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Be Careful With Chile's Annuity Market: Economists

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Poorly designed efforts to improve Chile’s retirement system could break the country’s individual annuity market, economists warn.

The economists — Gastón Illanes of Northwestern University and Manisha Padi at the University of California at Berkeley — look in a new working paper at efforts to replace Chile’s current system, which simply limits drawdown of retirement assets, with mandatory partial annuitization.

(Related: Latin America’s Pensioners Are Getting Greedy)

A working paper is a research paper that has not yet been through a full, formal peer review process.

Under the current rules, the economists write, about 60% of eligible retirees buy private annuities, and the prices for the annuities are low.

Requiring the retirees to annuitize and removing asset drawdown limits “causes the private annuity market to partially unravel,” the economists write.

The changes could increase retirees’ welfare by the equivalent of about $4,000 each, but the effects could be very uneven, and some retirees could end up being much worse off than under the old system, the economists say.

“Our results highlight the importance of considering the impact of policy reforms on the equilibria of related markets,” the economists say.


A link to a copy of the article, which may be behind a paywall, is available here.

— Read 13 Countries With Better Retirement Systems Than U.S., on ThinkAdvisor.

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