CHILE'S DISABILITY SYSTEM
September 27, 2007
Twenty-five years ago, Chile replaced its disability insurance system with one in which workers contribute to accounts they individually own. The new disability system is very innovative and could be a model for countries that rely on pay-as-you-go (PAYGO) systems, where the taxes of today's workers fund the benefits of today's retirees, say Estelle James, a consultant to the World Bank and other organizations, and Augusto Iglesias, a senior partner of PrimAmérica Consultores.
Features of Chile's disability system:
- Like the old age system, it is pre-funded, so each generation covers its own disability costs.
- Private pension funds and insurance companies participate in the process of assessing workers' disabilities and financially benefit from controlling costs.
- Disability rates and costs in the new system are lower than in the old system and lower than in most other countries.
Disabled workers who qualify are guaranteed a defined benefit for the balance of their lives: 70 percent of their average wage (if totally disabled) and 50 percent (if partially disabled). The benefit is funded in two ways:
- First, the money in the worker's retirement account is available in case of a disability.
- Secondly, if the amount in the account is insufficient to pay for a lifetime annuity at the specified level, the balance is funded by a group disability insurance policy purchased by each pension fund and paid for by its affiliated workers.
- Survivors' benefits for the spouse and minor children of a deceased worker are covered by the same group disability and survivors (D&S) insurance contract.
- Thus, at the point when a worker has been certified as permanently disabled, his entire lifetime defined benefit has been funded by a combination of his own retirement account and a top-up from the D&S insurance.
- This means that costs are not passed on to future generations.
Source: Estelle James and Augusto Iglesias, "Integrated Disability and Retirement Systems in Chile," National Center for Policy Analysis, Policy Report No. 302, September 2007.
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