Chile’s disability system

Twenty-five years ago, Chile replaced its disability insurance system with one in which workers contribute to accounts they individually own. The new disability system is very innovative and could be a model for countries that rely on pay-as-you-go (PAYGO) systems, where the taxes of today's workers fund the benefits of today's pensioners, say Estelle James, a consultant to the World Bank and other organisations, and Augusto Iglesias, a senior partner of PrimAmérica Consultores.

Features of Chile's disability system:

Like the old age system, it is pre-funded, so each generation covers its own disability costs.

Private pension funds and insurance companies participate in the process of assessing workers' disabilities and financially benefit from controlling costs.

Disability rates and costs in the new system are lower than in the old system and lower than in most other countries.

Disabled workers who qualify are guaranteed a defined benefit for the balance of their lives: 70 per cent of their average wage (if totally disabled) and 50 per cent (if partially disabled). The benefit is funded in two ways:

First, the money in the worker's retirement account is available in case of a disability.

Secondly, if the amount in the account is insufficient to pay for a lifetime annuity at the specified level, the balance is funded by a group disability insurance policy purchased by each pension fund and paid for by its affiliated workers.

Survivors' benefits for the spouse and minor children of a deceased worker are covered by the same group disability and survivors (D&S) insurance contract.

Thus, at the point when a worker has been certified as permanently disabled, his entire lifetime defined benefit has been funded by a combination of his own retirement account and a top-up from the D&S insurance.

This means that costs are not passed on to future generations.

Source: Estelle James and Augusto Iglesias, Integrated Disability and Retirement Systems in Chile, National Center for Policy Analysis, Policy Report No. 302, September 2007.

For text: http://www.ncpa.org/pub/st/st302/

For more on Social Security Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=39

FMF Policy Bulletin/ 02 October 2007