POLICY RESEARCH REPORT ON
GENDER AND DEVELOPMENT
~ Working Paper Series No. 17
L
Social Security Reform  and                                              The reform of the Chilean social
* security system had gender-
Women's Pensions                                                      . differentiated  impacts  on
incentives.       This   report
examines the benefit structures
and the gender breakdown of
L  recipients  to  determine  the
future implications of the new
Alejandra Cox Edwards                                                    system   in  a  rapidly  aging
society. The new social security
system may have the effect of
increasing women's labor-force
participation.
iF
February 2001                                                         i
The World Bank
Development Research Group/
Poverty Reduction and Economic Management Network
The PRR on Gender and Development Working Paper Series disseminates the findings of work in progress to encourage the
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Policy Research Report on Gender and Development
Over the last several decades, gender       extensive consultation with Bank staff,
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to equitable, efficient, and sustainable    been commissioned. These papers have
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these  links  are  still  not  widely       the  existing  literature  as well as to
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policy makers.                              The Policy Research Report on Gender
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This paper is part of a series of papers on selected topics commissioned for the forthcoming Policy
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Social security reform and women's pensions.
Alejandra Cox Edwards
California State University, Long Beach
ABSTRACT
The Chilean population is expected to age rapidly in the course of the generations born
from 1960 to 1980. The fraction of individuals 65 years or older will increase from 6. 1%
(1990), to 12.7%(2025). and to 17.3 (2050). Such a change in the demographic
composition of the population will likely exhaust traditional support systems of the
elderly, and increase the relative importance of life-time savings, including social-
security benefits. Thus, a policy approach that does not distort incentives to save for
retirement becomes is important for the well being of the population as a whole.
In 1981 Chile replaced a mature government-run social security system that operated on a
pay-as-you-go basis, with a privately managed system based on individual retirement
accounts. Overall, the new system is more fiscally sustainable. At the same time,
incentives towards using the social security system to channel savings towards retirement
changed, particularly for married women.
This paper examines the levels of income per capita and living arrangements of the
current elderly by sex, estimates their poverty rates, and compares these with the poverty
rates for the younger population. In addition, it estimates future pension benefits for the
current generation of contributors, by sex, in an effort to establish the likely effects of
reform on the living standards of elderly men and women. The key data source for the
statistical analysis is the micro data set of the 1994 Caracterizaci6n Socioecon6mica
Nacional (CASEN), a nationally and regionally representative household survey.
The 1994 cross section shows that women are less likely to earn income than men in any
of the categories of income generation. Yet, in the case of retirement income, gender
differences are relatively smaller. In urban areas, the fraction of elderly men that receive
an old-age pension is twice as large as that of elderly women - 62 vs. 31 percent. But, an
additional 19 percent of elderly women receive survivor's pensions, closing the
retirement income gender gap. In rural areas, where old-age pensions are less typical,
more than 23 percent of elderly women are beneficiaries of a PASIS, a government
program targeted to the elderly poor. In urban and rural areas, older women are more
likely to be widows, and more likely to live in extended households than men of the same
This paper draws heavily on two detailed reports by the author: "Pension Projections for Chilean
Men and Women: Estimates based on Social Security Contributions." and "A Close look at the Living
Standards of Chilean elderly men and women.' available at http://www.csulb.edu/-acoxedwalrecent.htm.
These papers are part of a World Bank Research Project on Gender and Social Security managed by Estelle
James (World Bank Institute) and Maria Correia (Latin America and the Caribbean Region Gender Team).



age group. An interesting finding for the case of Chile is that poverty rates -measured at
the household level using equivalency scales, are generally lower among elderly males
and females, compared to younger males and females. However, controlling for age
category, poverty rates are higher among females.
In the future, old age pensions are expected to be lower for women than men, because
women accumulate funds at a lower pace, can retire 5 years earlier and are expected to
live longer than men. However, a close examination of the impact of reform reveals that
it brought about significant changes in women's incentives to participate in the labor
market, to save, and to use the social security system as a channel for their savings. In
fact, the elimination of cross subsidies within the system is a source of complex effects
on the relative position of women. Under the new system's rules: (1) there is no
minimum level of contributions to obtain a pension; (2) contributions at a young age get
an increased weight via compound interest; (3) widows can keep their own pension
benefits in addition to their widow's pension. These three characteristics raised the
marginal benefit of own contributions for working women relative to what the old system
offered. In addition, the new system guarantees a minimum pension (MPG) for those that
have contributed a minimum of 20 years, adding another incentive for participation.
Transfers associated to the MPG are funded from general taxes and survivor's pensions
are funded via distribution within households. In effect, married men are required to
build a joint annuity leading to a within-family distribution towards women. Therefore,
the new system eliminated a significant degree of regressive distribution from working
families to elderly widows with no contribution of their own, but with generous pensions
as a function of their spouses' pensions.
Overall, the new system is more fiscally sustainable and creates an incentive for greater
labor force participation. Which system is preferable? If one thinks of labor market
behavior as immutable and women's place as in the home, some method of subsidizing
women in old age may be necessary. But, if one views the role of women as changing
and responding to incentives, the new structure is more appropriate way to provide a
social safety net while encouraging work and discouraging dependency.
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1.    Introduction
In 1981 Chile replaced a mature government-run social security system that operated on a
pay-as-you-go (PAYG) basis', with a privately managed system based on individual
retirement accounts. In this paper I investigate whether Chile's social security reform
affected men and women differently. A gender-differentiated analysis of current and
future living standards of the elderly is important because women are expected to live
longer, but they tend to save less than men through the social security system. In 1990, a
60-year-old woman was expected to live 21.8 years and a 60-year-old man 18.3. In the
year 2005, these life expectancies would increase to 23.4 and 19.5 respectively (see
Cepal, 1998). Given the differences in longevity, women would have to save more than
men do in order to obtain the same retirement incomes.
There are four factors that explain why women are less inclined to contribute to the social
security system as a way to provide for old age. (1) Women have lower labor-force
participation rates. The division of labor within households has traditionally rendered a
specialization along gender, particularly among married couples. Women specialize in
home production and men specialize in market-oriented income-generating activities. In
Chile, the extent of specialization along gender lines is subsiding. and there is a rising
proportion of single and married women that generate monetary incomes from work.
However, there is a larger likelihood of career interruptions among women compared to
men. In particular, women would stop working to take care of the new born, to care for
the sick, and generally to care for elderly parents or in-laws. Therefore, the density of
labor market participation throughout the life cycle would be smaller for women than for
men. (2) Women's salaries are generally lower than men's, even after controlling for
age and schooling. (3) Social security systems generally apply gender-differentiated
rules. For example, in Chile women can start drawing a pension five years earlier than
men. And (4) the expectation that a woman will survive her husband, who in turn will
receive a pension, means that she will typically get a widow's pension independently of
her own savings.
By the late 1970s. the system generated a large deficit in spite of several hikes in payroll taxes. In
1979, pension ages were raised to put the system in balance (see Wagner. 1983).
2



