NCPA - National Center for Policy Analysis

How To Reduce Disability: Lessons From Chile

August 24, 2010

Disability costs are rising in many countries, including the United States. Disability is the fastest-rising component of U.S. Social Security, growing at nearly twice the rate of retirement benefit spending. Chile, however, reversed this trend when it implemented a new retirement and disability benefits system in 1981, says Estelle James, a senior fellow with the National Center for Policy Analysis. 

In the United States, current workers pay taxes to fund the benefits of today's retired and disabled workers, however, under the Chilean system adopted in 1981: 

  • Workers prefund their retirement with individual accounts that are invested by private pension companies and earn market rates of return.
  • The accounts are also used to partially fund disability and survivors' benefits for workers who have not reached retirement.
  • Additionally, each pension company is required to provide group disability and survivors' insurance for its affiliated workers.
  • Until 2009 these insurance costs were included in the general fees that pension funds charged workers.  

Disabled workers were guaranteed a defined benefit for the remainder of their lives: 70 percent of their average wage if totally disabled or 50 percent if partially disabled.  In the long run, workers' savings were projected to cover about 50 percent of their disability benefits.  Widows and children of covered workers also got a defined benefit.  The group policy made up any difference between the person's account funds and the amount needed to finance the promised benefits, says James. 

As a result of this process and other factors, the disability rate among Chilean workers fell significantly after 1981 and is now less than half that in the United States, after controlling for age, says James: 

  • Workers in the new Chilean system are only 21 percent to 35 percent as likely to start a disability pension as they were in the old system, after controlling for age and gender.
  • In 1999, among 45- to 54-year-olds, 2.9 per thousand covered members of the new system in Chile were accepted to newly disabled status, compared to 7.8 per thousand in the United States.
  • For 55- to 59-year olds, these numbers were 7.2 per thousand in Chile, compared to 13.9 per thousand in the United States.  

Source: Estelle James, "How To Reduce Disability: Lessons From Chile," National Center for Policy Analysis, August 24, 2010. 

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