficiaries by type of beneficiary

20. 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  Additional
cost 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%
0
100
200
300
400
500
600
2S 2010 1S 2011 2S 2011 1S 2012 2S 2012
Solidarity Pillar: old Age Solidarity Pillar: Disability
Contribution subsidies Bonus per child
Cost as % GDP
Bn. Cl$ % of
GDP

21. Conclusions
• Coverage and adequacy gap due to high mobility in and
out of formal employment.
• Gender inequality exacerbated by DC pension system
• Strong rationale for integration between non-contributory
and contributory systems.
• Improve incentives to participate voluntarily and provide
protection while maintaining link between contributions
and benefits.
• Results underlie relevance of integrated approach and
gender equity measures.
• Still early for impact of self-employed mandate, but
already clear that occupational plans did not have an
impact.