NCPA - National Center for Policy Analysis


December 9, 2004

Chile adopted a new pension system featuring privately managed individual accounts in 1981. The system, with more than 20 years of experience, shows how pensioners and pension providers react when individual accounts replace government-run, defined benefit pension systems, and how various regulations shape these reactions, says Estelle James, a consultant to the World Bank.

Almost two-thirds of all retirees have chosen annuities -- a very high proportion compared with annuity markets in other countries. However, early retirees and normal age retirees tend to make different choices, says James. The normal retirement age is 65 for men and 60 for women, but many workers have met the preconditions to retire at an earlier age. (Early retirement means that they start withdrawing and may stop contributing; it does not necessarily mean that they stop working.)

  • Currently 60 percent of all retirees have chosen to retire early, many before age 55, and 85 percent of them have annuitized.
  • By contrast, 66 percent of normal age retirees have taken programmed withdrawals.
  • Moreover, the average pension for early retirees is almost twice the average pension for normal age retirees, and among normal age retirees the average annuity is almost twice the size of the average programmed withdrawal.

With appropriate incentives, a high proportion of pensioners in countries with individual account systems will purchase annuities. The Chilean experience also shows that in designing the payout stage, countries need to coordinate early withdrawal conditions with minimum pensions and other safety nets in order to avoid moral hazard problems and unexpected public liabilities, says James.

Source: Estelle James, "Private Pension Annuities in Chile," Policy Report No. 271, National Center for Policy Analysis, December 2004.

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