Implicit redistribution in the Chilean Social Insurance System

Produced by: 
Universidad Adolfo Ibañez
Available from: 
March 2012
Paper author(s): 
Eduardo Fajnzylber (Universidad Adolfo Ibáñez)
Topic: 
Fiscal Policy, Public and Welfare Economics
Year: 
2012

Social insurance schemes usually carry a certain degree of implicit redistribution, as certain individuals receive more or less than the monetary equivalents of the contributions they have made. This is usually the case of defined benefit insurance programs. In contrast with traditional designs, Chile has followed a different approach in their pension and unemployment insurance schemes. In the case of retirement, a structural reform undergone in 1980 replaced the traditional PAYG defined benefit scheme with a program based on individual accounts and financial savings. Redistribution occurs mainly through an explicit solidarity pillar introduced in 2008, which provides targeted non contributory benefits to individuals with low pensions. The current UI scheme was introduced in 2002 following a similar structure of the pension system but with the inclusion of a solidarity fund. We use contribution histories to compute the level of lifetime redistribution implicit in these two programs. We find essentially no redistribution in the contributory pension pillar but the inclusion of the recently created Solidarity Pillar greatly improves the pension distribution. In contrast, the UI scheme implies fairly limited redistribution – and not necessarily a progressive one – as eligibility conditions are relatively restrictive and tend to favor individuals with relatively stable careers. We also analyze the counterfactual effect of having benefits calculated according to a defined benefit scheme. To make the two systems comparable, we incorporate a distribution neutral tax schedule (with a fixed tax rate) used to finance the solidarity benefits or the DB scheme deficit. The results show that the neutral financing scheme has only a marginal effect in reducing inequality. In contrast, the DB scheme has only a marginal impact in reducing overall income inequality but a significant redistributive impact in reducing the income gap between men and women.

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