The Impact of Private Participation on Disability Costs: Evidence from Chile

44 Pages Posted: 22 Feb 2008

See all articles by Estelle James

Estelle James

Consultant

Alejandra Cox Edwards

California State University, Long Beach - Department of Economics

Augusto Iglesias

Primerica

Date Written: October 1, 2007

Abstract

Social security systems in many countries face problems of high and escalating disability costs. This paper analyzes how disability costs have been controlled in Chile. The disability insurance system in Chile is much less well-known than the pension part, but it is equally innovative. It differs from traditional public disability insurance in two important ways: 1) it is largely pre-funded, sufficient to cover a lifetime disability annuity and 2) the disability assessment procedure includes participation by private pension funds (AFPs) and insurance companies, who finance the benefit and have a direct pecuniary interest in controlling costs. We hypothesize that these procedures and incentives will keep system costs low, by cutting the incidence of successful disability claims. Using the Cox proportional hazard model based on a retrospective sample of new and old system affiliates (ESP 2002), we conclude that observed behavior is broadly consistent with this hypothesis. Disability hazard rates are only 20-35% as high in the new system as in the old, after controlling for other co-variates. Furthermore, analysis of mortality rates among disabled pensioners (using probit and proportional hazard models) suggests that the new system has accurately targeted those with more severe medical problems.

Suggested Citation

James, Estelle and Cox Edwards, Alejandra and Iglesias, Augusto, The Impact of Private Participation on Disability Costs: Evidence from Chile (October 1, 2007). Michigan Retirement Research Center Research Paper No. WP 2007-161. Available at SSRN: https://ssrn.com/abstract=1083792 or http://dx.doi.org/10.2139/ssrn.1083792

Alejandra Cox Edwards

California State University, Long Beach - Department of Economics ( email )

1250 Bellflower Blvd
Long Beach, CA 90840-4607
United States
562-985-5969 (Phone)
562-985-5804 (Fax)

Augusto Iglesias

Primerica ( email )

3120 Breckinridge Blvd
Duluth, GA 30099
United States

HOME PAGE: http://www.primerica.com/public/

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