Integrated Disability and Retirement Systems in Chile
Saturday, September 01, 2007
by Estelle James and Augusto Iglesias
Table of Contents
- Executive Summary
- Basic Structure of Disability Insurance in Chile
- How Costs Are Controlled in the Assessment Procedure
- How Adverse Selection Is Reduced
- The Chilean System versus PAYGO
- Comparisons between Chile and other Countries
- Lessons for Other Countries
- About the Authors
How Costs Are Controlled in the Assessment Procedure
In most public disability systems a public agency or body of medical experts must juggle sometimes-conflicting roles as advocate for taxpayers, protector of claimants and impartial judge and jury. Neither civil servants nor medical experts have direct financial incentives to limit successful claims. The high disability costs in many countries are partly due to public gatekeepers who are generous at the taxpayers' expense, who accept bribes in return for applying lax standards, or who allow governments to use disability benefits as a substitute for unemployment insurance or early retirement.
“Uninsured disabled workers get the money in their accounts as well as a minimum, government-funded pension, providing they meet the eligibility conditions.”
Chile's disability system, by contrast, attempts to balance public gatekeepers with countervailing incentives for private AFPs to contain costs. AFPs play a major role in the administration of disability benefits, including participating in claim assessments, appeals and determining disability criteria. For any given total fee the AFP charges, lower disability costs mean more profits for the AFP. 12
The following outlines how the system is structured and the various ways AFPs participate.
Assessing Disabilities. Initial claims are evaluated by 21 Regional Medical Boards. Each Board has three doctors, employed by the public Superintendencia of AFPs (SAFP) but financed by the AFPs. Nonvoting medical observers from AFPs and insurance companies regularly attend Board meetings, make comments and keep track of their work. Claimants may also present their own medical tests and have their personal doctors take part in the discussions (but not the vote).
After an initial assessment, about 60 percent of all workers claiming disability are certified for provisional, or temporary, disability status by a Medical Board. 13 Three years later — or sooner if the individual reaches the normal retirement age — the worker is reassessed. Currently, 80 percent of the temporary disabled come up for a second assessment (most of the attrition is due to death or appeals), and 93 percent of these are accepted as permanently disabled. 14 [See Figure I.]
Appealing Disability Determinations. Traditional public systems usually do not allow agencies to appeal against approved claims; they only allow workers to appeal denials of disability status. As a result, their costs are commensurately higher, all else being equal. 15 In Chile, both AFPs and workers can appeal the decisions of the Regional Medical Boards to a Central Board.
In 2004, AFPs appealed more than one-quarter (26 percent) of the disability claims that were approved provisionally and 18 percent of permanent approved claims. One-third of these appeals were successful, reducing the portion of claimants who receive permanent disability benefits by about 8 percent. 16 [See Figure I.]
Insurance eligibility. Almost all of these appeals involved workers who were likely to qualify for insurance. AFP representatives have the contribution records needed to determine whether or not a worker qualifies for insurance. They have no reason to spend resources questioning or appealing noninsured claims. The Medical Boards also have little incentive to deny the claims of noninsured workers, since at first the workers simply get early access to their own savings. These factors may contribute to the growing proportion of those certified as disabled who aren't insured, many of whom will eventually become candidates for the MPG.
“Pension funds participate in disability assessments and frequently appeal disability claims.”
Claims that Result in Insured Permanent Disability Benefits. As a result of the first and second assessments, the appeals process and eligibility evaluations, only a small percentage of initial claims result in insurance-funded permanent total or partial disability benefits. Figure I shows the projected disposition of claims from 2004, based on data from the Association of AFPs.
- About 40 percent of all disability claims were rejected at the first stage.
- Another 10 percent were cut due to death during the provisional stage or rejection upon evaluation for permanent status.
- Appeals cut another 8 percent of claims.
- Approximately 16 percent of claimants were found to be ineligible for insurance. 17
Thus, only 26 percent of original claimants are projected to be permanently disabled and insured. The remainder are not considered disabled or, if disabled, get access to their own retirement savings but not to the insurance top-up. Among those disabled and insured, one quarter are only partially disabled and get only a 50 percent benefit. Many have a reference wage that is far less than their full working wage (because they have not contributed for some of the prior 10 years) and therefore a benefit that is far less than 70 percent (or 50 percent) of their full working wage. A major role in containing these costs is played by the AFPs, who actively participate in the assessment procedure, help set the rules, have a vested interest in enforcing them, and use their Association to keep careful track of their success.
“About a quarter of claims result in permanent disability insurance coverage.”
Conflicting Work Incentives of Provisional and Permanent Disability Status. Chilean workers receiving provisional disability benefits may continue to work; but, if they do, they must keep contributing to social security. This weakens their incentive to work. If they are eventually granted permanent total disability status, as most are, the greater personal account balance will reduce the payment from insurance without increasing their total pension. 18 In effect, their entire contribution during temporary disability is a pure tax to them.
However, once a worker is granted permanent disability status, he keeps it regardless of whether or not he works. This contrasts with many other countries where, eventually, individuals who work are taken off the disability rolls. In this sense, the Chilean disability system encourages work, benefiting the individual, the system and the economy.