The Chilean pension reform: A model to follow?

Abstract

One of the major economic reforms in the Chilean economy was the 1981 pension reform. In that year, Chile transformed its Pay-as-you-go social (PAYG) security system to an individual account social security system (IA). This paper discusses the impacts of the social security reform. To do so, we construct a countra-factual scenario of the Chilean economy under the PAYG system using simulations methods and we compare it with the effective data occurred under the IA system. We discuss the fiscal impacts, plus pension coverage on the elderly and the PAYG system's macroeconomics impacts by comparing them with the actual evolution of the Chilean economy under the IA system. Our simulations show significant fiscal deficits in the PAYG plus relatively lower pension coverage and modest benefits compare to the IA system. Finally, we show that the pension reform might have had significant macroeconomic impacts.