NCPA - National Center for Policy Analysis


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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