This is a study done by Barbara E. Kritzer, here is the link:
http://www.ssa.gov/policy/docs/ssb/v59n3/v59n3p45.pdfI have not read Ferrara's article yet but from what I heard from him it seems he is jumping the gun on the benefits of an experiment that has not proven itself yet, and by what this study implies, it may turn out to be a problem for many, mostly those with the lesser income.
Adequacy of Benefits -.__ -~
Although average benefits under the new system are reportedly higher than those under the old system, this comparison may not be fair since current beneficiaries in one program may differ by age and income level from those in the other program. Also, the new system is still young and pays relatively few beneficiaries. To date, the pensions being paid by the AFPs are made up, in large part, by the recognition bonds that reflect participation under the old system. No one has been abie to retire with 20 years of contributions to the AFPs, since the system is just I5 years old, although there have been some early retirements. Retirement is permitted if the worker has accrued enough funds so that the pension equals at least 50 percent of the worker’s indexed annual wage over the last 10 years and is at least equal to I 10 percent ofthe mini- mum old-age pension. As the new system matures, if the active participation rate in the new system-those actually contributing to their individual accounts-continues at the same low level described above. an increasing number of beneficiaries will receive the minimum benefit funded by the government. This benetit may not be sufficient to maintain a minimum standard of living.
In examining profiles of active contributors in the new system: low earners do not participate as much as high earners. Based on September I995 data from the SAFP, the mean monthly earnings of contributors is 196,000 pesos (about US$480). compared with an average of 168.000 pesos (about USS412) for all workers (Chilean Statistics Institute 1995). Thus, the earnings of participants are I7 percent higher than for all workers, indicating that lower earners are less likely to participate.
Women represent about 40 percent of the total number of affiliates (SAFP 1996). Women’s average benefits are lower than men’s because women do not receive credit for their child-rearing years and because they have lower earnings overall, Generally, women’s earnings are 25 percent lower than men’s (Ruiz-Tagle 1996). Even women whose age and individual accounts at retirement are equal to their male counterparts will have a lower benefit if they choose the annuity option because it would be based on a longer life expectancy (Collins and Lear 1995).
Taxable wages for pension purposes among AFP contribu- tors have not kept up with the growth of average wages in the economy. Between 1982-90, there was a 20-percent difference between these figures. Marcel and Arenas (1992) consider two reasons for this gap: older workers have relatively higher wage increases than younger workers, and there appears to be underreporting of income for social insurance purposes. In late 1990, about 25 percent of all contributions were made on taxable incomes at or below the minimum wage. At the end of
1990, about 70 percent of contributors between ages 30-3.5 had account balances below 1 million pesos. This latter figure, duly capitalized, equals barely 25 percent of the funds needed to ensure a pension equivalent to only two current ‘minimum incomes at retirement.
A percent real rate of return is needed to reach the 70 percent of final salary replacement rate expected by the creators of the system. Despite the high average rates of return from the AFPs for the past 1.5 years, these rates may not be sustainable over the long term. Gillion and Bonilla (1992) assume that real rates of return of at least 4-5 percent would be required to ensure an adequate replacemect rate. These could be difficult to maintain in the long term. Robert Myers (1992). former Chief Actuary of the U.S. Social Security Administra- tion, concludes that, as long as about two-thirds of AFP investments are in low-risk government securities or govern- ment-backed bank time deposits, the high rates of return to date cannot continue in the long term: rates are more likely to be in the 2-3 percent range.
Go vemmetz t Role
The Chilean pension system is not a fully privatized system. The government plays a large financial and administrative role. It must fund the guaranteed minimum pensions under the new system. This cost could be much larger than originally anticipated and is ongoing. Government transition costs include the recognition bonds and an increasing share of pension payments under the old system. as the number of contributors to the system declines and eventually reaches zero.
In addition, the SAFP. an autonomous government agency. strictly regulates the AFPs and guarantees their solvency. During the 15-year history of the system. a number of AFPs have either merged with other AFPs or failed. Especially during the 1982-84 economic crisis. the government had to step in and take over financial control of some AFPs.
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