The empirical analysis reported in this paper shows that Chile's social security reform
brought about significant changes in women's incentives to participate in the labor
market, to save, and to use the social security system as a channel for their savings. First,
under the new system there is no minimum level of contributions to obtain a pension,
while in the old system contributors with less than 10 years of contributions could not get
a pension benefit. Second, the new system guarantees a minimum pension for those that
have contributed a minimum of 20 years. In the old system, the guaranteed minimum
was available to whoever had contributed a minimum of 10 years. These two changes
hurt women with 10 to 20 years of contributions who would have qualified for the old
minimum pension and would not qualify for the new minimum, but generally encourage
women to work and contribute. Third, the new system requires married men to build a
joint annuity leading to a within-family distribution towards women. In addition, the new
system allows widows to keep their own pension benefits in addition to their widow's
pension, restoring the marginal benefit of own contributions for working women. Fourth,
the reform gives an increased weight to early years of contributions via compound
interest, instead of the heavy weight given to the last five years in determining the
pensionable wage under the old system. This change favors women relative to men
because women are more likely to hold paid jobs when young and later drop out of the
labor force. Moreover, even if women maintain a significant attachment to the labor
force, they tend to have flatter age-earnings profiles relative to men.
The paper proceeds as follows. Section 2 describes the data and lays out the
methodology. Section 3 examines the levels of income per capita and living
arrangements of the current elderly, estimates their poverty rates, and compares these
with the poverty rates for the younger population. Section 4 draws on the current
behavior of the working-age population and current data on gender wage differentials to
simulate the accumulation of funds towards pensions for men and women. The degree to
which differences in savings are translated into differences in old age pensions depends
on the rules of the system. The paper combines the fund accumulation estimates with the
rules of the new social security system to simulate old age pensions. In addition, it uses
the same data on contributions to simulate the old age pensions that would have been
3



paid under the old system rules. Section 5 uses the previous results to estimate gender-
differentiated effects of the social security reform. Section 6 summarizes the results.
2.   Data and Methodology
The key data source for the analysis is the micro data set of the Caracterizaci6n
Socioecon6mica Nacional (CASEN) for 1994.2 This is a national household survey
carried by the National Planning Office (MIDEPLAN).3 The sample contains 178,057
observations (111,643 representing urban and 66,414 representing rural areas). Urban
areas are defined as groupings of dwellings with a population greater than 2,000
individuals. The survey collects information on: demographics, characteristics of the
dwelling, educational attainment, health care, occupation and employment, and incomes.
Income questions distinguish labor income, income from capital, rental, imputed rent,
and transfers such as pensions.
The paper uses this data set to examine the levels of income per capita and living
arrangements of the current elderly. I also estimate poverty rates among the elderly, and
compare them to the poverty rates for the younger population. Per capita incomes are
estimated at the individual and household levels, using standard methods and following
the literature on the subject. A key feature of these calculations is that I formally
compare these variables for men and women
In addition, I use the same cross section data to estimate future pension benefits for the
current generation of contributors, in an effort to establish the likely effects of reform on
the living standards of elderly men and women. The paper does not attempt to predict the
living arrangements of the elderly in the future. The results presented focus on social
security benefits, and do not include other potential sources of income.
2      The data used is the one adjusted by Cepal (see Cepal. 1995) with three additional corrections that
were justified in a recent study by The World Bank (see World Bank, 1997). (1) Live-in domestic service
workers are treated as a separate household. (2) Incomes are deflated by a regional price index. (3) The
three richest households in the sample are excluded from the income analysis because the incomes reported
can be regarded as genuine outliers (see World Bank. 1997, Vol. II. pg 6).
3      I am thankful to the Economics Department at Universidad de Chile. and in particular to Dante
Contreras, for assistance with Casen data.
4



