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The impact of private participation and countervailing information on disability costs: evidence from Chile

Published online by Cambridge University Press:  27 January 2009

ESTELLE JAMES ,
ALEJANDRA COX EDWARDS  and
AUGUSTO IGLESIAS
ESTELLE JAMES*
Affiliation:
Professor Emeritus, State University of New York, Stony Brook and Consultant, World Bank
ALEJANDRA COX EDWARDS*
Affiliation:
Professor of Economics, California State University, Long Beach
AUGUSTO IGLESIAS
Affiliation:
Director, PrimAmerica Consultores, Santiago, Chile
*
(e-mail: ejames@estellejames.com)
(e-mail: edwards.ac@ca.rr.com)
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Abstract

Many social security systems face high and escalating disability costs. In Chile's new system, the disability assessment procedure includes participation by private pension funds (AFPs) and insurance companies, who finance the benefit, have a direct pecuniary interest in controlling costs and are able to pursue this objective by helping to set criteria and providing countervailing information. We hypothesize that these procedures and incentives will keep costs low, by cutting the incidence of successful claims. Using the Cox proportional hazard model and a retrospective sample of new and old-system affiliates (EPS, 2002), we find that disability hazard rates are only 20–35% as high in the new system as in the old traditional system. Analysis of mortality rates suggests that the new system has accurately targeted individuals with more severe medical problems.

Type
Articles
Information
Journal of Pension Economics & Finance , Volume 8 , Issue 3 , July 2009 , pp. 291 - 320
Copyright
Copyright © 2009 Cambridge University Press

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Footnotes

We appreciate support from the Social Security Administration through the Michigan Retirement Research Center. The findings and conclusions expressed are solely those of the authors and do not represent the views of the Social Security Administration or the Michigan Retirement Research Center. We thank the representatives of AFPs, insurance companies, the Association of AFPs and the Superintendencia of AFPs for their assistance, Juan Pablo Contreras and Janette Kawachi who helped us to organize the data for a previous version, and Ruben Castro and Pat Wiese for useful exchanges of ideas and information.

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