IDEAS home Printed from https://ideas.repec.org/p/mrr/papers/wp068.html
   My bibliography  Save this paper

Payout Choices by Retirees in Chile: What Are They and Why?

Author

Listed:
  • Estelle James

    (Urban Institute)

  • Guillermo Martinez

    (Primamerica, Chile)

  • Augusto Iglesias

    (Primamerica, Chile)

Abstract

In 1981 Chile adopted its new multi-pillar system, which featured privately managed individual accounts. Starting in 1983 payouts from the accounts were permitted and detailed rules about payouts were put in place. The Chilean scheme therefore gives us an opportunity to examine how pensioners and pension providers react to individual account systems during the payout stage and how regulations shape these reactions. We use aggregate time series data obtained from the pension fund and insurance industry regulators, individual-level data on all annuitants in the system, and interviews with pension providers and regulators for this analysis. Retirees in Chile have a choice between early versus normal retirement from the system and between annuitization versus programmed withdrawals (PW); lump sum withdrawals are largely ruled out. These choices determine the time stream of benefits and the eventual financial burden that will be placed on the public treasury. Almost twothirds of all retirees have annuitized, but this proportion differs greatly between early and normal age retirees. Currently 60% of all retirees have chosen to retire early, many before age 55. (Early retirement means that they stop contributing and start withdrawing; it does not mean that they stop working). Most (85% of) early retirees have annuitized, while most (66% of) normal age retirees have taken PW. We present evidence that this disparate behavior is explained by incentives and constraints stemming from guarantees and regulations on pensioners and pension providers. These rules have lead workers with small accumulations to take PW at the normal age, with the minimum pension guarantee providing longevity and investment insurance. They lead workers with large accumulations to retire early, with annuities providing insurance. Regulations have given insurance companies selling annuities a competitive advantage in marketing to this group, and they do so aggressively. Early access to retirement saving through early retirement or front-loaded PW imposes a potential financial burden on the government because of the minimum pension guarantee, which has been rising in real value through time. As a result, the expected public share of the total pension payout grows with a cohort’s age and may exceed expectations as cohorts that retired under the new system grow very old. Annuitization mitigates (but does not completely eliminate) this cost to the public treasury. This analysis suggests that, with appropriate incentives, a high proportion of pensioners will purchase annuities in countries with individual account systems. But these countries need to coordinate early withdrawal conditions with minimum pensions and other safety nets, in order to avoid moral hazard problems and unexpected public liabilities.

Suggested Citation

  • Estelle James & Guillermo Martinez & Augusto Iglesias, 2004. "Payout Choices by Retirees in Chile: What Are They and Why?," Working Papers wp068, University of Michigan, Michigan Retirement Research Center.
  • Handle: RePEc:mrr:papers:wp068
    as