Clearly, a cross section is far from the ideal data source to estimate life-cycle earnings, or
life-cycle contributions to social security. However, there is no better alternative.
Historical patterns of contributions are not relevant under the current rules, and current
longitudinal data files are not available. As a result, the paper goes through a detailed
explanation of the way in which the cross-section data is used to make estimates of
longitudinal behaviors. One of the most challenging estimates is female labor force
participation patterns. This is because female labor force participation rates vary
significantly by schooling, have seen a secular increase in the Latin America region, and
are likely to respond to changes in labor force participation incentives.
At the simplest level, the cross section data allows us to estimate the labor force
participation rate for a typical woman of a given age -say a 30, 40 or 50 year old. The
observed participation patterns can then be used to project the behavior of a 20 year old
into the future, assuming that the behavior of the observed 30, 40 and 50 year olds is
characteristic of all women. Fortunately, we can do better. The data contains other
individual variables, such as schooling and marital status, that are known to influence
participation behavior. In addition, we note that participation rates are higher among
women affiliated to the social security system compared to the female population as a
whole. Therefore, the methodology rests on estimates for women affiliated to the social
security system, by schooling and marital status.
Using the estimated participation rates, and the estimated wages by age and schooling as
seen in the data, the analysis proceeds with an estimation of the accumulation of social
security contributions. These estimates are a function of the system's rate of return, and
the individual retirement ages. Individual pension benefits are subsequently estimated
from the accumulated funds. These individual benefits are then compared to what the
same "typical individuals" would have obtained if the nominal formula of the old system
was applied. These comparisons allow us to understand better the effects of social
security reform on the well being of the elderly
5



3.    Standards of Living of the Current Elderly
Women are less likely to earn income than men. This is true in any of the categories of
income generation. Yet, in the case of retirement income, gender differences are
relatively smaller. In urban areas, the fraction of elderly men that receive an old-age
pension is twice as large as that of elderly women -62 vs. 31 percent. This section
examines the sources of income of the elderly population, and looks at the standard of
living, of the elderly in comparison to the rest of the population.
3.1   Incomes
The relative importance of the various sources of income varies by age and gender. For
example, 67% of urban men of all ages obtain income from work and 70% of non-
working older men have retirement income, suggesting a correspondence between work
income and retirement income for men. The patterns for women are different. Only 32%
of urban women of all ages obtain income from work, while 60% of non-working older
women have some sort of retirement income. The picture is not too different in rural
areas, except for a smaller percentage -only 16%-- of women report income from work.
What is surprising, however, is that when it comes to pension earnings, gender
differences are much smaller. About 60% of elderly women and 70% of elderly men
receive some sort of pension income.
Two factors explain why a large faction of elderly women receive pensions while at the
same time, a small fraction of women works at younger ages are two. First, in urban
areas, most elderly women are widows, and a large fraction of them have pension
benefits either from their own work or from their husbands. Second, in rural areas, where
poverty rates are higher, close to 40% of female beneficiaries of pension income are
beneficiaries of the social assistance pension (Pension Asistencial - PASIS).4
The PASIS program, which was implemented in 1975, has two components: (a) free
medical assistance in the Public System and, (b) a monthly benefit indexed to the
The PASIS program makes income transfers given to indigents that are over 18 and incapacitated.
or above 65. that have resided in the country for a minimum of three years.
6



Consumer Price Index (CPI) adjusted every December. In October of 1999, the benefit
was $32,772.84 (approx. US$ 64) per month. This is equivalent to 50% of the minimum
pension, or about 11% of the average wage.5 In December of 1998, old-age PASIS
beneficiaries represented 12.5% of all old-age pension beneficiaries (public and private).
Coverage is significant in the rural areas where poverty levels are higher. Based on data
from the 1994 survey, we calculate that about 75% of poor women receive the PASIS
subsidy. These pensions are financed by a special fund transferred from the central
government to the thirteen regional authorities (Intendencias) and is independent of the
social security system.
3.2.   Elderly Women are more likely to live in Extended Households
Most studies on the living arrangements of older men and women, use three conventional
household types: unipersonal, nuclear, and extended. However, a non-trivial fraction of
the elderly live with unmarried grown up children. This arrangement does not fit with the
extended family definition, although it is closer to the extended family than to a nuclear
family, simply because grown children are likely to be taking care of their parents. To
attend to this distinction, nuclear families were subdivided- into two types: those with at
least one child 30 years of age or older, and those with no children 30 or above.6
Table 1 summarizes the results of living arrangements for men and women 60 years old
or above. It is clear that elderly women are more likely to live in extended families than
elderly men. More than 50% of elderly women live in extended households. The
fraction of elderly men in extended households is just about 40%. About 50% of elderly
men live in nuclear households, with or without adult children. These patterns are
observed in urban and rural areas, and suggests that men are more likely to age with their
household while women, perhaps because they live longer, are more likely to age with an
5      Given that the data analysis in this paper is based on 1994 information. it is relevant to note that
the typical amount for 1994 was $15.967.
6      Each household is formed by a minimum of one family, conformed by a 'head of household,"
who may have a spouse or partner, a child, a parent, a sister, etc. Everybody is defined in relation to the
"head of household." If the family is limited to a head, spouse or partner and child(ren). it is considered a
nuclear" family. If the family includes other members aside from the "nuclear" family, it is considered
-extended." Non-family members, except for live-in domestic workers, are classified in the same family
category of the main family. Live-in domestic workers are considered unipersonal households.
7



