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

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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.

 

Key Findings

  • The public disability insurance system in Chile differs from the traditional one in that it is largely pre-funded and the disability assessment procedure includes participation by private pension funds and insurance companies, who finance the benefit and have an interest in controlling costs.
  • We hypothesize that these procedures and incentives will keep system costs low, by cutting the incidence of successful disability claims.
  • Disability hazard rates are only 20-35% as high in the new system as in the old.  Mortality rates among disabled pensioners suggest that the new system has accurately targeted those with more severe medical problems.

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Project

Paper ID

WP 2007-161

Publication Type

Working Paper

Publication Year

2007