    Download full text from publisher

    File URL: http://mrdrc.isr.umich.edu/publications/Papers/pdf/wp068.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Gert Wagner, 1991. "La seguridad social y el programa de pensión mínima garantizada," Estudios de Economia, University of Chile, Department of Economics, vol. 18(1 Year 19), pages 33-91, June.
    2. Estelle James & Xue Song, 2001. "Annuities Markets Around the World: Money’s Worth and Risk Intermediation," CeRP Working Papers 16, Center for Research on Pensions and Welfare Policies, Turin (Italy).
    3. Amy Finkelstein & James Poterba, 2004. "Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 183-208, February.
    4. James, Estelle & Edwards, Alejandra Cox & Wong, Rebecca, 2003. "The gender impact of pension reform : a cross-country analysis," Policy Research Working Paper Series 3074, The World Bank.
    5. James, Estelle & Edwards, Alejandra Cox & Wong, Rebeca, 2003. "The gender impact of pension reform," Journal of Pension Economics and Finance, Cambridge University Press, vol. 2(2), pages 181-219, July.
    6. Amy Finkelstein & James Poterba, 1999. "Selection Effects in the Market for Individual Annuities: New Evidence from the United Kingdom," NBER Working Papers 7168, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Amy Finkelstein & James Poterba, 2004. "Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 183-208, February.
    2. David Robalino, 2005. "Pensions in the Middle East and North Africa: Time for Change," World Bank Publications - Books, The World Bank Group, number 7427.
    3. Finkelstein, Amy & Poterba, James & Rothschild, Casey, 2009. "Redistribution by insurance market regulation: Analyzing a ban on gender-based retirement annuities," Journal of Financial Economics, Elsevier, vol. 91(1), pages 38-58, January.
    4. Andres J. Vargas, 2011. "The Effect of Social Security Contributions on Coverage and Wages: A Gender Perspective Using a Natural Experiment from Colombia," Southern Economic Journal, John Wiley & Sons, vol. 78(2), pages 476-501, October.
    5. Février, Philippe & Linnemer, Laurent & Visser, Michael, 2012. "Testing for asymmetric information in the viager market," Journal of Public Economics, Elsevier, vol. 96(1), pages 104-123.
    6. Carlos Vidal-Melia & Ana Lejárraga-García, 2004. "The Bequest Motive And Single People’S Demand For Life Annuities," Public Economics 0405005, University Library of Munich, Germany.
    7. Antoine Bommier & François Grand, 2014. "Too risk averse to purchase insurance?," Journal of Risk and Uncertainty, Springer, vol. 48(2), pages 135-166, April.
    8. Fang, H., 2016. "Insurance Markets for the Elderly," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 237-309, Elsevier.
    9. World Bank, 2012. "Toward Gender Equality in East Asia and the Pacific : A Companion to the World Development Report," World Bank Publications - Books, The World Bank Group, number 12598.
    10. Federica Teppa, 2011. "Can the longevity risk alleviate The annuitization puzzle? Empirical evidence from Dutch data," Working Papers 223, ECINEQ, Society for the Study of Economic Inequality.
    11. Solange Berstein & Andrea Tokman, 2005. "Brechas de ingreso entre géneros: ¿Perpetuadas o exacerbadas en la vejez?," Working Papers 8, Superintendencia de Pensiones, revised Jul 2005.
    12. Cannon, Edmund & Tonks, Ian, 2016. "Cohort mortality risk or adverse selection in annuity markets?," Journal of Public Economics, Elsevier, vol. 141(C), pages 68-81.
    13. Horneff, Vanya & Kaschützke, Barbara & Maurer, Raimond & Rogalla, Ralph, 2014. "Welfare implications of product choice regulation during the payout phase of funded pensions," Journal of Pension Economics and Finance, Cambridge University Press, vol. 13(3), pages 272-296, July.
    14. Estelle James & Guillermo Martinez & Augusto Iglesias, 2005. "The Payout Stage in Chile: Who Annuitizes and Why?," Working Papers 14, Superintendencia de Pensiones, revised May 2007.
    15. Javier Pla-Porcel & Manuel Ventura-Marco & Carlos Vidal-Meliá, 2017. "How do unisex life care annuities embedded in a pay-as-you-go retirement system affect gender redistribution?," Documentos de Trabajo del ICAE 2017-11, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    16. Solange Berstein & Andrea Tokman, 2005. "Income Gap by Gender: Perpetuated or Exacerbated when Old?," Working Papers Central Bank of Chile 334, Central Bank of Chile.
    17. Robert Holzmann & Richard Hinz, 2005. "Old Age Income Support in the 21st century: An International Perspective on Pension Systems and Reform," World Bank Publications - Books, The World Bank Group, number 7336.
    18. Alejandra Cox Edwards, 2005. "Pension reforms and employment," International Economic Journal, Taylor & Francis Journals, vol. 19(2), pages 305-319.
    19. Sutcliffe, Charles, 2015. "Trading death: The implications of annuity replication for the annuity puzzle, arbitrage, speculation and portfolios," International Review of Financial Analysis, Elsevier, vol. 38(C), pages 163-174.
    20. Federica Teppa, 2011. "Can the Longevity Risk Alleviate the Annuitization Puzzle? Empirical Evidence from Dutch Data," DNB Working Papers 302, Netherlands Central Bank, Research Department.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mrr:papers:wp068. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MRRC Administrator (email available below). General contact details of provider: https://edirc.repec.org/data/isumius.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.