extendedfamily. Clearly, this analysis faces the challenge of establishing the living
standard or well being of the elderly inserted in extended households, and then comparing
it with that of older individuals living alone, or with their spouse.
3.3    Income levels and povertv rates of the elderly
As pointed out above, about 60% of elderly women and 70% of elderly men receive some
form of pension income. These numbers, however, do not give an accurate measure of
the elderly's real income, because retirement income is not the only source of income,
and old men and women most often do not live alone. In order to address these issues,
we compare the levels of household income per capita for men and women 60 and over,
controlling for the type of household structure they live in.
As a first step in our income calculations, we take into account the fact that there are
economies of scale within households, and that the cost of living varies according to age.
We use five alternative scales to calculate weights to count household members and
calculate income per capita: a simple members count (N); the Chile scale (Neq); the
Deaton scale (NeqD); the OECD scale (NeqO); and the Cutler scale (NeqC).7  The Chile
scale is a household-equivalency scale calculated by Contreras (1995), using the
"Rothbarth adult goods method".8
7      The Deaton scale weights all adults 18 or over as 1; children below 6 as .2: children between 7 and
13 as .3; and children 14-17 as .5. The OECD scale weights the first adult as 1 additional adults as .5: and
children less than 14 as .3. The Cutler scale weights adults 20 to 65 as I: adults above 65 as 1.27; and
children less than 20 as .72.
Contreras' scale was estimated excluding all households with a single adult from the sample, and
taking two adults as a reference type. He found that adult good expenditures were restored to the childless
couple level when incomes for families with one child in the age categories below was raised by estimated
percentages. Contreras' original scale was modified to include single individual households. and to take
into account economies of scale within the household. The scale used, which is also applied to unipersonal
households, is the following:
Yi= X,/M,, where
M= 1.2 + 0.8(N,, + N 115) + 0.4 Ns 1( + 0.3 N(4
With   Naa  = number of additional adults in the household
N I 1-= number of children aged 11-15 in the household
N5-1(,= number of children aged 5-10 in the household
N0l 4 = number of children aged 0-4 in the household
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We proceed to use the household-income estimates to establish poverty rates using a
poverty line of 30,100 pesos per equivalent adult.9 The results for poverty calculations
by household according to the number of elderly are presented in Table 2, and contain
two key results. Poverty rates are higher in rural areas compared to urban areas across
comparable households with or without elderly. The data also shows that poverty among
households with elderly is lower than poverty among households at large, both in urban
and rural areas. This conclusion is robust to the choice of equivalency scale, except when
using Cutler's. Therefore, the conclusion regarding the relative well being of the elderly
can be turned around if we assume, as Cutler does, that the elderly are subject to a
substantially higher cost of living.
Table 3 focuses on individuals, and allows a closer look at gender differentials. Once
again, income per capita is measured at the household level adjusting household size
according to equivalency scales. The estimated per capita incomes are applied to each
individual, and the table presents poverty counts by age and gender category. Table 3
leads us to conclude the following. Poverty rates are generally lower among elderly
males and females, compared to younger males and females --in the 16 to 59 age-range.
Poverty rates are higher among 16-59 year old females relative to 15-59 year old males,
and also higher among elderly females relative to elderly males.
Table 4 presents calculations of poverty counts for the elderly according to housing
arrangement. The income per capita figures (not shown) used to arrive to these
calculations, indicate that across the different scales, income per capita levels are the
highest among unipersonal and nuclear households. Nuclear households with adult
children (30 or over) are characterized by per capita incomes below nuclear, and above
extended. This would suggest that the unipersonal or nuclear-household arrangement is a
less likely alternative for lower income families. Yet, the distribution of income among
unipersonal households of elderly individuals is very unequal, causing a high poverty
incidence among unipersonal households.
A regional price level indexed incomes in the different regions. The poverty line is the same used
by a recent World Bank study on Chilean Poverty and Income Distribution (World Bank. 1997).
9



3.4   Sources of Income among the elderly
We turn to the various sources of income among the elderly and to the significance of
these sources to the overall household's monetary income. As shown in Table 5, about
74% of urban and rural elderly women generate some form of monetary income. Close
to 100% of elderly males in urban areas generate some form of monetary income and
about 93% of elderly males in rural areas do so. Women are less likely than men to
contribute in any of the categories of monetary income generation (wages, imputed rent,
and own pension), although the differences are less pronounced in the pension category.
The fraction of elderly men that receive an old-age pension is twice as large as that of
women -62 vs. 31 percent. Yet, an additional 19 percent of elderly women receive
survivor's pensions, closing the retirement income gender gap. In every category,
women with sources of income earn less relative to men. Differences are smaller in the
PASIS program and the imputed rent category relative to the other income categories.
The fact that elderly women are poorer than elderly men is also evident in the importance
of the PASIS program as a source of income for elderly women, particularly in rural
areas.
Columns 3 and 6 in Table 5 show the significance of income contributions of the elderly
to total household income. The likelihood that elderly women make contributions to
household incomes is lower than that of elderly men. Furthermore, the relative
contribution of elderly women's incomes towards total household incomes --among those
that make contributions-- is also lower than income producing elderly men. The
exception on the last regularity is the case of imputed income from owner occupied
housing. This last finding suggests the importance of researching the role of investments
in housing, as an alternative to social security savings, in the case of women.
Given that a significant fraction of elderly women live in extended households, it is of
interest to know how significant is the contribution of their income to that of the extended
household. We restrict our analysis to monetary income sources, because we do not have
any direct measure of the non-monetary contribution of elderly individuals to
10



household's production. Do elderly women improve the standard of living of the
household they join? Are these extended households close to the poverty line? Table 6
reports the results of comparing extended-households income per capita with and without
the elderly person in question.
Close to 85% of elderly men make a contribution to extended household's income, in
rural as well as urban areas. However, less than 45% of elderly women have such a
positive impact on household income. The average income effect of the presence of an
elderly person in the household (positive or negative) is relative small in rural areas, and
more significant in urban areas. These cross tabulations do not allow us to draw any
conclusions on causality. Extended households may originate on the move of an elderly
widow to her son's household. They may also originate on the move of a man, wife and
children to his parent's house. When we turn to poverty counts, we see that the highest
incidence of poverty among the elderly is found among extended households. Again,
there are many possible explanations. However, we shall see that the incidence of
poverty is larger among extended households where the elderly have a positive impact on
pc income.
Women are less likely to earn income than men are. This is true in any of the categories
of income generation. Yet, in the case of retirement income, gender differences are
relatively smaller. In urban areas, the fraction of elderly men that receive an old-age
pension is twice as large as that of elderly women -62 vs. 31 percent. But, an additional
19 percent of elderly women receive survivor's pensions, closing the retirement income
gender gap. In rural areas. where old-age pensions are less typical, more than 23 percent
of elderly women are beneficiaries of a PASIS, a government program targeted to the
elderly poor. In urban and rural areas, older women are more likely to be widows, and
more likely to live in extended households than men of the same age group. Poverty
rates -measured at the household level using equivalency scales, are generally lower
among elderly males and females, compared to younger males and females. However,
controlling for age category, poverty rates are higher among females.
11



