Transcript Chile

Social Security in Chile
Demographics
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Chile
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15,980,912 people
0-14 years: 25.2%
15-64 years: 66.7%
65 and up: 8%
Population Growth
Rate: 0.97%
Birth Rate: 2.02
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USA
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295,734,134 people
0-14 years: 20.6%
15-64 years: 67%
65 and up: 12.4%
Population Growth
Rate: 0.92%
Birth Rate: 2.08
Economic Performance
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Chile
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GDP (PPP) $170
Billion
Real GDP growth:
6.06 %
GDP per Capita
(PPP) $10,630.97
GDP per Capita
growth: 4.85 %
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United States
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GDP (PPP) $12.37
Trillion
Real GDP growth:
3.5%
GDP per Capita
(PPP) $41,800
GDP per Capita
growth: 3%
GDP per Capita
GDP per Capita
40000
30000
Chile GDP per capita, PPP (constant 2000
international $)
25000
Latin America & Caribbean GDP per capita, PPP
(constant 2000 international $)
20000
United States GDP per capita, PPP (constant 2000
international $)
15000
10000
5000
Time (years)
20
03
20
01
19
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
19
83
19
81
19
79
19
77
0
19
75
GDP per Capita (PPP adjusted, constant 2000 $us)
35000
GDP Growth
GDP Growth
15
5
Chile GDP growth (annual %)
0
-5
-10
-15
Time (years)
20
03
20
01
19
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
19
83
19
81
19
79
Latin America & Caribbean GDP growth (annual %)
19
77
19
75
GDP Growth (annual %)
10
United States GDP growth (annual %)
Origins of Social Security
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Social Security is a system by which living
wages are paid to those who are retired. It is
designed to enable the elderly and disabled
to retire, but to still earn monthly incomes.
In 1898, Chile was one of the first American
Nations to implement a Social Security
program.
The United States did not adopt Social
Security until 1935.
Origins of Social Security
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1924: Government of Chile established a
national social insurance system for workers.
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A response to pressure exerted by the growing
number of worker organizations and strikes.
Originally called “Caja,” the program was modeled
after system pioneered by Otto Von Bismarck in
the German Empire.
Employee and Employer contributions to a state
run fund.
Origins of Social Security
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1952: Government of Chile reorganized
the The Workers' Security Fund.
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Created a Social Insurance Service.
This system lasted until after
1973, when Salvador Allende
was overthrown in a military
coup by Augosto Pinochet.
Social Security and the Military Coup
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The new military government eliminated the
traditional “pay-as-you-go” (PAYG) system.
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This system was similar to the system still used by
the United States, involving mandatory tax based
contributions.
Laid the groundwork for the current
privatized social security system, which
involves mandatory contributions, with fixed
exceptions.
“Pay-as-you-go”
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The government takes a percent of
workers’ monthly salaries and deposits
it into a general social security fund.
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This fund directly finances social security
benefits paid to those currently retired:
A PAYG type system relies entirely on
the willingness of younger generations
to work.
How it Works
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The General Social Security Account, which is not
an investment in the economy, is merely a
‘holding place’ to keep the money until it is paid
out in benefits.
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Any surplus that is in this general social security
account, the government lends to itself. However,
there are no funds earmarked to repay this debt,
meaning when it comes due, the government must
incur new debt or raise taxes.
Various estimates from government actuaries
predict the bankruptcy of the US Social Security
system by 2030.
Fixing Social Security
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Although predicted bankruptcy is not
for another 25 years, the problem
needs to be resolved.
Two main options arise to fix the
solvency problem:
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Changing the tax structure.
Privatization.
Four Types of Tax Systems
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Progressive tax systems are those in which,
as income rises, the tax percent increases.
Regressive tax systems are those in which, as
income rises, the tax percent decreases.
Fixed percent systems are characterized by
everyone paying the same percent,
regardless of income.
Lump sum tax systems demand a required
payment, regardless of income and percents:
everyone pays the exact same amount.
Four Types of Tax Systems
Chile’s New System
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Chile’s private social security system was
implemented in 1981 due to non-solvency of the
old system, in part from differential treatment
amongst various retirees.
The new system privatized social security into
publicly mandated but privately administered
personal accounts.
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In the formal sector, 10% of workers’ monthly
earnings are deposited into their private account.
