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Payout Choices by Retirees in Chile: What Are They and Why?
by Estelle James, Guillermo MartÃnez Barros and Augusto Iglesias Palau
WP 2004-068
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In 1981 Chile adopted its new multi-pillar system, which featured privately managed individual
accounts. Starting in 1983 payouts from the accounts were permitted and detailed rules about
payouts were put in place. The Chilean scheme therefore gives us an opportunity to examine how
pensioners and pension providers react to individual account systems during the payout stage and
how regulations shape these reactions. We use aggregate time series data obtained from the
pension fund and insurance industry regulators, individual-level data on all annuitants in the
system, and interviews with pension providers and regulators for this analysis.
Retirees in Chile have a choice between early versus normal retirement from the system and
between annuitization versus programmed withdrawals (PW); lump sum withdrawals are largely
ruled out. These choices determine the time stream of benefits and the eventual financial burden
that will be placed on the public treasury. Almost twothirds of all retirees have annuitized, but
this proportion differs greatly between early and normal age retirees. Currently 60% of all retirees
have chosen to retire early, many before age 55. (Early retirement means that they stop
contributing and start withdrawing; it does not mean that they stop working). Most (85% of) early
retirees have annuitized, while most (66% of) normal age retirees have taken PW. We present
evidence that this disparate behavior is explained by incentives and constraints stemming from
guarantees and regulations on pensioners and pension providers. These rules have lead workers
with small accumulations to take PW at the normal age, with the minimum pension guarantee
providing longevity and investment insurance. They lead workers with large accumulations to
retire early, with annuities providing insurance. Regulations have given insurance companies
selling annuities a competitive advantage in marketing to this group, and they do so aggressively.
Early access to retirement saving through early retirement or front-loaded PW imposes a potential
financial burden on the government because of the minimum pension guarantee, which has been
rising in real value through time. As a result, the expected public share of the total pension payout
grows with a cohort’s age and may exceed expectations as cohorts that retired under the new
system grow very old. Annuitization mitigates (but does not completely eliminate) this cost to the
public treasury. This analysis suggests that, with appropriate incentives, a high proportion of
pensioners will purchase annuities in countries with individual account systems. But these
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.
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