4.    Preparing for Old Age: Gender Differences in Employment and
Social Security Participation among the Young.
In this section we estimate longitudinal patterns of contributory behavior and wages. The
CASEN 94 survey provides information on current labor force participation, working
status, affiliation to social security, and contributory status. It also asks individuals if they
have ever worked. Because the information on years of contributions is not available
from CASEN, nor is it publicly available from the AFPs, it is crucial to derive the best
possible estimate of contributory behavior from the cross section data. In the absence of
longitudinal data, we are forced to use the cross section data as a synthetic cohort and
estimate years of contributions based on the best estimate of contributory behavior
through the life cycle of "typical" men and women.
The group of individuals that makes contributions to the social security system in a given
month is a sub-sample of all workers. This group, in turn, is a sub-sample of individuals
in the working-age population, with distinct gender, age, schooling, and marital status
characteristics. Labor force participation of 16-65 year old urban women and men, is
driven by marital status; years since finishing school or potential experience; post-
secondary schooling: and marriage. The likelihood of participation is significantly lower
for women --at 39% on average than for men-- at 82% on average. Marriage will further
reduce the probability of participation for women and will increase it for men. Post
secondary schooling increases the likelihood of participation and diminishes the negative
effect of marriage for women, but lowers the probability of participation for men.
4.1    Who contributes?
Chilean law requires employees under contracts to make contributions to their personal
retirement accounts. The self-employed and those without contracts may, if they so wish,
make voluntary contributions to the pension system. In urban areas, for example, the
employees' category accounts for about 72 percent of working men and just about 60
percent of working women. Within the employee's category, 82 percent of males and 85
percent of females have contracts, and among those that have contracts, 95 percent of
men and women make contributions.
12



However, there is also a significant fraction of workers that make contributions without
being obliged to do so. Up to 24.8% of individuals not required to contribute (the self-
employed and the employees without contracts) do make contributions. This fraction
increases with age and schooling, and does not vary much with the level of salaries or the
sector of employment. Establishment size and gender are important factors. In
particular, workers in larger establishments are more likely to contribute. It is apparent
that, with or without controlling for industry and establishment size, women are 6.16%
less likely to contribute. lo
A natural approach to study the behavior of contributors by age is to focus on the sample
of "affiliates," since affiliation to the social security system is a necessary condition to
contribute to social security. The survey collects information on current labor force
status, and also asks individuals if they have ever worked. In 1994, the proportion of 15
years or older that work or has worked is 90.7%, while the equivalent proportion of
women is 70.4%. That is women have, on average about 25% lower probability of ever
generating income from labor relative to men. In addition, women have a lower
attachment to the labor force, which is captured by the gender differences in employment
ratios in a given year. In 1994, for example, 72% of urban working age males worked,
and only 36% of working age females did so.
Conditional on working or having worked for pay, 73.4% of men are affiliates to the
social security system, and only 55.2% of women are. The already smaller fraction of
women that ever worked for pay, is 25% less likely than the equivalent group of men to
affiliate to the social security system, suggesting that women are less inclined to use the
social security system as a vehicle for channeling savings.
This finding suggests that women. in similar circumstances to men. are less likely to assign a marginal value to their
social security contributions. As we wi]l see later, a large fraction of women are expected to qualify for the pension
guarantee. The prospect of a guarantee reduces to zero the marginal value of contributions beyond the 20 years
minimum requirement. In addition, the fact that married women obtain health care coverage through a contfibuting
husband's famity plan. may be part of the explanation. This reduces the value of the 20% contribution to just about
13%7. Further work should examine the impact of the tied-in character of the pension and health care programs on a
married couple's incentive to save towards retirement.
1 3



Affiliates are not a random sample of the working population. In particular, affiliates are
individuals that have a higher attachment to the labor force than average. Out of all men
affiliates, 82% are working at the time of the survey, and about 64% of women affiliates
are working at the time of the survey. These working ratios must be compared to the
72% and 36% ratios as a fraction of the working age population.
More than 90 percent of men and women affiliates that are working at the time of the
survey are also contributing towards social security. In fact, the fraction of women
contributors in this sample is slightly higher than that of men. This leads us to conclude
that the month-to-month contributory behavior of affiliates is driven primarily by the
choice of work or no work in any given month. However, the reader should not loose
sight of the fact that women affiliates have a lower attachment to the labor force than men
affiliates, causing a gender gap in the accumulation of contributions among affiliates.
We proceed to estimate contributing behavior among affiliates only. The reasons to
concentrate on affiliates are four. (1) Only those individuals that are "affiliated" to the
social security system can make contributions toward retirement. (2) Unlike labor force
participation, employment, or employment status, affiliation does not change as an
individual ages. Once an individual affiliates, he or she remains affiliated. (3) The
probability that an affiliated individual of a given age and schooling level is working at
the time of the survey is not 100%, but it is significantly higher than the probability of
work of the non-affiliated. (4) In addition, when affiliates work, they have a 90%
probability of contributing.
Further data analysis shows that the proportion of women that ever works rises with
schooling. As stated earlier, schooling is a key explanatory variable of wage levels, age
of marriage, and labor force participation. We consider five schooling groups:
incomplete primary, complete primary, incomplete secondary, up to four years of post-
secondary, and five or more years of post-secondary. It is of interest to note that, if we
restrict the sample to affiliates that are currently working or have worked before, and that
14