There are a variety of private companies from which
to choose, who invest the monthly deposits.
How the New System Works
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Each worker deposits 10% of monthly
earnings, which the investment firms take
and reinvest into stocks and bonds.
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Preferential tax treatment:
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This is similar to the idea of a mutual fund.
The money deposited each month is done so
without paying taxes on said earnings.
Withdrawals are subject to government taxes.
Retirement age: Men: 65, Women: 60.
How it Works
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Money goes into the accounts and is
not-touchable until retirement.
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Upon withdrawal in retirement, funds are
subject to fees and taxes.
New policy additions have created
voluntary savings accounts, with
preferential tax-treatment, which can
only be accessed a total of four times
per year.
Workers in Transition
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During the transition process, the government
bore all of the costs, and paid out benefits
from the general budget.
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Workers who contributed to the PAYG system,
received recognition bonds, which guaranteed 4%
annual, inflation adjusted yields.
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These bonds were put into private savings accounts.
This process was expensive, reaching upwards of
5% of total GDP in 1983.
Requirements
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The managing firms are required by law to
pay no less that 70% of the monthly salary
earned by each client.
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If they have not earned sufficient revenue on
investments and cannot pay the allotted monthly
amount, the firm must cover it out of their own
reserves.
If the firm cannot cover the payments, the
government, which insures the system, must step
in to pay.
The Macroeconomic Model
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Y = C + I + G + NX
National Savings:
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Y – C – G = I + NX
Savings = (Y – T – C) + (T – G)
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Savings = Private + Public
In a PAYG system, social security contributions
appear in taxes and government spending, but do
not factor into savings, since they are not saved.
In Chile’s privatized system, required deposits are
are accounted for in private savings.
A New Model
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Create a model in which savings is a
function of time, reform, and GDP per
Capita:
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S = f( time, reform, GDP per Capita)
Predictions:
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Given what we know about private social
security systems, this model ideally
predicts a discontinuous best fit line, with
the break in the year of initial reform.
A New Model
A New Model
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Best fit lines cannot be discontinuous.
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Knowing this, the data based line should
be more steeply upward sloping.
Specific data taken from regression results:
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Y-int: -1.32 x 10^12
Slope: 4.48 x 10^8
A new model
Results of the New Model
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It is visible in the regression data
results that this model produces a very
accurate prediction:
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It explains over 96% of the relationship.
There is a .05 % probability that the
relationship occurs by chance alone.
The Reality of Private Systems
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Since the first generation to work and live
under this private system are currently
retiring, the actual effectiveness of the
system is becoming visible.
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What has actually happened?
Change in incentive structure: Moral Hazard.
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Some informal sector workers contributed only enough
money to be guaranteed the minimum retirement
benefits, meaning the investment firms or government
would have to cover the difference.
The Reality of Private Systems
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There is a large dissatisfaction in Chile with the
private system:
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Hidden withdrawal fees eat away final value of
savings.
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Some of these fees go to pay the costs of the investment
firms.
In the USA, 99% of investment goes towards benefits and
1% towards overhead.
In Chile, overhead is about 20 times as large.
There is a large underground economy in Chile. This,
coupled with seasonal and self-employed workers,
means roughly that only 60% of all workers are
actually covered by the private system.
The Reality of Private Systems
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The private system is required to pay at least
$140 per month per worker. However,
frequently the investment firms cannot meet
these payments.
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Investment firms use up their reserves, and then
need the government to step in and bail them out.
The government of Chile is still spending large
amounts of money to support the social safety
net, which should ideally have been provided
entirely from the private pension system.
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This is to support the people who do not have large
enough lifetime earnings to support their retirement.
Poverty Cohorts
Why?
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There are a variety of reasons why
the privatization of social security
could be beneficial:
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Reduction in government spending.
Reduction in government debt.
Increase private savings.
Increased standard of living during retirement.
(Re-)Investment in the economy promotes higher
growth and many other things.
Source: Poverty and Income Distribution in a High Growth Economy, 1987-98, World Bank.
Final Thoughts
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Both PAYG and private social security
systems have their perks and pitfalls,
and the solvency of each is debatable.
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What will the future be of each type of
system?
Which system would be easiest to reform
to more adequately support the retired
population?