pension reform in Chile

[Salvador Valdés-Prieto,] a Chilean economics professor, concludes that Chile’s 2008 pension reform was not necessary because Pinochet in 1975 provided the poor from age 65 with a non-contributory Assistance Pension. “[E]lderly poverty in Chile has remained at … half the national poverty rate for all ages. Controlling for her income level, Chile had one of the best old-age poverty alleviation schemes before the 2008 reform, by international standards.” The report concludes: “The main reform of 2008 was to rename, expand and redesign Pinochet’s Assistance Pension. The new name is `Solidarity Pension’.”

PensionReforms senses the reform did not go far enough, but reaches a more positive assessment – more on that below.

Poverty in Chile has to date been expressed by reference to household income. `Household’ is defined as one or more persons, not necessarily related, who live together in the same dwelling and share a common food budget. The 2006 household survey revealed that 13.7% of all households had per capita incomes below the poverty line, but only 7.5% of households with an elderly member (aged 60+) had less than poverty-level per capita incomes. An elderly person who lives in a non-poor household – with a friend or with the family of an adult child, for example – is not classified as poor, even if she has no income of her own. ….

Everyone 65 years and older, regardless of their contribution history, is entitled to a minimum pension of 60,000 pesos (US$118) a month beginning July 2008, increasing to 75,000 pesos in July 2009 and subsequently indexed to consumer prices. The report surprisingly concludes that the new Solidarity Pension is too generous, since “the non-elderly … must work all day to attain a level of consumption similar to the retired elderly”. This assertion is justified by looking at “the autonomous income (market wage) of a couple in the 40th percentile of the income distribution” in the household survey, then making the dubious assumption that this is equivalent to wages earned by both husband and wife working at full-time jobs for the entire year. A pension of 60,000 pesos is about 13% of per capita GDP – 37% of the minimum wage – which does not seem excessive to PensionReforms. ….

The [Valdés] report fails to mention that the means test is now based only on the per capita income of husband, wife and dependent children [rather than the household]. It notes only that “the new law defines household on the basis of blood ties, while the CASEN [household] survey defines household on the basis of sharing cooking and shelter”, and points out that since the new definition “is incompatible with the definition used by the survey which is the source of the data used to rank households by average income per capita”. PensionReforms discovered that the government is aware of this, and intends to amend the annual household survey to include questions on family groups. For elderly persons without pension income and who want to live with their adult children without becoming a burden, this reform will be seen by them as a godsend. ….

PensionReforms thinks that the 2008 reform was both useful and necessary but suggests that it should be seen as just a step in the right direction. Chile since 1975 has recognised that compulsory Tier 2 schemes cannot meet a government’s social objectives for financial support to its older citizens. Now it is time to move to a universal Tier 1 pension. The 2008 reform has made that easier.

The 2008 Chilean Reform to First-Pillar Pensions“, Pension Reforms, 26 February 2009.

Recycled from the TdJ archive, 12 March 2009. There is a link to Valdés-Prieto’s report at the end of the Pension Reforms abstract.

pension reform in Chile

[Salvador Valdés-Prieto,] a Chilean economics professor, concludes that Chile’s 2008 pension reform was not necessary because Pinochet in
1975 provided the poor from age 65 with a non-contributory Assistance Pension. “[E]lderly poverty in Chile has remained at … half the
national poverty rate for all ages. Controlling for her income level, Chile had one of the best old-age poverty alleviation schemes
before the 2008 reform, by international standards.” The report concludes: “The main reform of 2008 was to rename, expand and redesign
Pinochet’s Assistance Pension. The new name is `Solidarity Pension’.”

PensionReforms senses the reform did not go far enough, but reaches a more positive assessment – more on that below.

Poverty in Chile has to date been expressed by reference to household income. `Household’ is defined as one or more persons, not
necessarily related, who live together in the same dwelling and share a common food budget. The 2006 household survey revealed that 13.7%
of all households had per capita incomes below the poverty line, but only 7.5% of households with an elderly member (aged 60+) had less
than poverty-level per capita incomes. An elderly person who lives in a non-poor household – with a friend or with the family of an adult
child, for example – is not classified as poor, even if she has no income of her own. ….

Everyone 65 years and older, regardless of their contribution history, is entitled to a minimum pension of 60,000 pesos (US$118) a month
beginning July 2008, increasing to 75,000 pesos in July 2009 and subsequently indexed to consumer prices. The report surprisingly
concludes that the new Solidarity Pension is too generous, since “the non-elderly … must work all day to attain a level of consumption
similar to the retired elderly”. This assertion is justified by looking at “the autonomous income (market wage) of a couple in the 40th
percentile of the income distribution” in the household survey, then making the dubious assumption that this is equivalent to wages
earned by both husband and wife working at full-time jobs for the entire year. A pension of 60,000 pesos is about 13% of per capita GDP –
37% of the minimum wage – which does not seem excessive to PensionReforms. ….

The [Valdés] report fails to mention that the means test is now based only on the per capita income of husband, wife and dependent
children [rather than the household]. It notes only that “the new law defines household on the basis of blood ties, while the CASEN
[household] survey defines household on the basis of sharing cooking and shelter”, and points out that since the new definition “is
incompatible with the definition used by the survey which is the source of the data used to rank households by average income per
capita”. PensionReforms discovered that the government is aware of this, and intends to amend the annual household survey to include
questions on family groups. For elderly persons without pension income and who want to live with their adult children without becoming a
burden, this reform will be seen by them as a godsend. ….

PensionReforms thinks that the 2008 reform was both useful and necessary but suggests that it should be seen as just a step in the right
direction. Chile since 1975 has recognised that compulsory Tier 2 schemes cannot meet a government’s social objectives for financial
support to its older citizens. Now it is time to move to a universal Tier 1 pension. The 2008 reform has made that easier.

“The 2008 Chilean Reform to First-Pillar Pensions”, Pension Reforms, 26 February 2009.

http://www.pensionreforms.com/Preview.aspx?274

Recycled from TdJ archive. There is a link to the full report in the Pension Reforms abstract.

http://uk.groups.yahoo.com/group/thought_du_jour/message/1395

http://uk.groups.yahoo.com/group/thought_du_jour/

Tags:

Comments are closed.