are 60 years old or younger, we see a remarkable similarity across gender in contributory
status. Among men and women with less than primary schooling contribution rates are
84%. The contribution rates increase to 89% among those with incomplete primary; to
93% among those with complete secondary and men with up to four years of post
secondary; and to 96% for women with post secondary and men with 5 or more years of
post secondary.
4.2    Estimating Years of Contributions
The methodology rests on estimates of the fraction of contributors within each gender,
age, marital status, and schooling category, from the sample of affiliates that have worked
at some point. The precise procedure is as follows:
1.    The sample of ever-working affiliates is separated in 20 main categories (2*245):
Men and women, married and single, and five schooling categories. Within each of these
20 samples, we calculated the proportion of individuals that contributed to the social
security system."
2.     Since marriage is an important determinant of participation, and marriage age
varies significantly by schooling category, we distinguish the behavioral patterns of
single and married individuals. We assume that the "typical" man and woman within
each schooling category accumulates contributions as a single person first, gets married,
and continues to accumulate contributions as a married person afterwards. The marriage
age for the "typical" men and women is the age at which 50% of the corresponding
category is married.'2 Marriage tends to be earlier for ever-working men affiliates than
for the men sample, and marriage tends to be delayed for ever-working women affiliates
than for the women sample. Since we are focused on the group of affiliates, we use the
corresponding marriage ages for that sample. This step reduces our categories to 10: five
schooling categories, two sexes. We then estimate years of contributions by single age.
The sample of men that ever worked is almost always the same as the sample of men, but the
sample of women that ever worked varies with schooling. For example, at age 34. the fraction of women
that ever worked goes from 67 percent among those without complete secondary schooling, to 75, 93 and
97 percent among those with secondary, up to 4 years of post secondary. and 5 or more years of post
secondary schooling.
12     The *-typical marriage age" is the same in the sample of ever working affiliates.
15



The emerging relationship between age and years of contributions is captured in Figure 1
where two male and female schooling types are represented. The lines describe the
relationship between estimates of work experience and age. Asuming that working
affiliates make contributions to social security, a relatively higher line indicates steady
accumulation of years worth of contributions, as it is the case of male with secondary
schooling. A relatively high and steeper line indicates fast accumulation after a later
start, as it is the case of males and females with 5 or more years of post secondary
schooling. A lower and flatter line shows a relative lower degree of labor force
attachment, and a relatively slower accumulation of contributions, as it is the case of
female with secondary schooling.
Figure 1
Estimated Years of Contributions by age category,
schooling and gender
45
40 -
o35                                           II
I
:230                                           - - |fem sec
-u-O-fem 4 postsec
0  25                        X    -_ 
o 25                                              -*-male sec
20                                               -U- male 4 postsec
15
l 0
5
0
20 25 30 35 40 45 50 55 60 65
Age Category
Gender differences in the degree of attachment to the labor force among affiliates result
in important differences in life-time-contributions. Men typically accumulate 40 years
16



worth of contributions from age 16 to 65. Women tend to have more interruptions
especially the ones in the lower schooling categories. In particular, women with
complete secondary schooling accumulate, on average, less than 30 years worth of
contributions by age 65.
4.3   Earnings Profiles
To estimate the accumulation of funds, it is necessary to have an estimate of contributory
behavior --which was obtained in the previous sub section--, and also an estimate of
wages. We produce an estimate of wage variations as individuals age, based on observed
wages by age, sex and schooling. The wage data used represents all workers. The sample
choice is driven primarily by the objective of keeping it as large as possible. However, it
is also reassuring that both affiliation and contribution behavior is not significantly
affected by wage levels. Therefore wage estimates originated from a broad sample of
workers should not be different from wage estimates originated from a sample of ever
working affiliates.
We start from the assumption that current patterns of earnings (as a function of schooling
and experience) have been there for some time, and will remain stable in the future. The
key challenge is to capture that earnings pattern from the existing data. The human
capital earnings function, in which earnings are expressed as a quadratic in potential
experience, is probably the most widely accepted empirical specification in economics.
Nevertheless, there are two reasons why this procedure is not the most appropriate for the
question in front of us. First, we simply do not have a good proxy for female experience.
Second, our aim is to get the best estimate of wages for workers of a given age (since
contributions and benefits eligibility are bound by age). Consequent with the reasons
offered above, we use an alternative procedure to compute earnings.
We organize the data on wages from the 1994 Casen survey along sex/age/schooling
categories, and an average wage was calculated for each cell. This method does not
impose a particular functional form, and it also has the advantage of implicitly weighting
17



the sample according to its composition (by other characteristics) within each cell.
Given the limitation imposed by sample sizes, it is not possible to estimate average wages
for single-age categories. A five-year interval was chosen in order to gain sample size
while keeping the age categories short, since estimated salaries for a range of years are
likely to overestimate starting-period contributions and underestimate end-period
contributions.
The resulting wage - experience profiles have a concave shape. That is, wages grow
faster at the earlier stage of most groups' careers, and growth slows down after age 40,
and often we see wages fall bellow the peak by age 60. Estimated gender wage
differentials by schooling and age are captured in Figure 2, and indicate that the
female/male wage ratio is in the .6 to .8 range in most cases. The notable exception is the
"5 or more years of schooling" category, where the differential is closer to .5. The wage
differential tends to grow with age, a feature that will have an impact on the savings
accumulation towards pensions.
Figure 2
Fem/Male Wage Ratios by age and
schooling
1.2
0                                              r
~  0.8
0.6
0)2
02                                           iincomple
20  25  30  35  40  45  50  55  60  65  13secondar
Age group                      0 4 psec
18



