Inclusion of the Self-employed in the Pension System

Chile was a pioneer in changing its defined benefit, pay as you go, pension system to a defined contribution system based on private accounts and managed by private fund managers. Back in the early 1980s when the reform was designed and implemented, the expected replacement rates of this new system were expected to reach 70%.

However, this “promise” fell short.

Now that people are reaching their retirement age we are realizing that replacement rates are reaching only 35% and 50% on average for women and men respectively.

One of the main reasons for the discrepancy between what was envisioned and what really happened was the high level of labor mobility between the formal and informal sector, as well as, in and out of the labor force. While formal workers were mandated to contribute to their private pension accounts, those in the informal sector were not. Similarly, those leaving the labor force did not contribute, and this started generating accumulation gaps.

In 2008, Chile introduced comprehensive reforms aimed at increasing coverage, improving adequacy, reducing costs, and strengthening the institutional framework of the pension system. An important challenge of this reform was the inclusion of the self-employed into the system by imposing mandatory contributions.

Our chapter describes and analyses the measure that introduced mandatory contributions for the self-employed in the context of the 2008 Pension reform, which consisted of a comprehensive package to improve coverage adequacy and efficiency in the Chilean Pension system.

Given that contributions for the self-employed were not mandated but only proposed, facilitated and nudged, until 2018, the reform resulted in increased contributions by individuals who are already members of the system. However, it did not have a significant impact of bringing in those outside the system.

These reforms are definitely a step in the right direction as it did improve savings. Nonetheless, more is needed to increase coverage.

To find out more, don’t forget to check out our new book, Saving the Next Billion from Old Age Poverty to be released October 12, 2017.

 

Photo credit: Alejandro Inostroza/ Flickr CC


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