NCPA - National Center for Policy Analysis

Chile's Unemployment Accounts

November 12, 2002

Chile, the first country in the western hemisphere to set up a social security system, and the first country in the world to reform it using individual investment accounts, has again broken new ground by becoming the first country to use individual accounts in an unemployment insurance (UI) system.

The system now being implemented builds on Chile's success with individually-owned retirement accounts:

  • Workers will pay 0.6 percent of their wages into individual accounts, while employers will pay a 2.4 percent payroll tax divided between individual accounts and a "joint account." [See Figure I.]
  • The accounts will be administered by the same private pension funds that manage Chilean workers' retirement accounts, and the funds will invest conservatively in a variety of securities.
  • The individual account will be in the worker's name and will not be paid out until the worker becomes unemployed or retires.

Unemployed individuals will be able to draw 30 percent to 50 percent of their previous wages for up to five months. The joint account will provide benefits to unemployed people who exhaust the balances in their individual accounts.

Unlike the U.S. unemployment system, Chileans will be able draw the funds out even if they quit or were fired from their last jobs. This will allow workers more flexibility in changing jobs.

Workers with money left in their UI accounts at retirement will roll the money into their individual social security accounts. This greatly changes job search incentives. Workers who find jobs more rapidly will build up a larger retirement nest egg. With the UI account appearing on the same statement as the social security account, workers will clearly see the connection between rapid reemployment and retirement funds.

Source: William B. Conerly (NCPA senior fellow),"Chile Leads the Way with Individual Unemployment Accounts," Brief Analysis No. 424, November 12, 2002, National Center for Policy Analysis.

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