5.    Funds Accumulation and Gender-Differentiated Pensions
This section explores gender-differentiated accumulation of funds, pension benefits, and
replacement rates, based on simulations for representative workers. The impact of social
security reform (from a pay-as-you-go to a multi-pillar system) and of particular pay out
policies of a defined-contributions system will be calculated.
5.1    Gender differences in funds accumulation
We assume that workers in a given schooling and gender category contribute 10% of the
corresponding estimated wage, as required by law. The wage estimate for each age, in
turn, is assumed to be equal to the estimated value for the corresponding 5-age period. 13
For a given age, estimated annual months of contributions are equal to 12*(accumulated
contributions for the 5 years-period)/5. The accumulation of funds is the result of
compounding the estimated contributions at a various interest rates. According to our
estimates, women accumulate funds at a lower pace on average, and have wage profiles
that are flatter and typically bellow those of men.
The calculations presented in Table 7 show estimated life-time accumulation of funds for
men and women, by schooling. Estimates based on a 5% rate of return and a 2% wage
growth generate women's funds that are 36 to 52 percent of male funds. In addition,
calculations shown at the bottom of the Table decompose the overall difference in fund
accumulations, within each schooling category, in four steps. (1) Starting from that lower
level, if women postpone retirement to age 65, their funds accumulation would increase
between 10 and 15 points towards male funds accumulation depending on the schooling
group. This effect tends to be larger for more educated women because their work
intensity from 60 to 65 tends to be higher. (2) If women still work to age 60, but do so
with the same work intensity of men, their funds accumulation would increase between
19 and 1%, depending on the schooling group. The effect of this step shows significant
variation across schooling groups, because there is a significant variation in work
'3   In some simulations we add a secular growth to wages, simply increasing the estimated annual
wage by the corresponding growth effect.
19



intensity across these women groups. In fact, highly educated women work almost as
intensively as men of that same schooling group do. Therefore the effect of changing the
work pattern for this group of women is very small. (3) If, on the other hand, women
work to age 60, with their own work patterns, but are paid as men, their funds
accumulations would increase between 7 and 25% towards male funds accumulation,
depending on the schooling group. In this case, we see a pattern of effects characterized
by about 7% impact for the secondary and up to 4 years of post secondary groups, about
13% for the lower education groups, and above 25% for the higher schooling group. One
of the reasons for the relatively larger effect of wage increases for women in highest
schooling group is that this is precisely the group with the most labor market attachment.
Therefore, an increase in wage levels is weighted by a higher number than an increase in
wages of other women groups. (4) The last step represents the interaction of the first
three effects.
5.2   Estimated Future Pension Benefits (Urban Areas)
Given a large difference in accumulated funds, the estimated defined-contribution
pensions are expected to be lower for women than for men. In addition, the combination
of earlier retirement age and longer life expectancy, leads women to provide for 23 years
of income from their accumulated fund. Married men retire at 65, and must provide for a
joint annuity of 21 years. This joint annuity is composed of 15 years of own pension and
6 years of widow's pension, at 60% of own benefit. Single men retire at 65 and must
provide for their own 15 years annuity. Therefore, even if men and women started with
the same fund accumulation at their "normal" retirement age, a woman's annuity derived
exclusively from her accumulated funds, would be necessarily smaller than that of a man
derived from his accumulated fund.
To arrive to the annuities from the estimated fund, we assume that the typical man is
married with a woman that is three years younger.14 This typical man retires at age 65,
with a life expectancy of 15 years. His wife is expected to live 6 years beyond his
expected life therefore, he is required to provide for 6 years of his "survivor's pension,"
14    This is consistent with CASEN data.
20



at 60% of his own pension. Chilean law requires retiring married men to put aside funds
in order to cover a pension for his widow and surviving children in case of death.15 The
law does not require retiring married women to provide for their surviving husbands,
unless the husband is handicapped. In our calculations, we assume there are no surviving
minors, that men reserve part of their fund to provide for surviving wives, and that
women convert their entire fund to their annuity. If the resulting annuity is smaller than
the minimum pension guarantee (MPG), the estimated value is increased to the MPG.
Based on the calculated annuity, women's replacement ratios'6 are close to 60% of men's
replacement ratios. Note however, that gender differences in replacement rates are
smaller than the measured differences in the accumulated funds and the annuities. There
are three reasons for this:
(1) Several categories of women qualify for the MPG, which raises the annuity above the
level supported by own funds.
(2) Replacement ratios are calculated as the ratio of the monthly annuity over the
reference salary, which is the average tax base of the last ten calendar years of work
divided by 12. The reference period corresponds to 120 calendar months. To the
extent that the typical man or women would work less than 120 calendar months
during the reference period, the estimated reference salary is lower than the estimated
average wage for the same reference period. During the 10 years that precede the
minimum pensionable age, women have an average work accumulation that is
significantly lower than that of men. This causes the gender differential in reference
wages to be larger than the gender differential in wages.
(3) If the denominator in women's replacement ratio is relatively low, the resulting
replacement ratio for women is relatively high.
5.3    The issue of retirement age
Current information indicates that a significant fraction of men and women that have
reached retirement age, choose not to claim benefits. Thus, the retirement aae operates as
I The exact amount required to comply with this regulation is a matter of a private contract between the
retiree and an insurance company.
21



an option that individuals take when it is more convenient for them. If women stay in the
labor force beyond age 60, they can add to their fund accumulation and they are more
likely to qualify for the minimum pension on grounds of years of contributions. The
impact on annuities is positive on two grounds: the accumulated fund is larger, and the
number of years to be covered by the annuity is smaller.
Under our low returns' scenario, women with less than complete secondary schooling,
have no gains from delaying claims. The reason is that they will all qualify for the
minimum pension guarantee. On the other hand, women with complete secondary
schooling stand to increase their annuity by 10% if they postpone claims, and the effect
would be much larger for women with higher levels of schooling. Under the assumption
of high return, postponing claims increases the annuity in the order of 50% for all groups.
However, we do not know if an additional year of work past age 60 will increase or
reduce these women's welfare. The answer depends on individual preferences. We can
only say that the option to draw a pension early or late is a superior alternative to that of
an age requirement before claiming benefits or that of forced retirement at a given age.
5.4    The Impact of Reform
In this section pension estimates obtained for the current system are compared with the
corresponding pension incomes that would be obtained under the old system rules, 17
where retirement benefits were based on the following formula:
Monthly Retirement Benefit = 0 if the affiliate makes less than 10 years worth of
Contributions; or the maximum between
= .50 BS + .01*BS*(W - 500)/50, or
= .70* BS"8,
16    Replacement ratios divide the estimated annuity by the reference salary
17 Since rules varied according to the specific fund, we used the SSS rules. The SSS represented more than
60 percent of contributors in 1980.
18 The old system also offered a minimum pension guarantee.
22



With BS= basic salary = sum of total taxable wages of the prior five years, divided by
sixty, indexing the last three years, and
W = Total number of weeks of accumulated experience (above 520).
Men could retire at 65 and women at 60.19 Benefits included survivor's pensions
equivalent to 50% of the pension of the originator for the widow, and 20% of the mean
salary per child. Men typically work 40 years, and a man with 40 years of contributions
is very close to the maximum replacement rate of 70 percent. Therefore, men's pensions
and widow's pensions were generally capped.
Based on the rules of the two systems, it is apparent that women with more than 10 years
of contributions got a very good deal under the old system rules. They could retire 5
years earlier than men, receive a benefit based on their last five years of earnings, and
with a typical life time experience of 20 to 30 years, got a 60 percent replacement rate.
On the other hand, women with less than 10 years of contributions did not have any
incentive to participate in the system since they did not qualify for a pension benefit.
However, the rules of the old SSS (servicio de seguro social) system, which covered the
majority of the currently retired population, forced women to choose between retirement
income and pension. That is, if they were eligible for benefits from their own working
years, and were also eligible for a widow's pension, they could not access the two sets of
benefits, and had to choose the better of the two (see article 7- Law 10.383).
Under the rules of the new social security system, benefits are a function of the
accumulation of funds. There is no minimum contributions required to obtain a pension,
as there was in the old system, which required a minimum of 10 years. Contributions add
to the accumulated fund independently of the timing of labor force participation, and
independently of the periodicity of income-generating activities. Women that make
contributions early in their careers benefit from the interest accumulation associated to
those early contributions.
1 9    The retirement age for women was raised from 55 to 60 in 1979 as part of an effort to equilibrate
the old system.
23



The new system pays benefits as a function of contributions. This would tend to lower
some women's benefits, and raise the benefits of single men to the extent that they would
not be subject to a maximum benefit. On the other hand, the new system includes a
minimum pension guaranteed, which as shown, would raise the benefits for women with
low levels of schooling significantly above the actuarially fair levels. Moreover, married
men are required to provide for the funding of their spouse pension as a function of her
probability of survival, lowering the individual benefits of married men relative to single
men.
In Table 8 we provide estimates of social security related incomes for elderly men and
women in each of the schooling categories. To estimate widow's pensions, it is assumed
that married couples belong to the same schooling category. 20 The calculations highlight
the complex effects of the system's reform. In particular, it suggests systematic effects by
marital status and across schooling categories. The calculations presented at the bottom
of Table 8 assume full indexation. However, since the old system was not fully indexed,
the benefit estimates for the old system presented at the bottom of Table 8 represent an
upper bound. To give an idea of the degree of overestimation of these benefits, the
following calculation is of interest. If benefits are maintained at the nominal level shown
in Table 8, and there is a 10% annual inflation, in the absence of indexation real benefits
fall to less than 50% of their initial value after 10 years, less than 20% after 17 years, and
just over 10% after 23 years.
20) These estimates can be compared with those provided by Baeza and Burger (1995). Their estimates are
based on actual retirement cases. They use a sample of 4,064 individuals that have retired under the new
system. and estimate that the average replacement rate has amounted to 78%. The highest (relative)
pensions have been obtained by those individuals that have opted for early retirement, with a replacement
rate of 82% under programmed retirement. Baeza and Burger (1995) attribute this result to the fact that
only those that have had rapid accumulation of funds -- mostly by making voluntary contributions -- can in
reality opt for early retirement. To December of 1997 average old age pensions under the capitalization
system were 39% higher than average pensions under the old pay-as-you-go regime. In the case of
disability. pensions under the new system were 61% higher than under the previous regime. Overall,
replacement rates have been quite high - indeed higher than under most industrialized countries' systems
(see Davis (1998) and Gruber and Wise (1999)). Naturally, since the Chilean system is a defined-
contribution system. there are no assurances that the replacement rates observed until now will be
maintained in the future.
24



In addition, direct comparisons of benefits before and after the reform do not take into
account the degree of sustainability of the systems, and in particular, the fact that the old
system was unable to deliver the promised benefits under its formulas; and do not take
into account the fact that there was a significant reduction in contribution rates. In view
of these shortcomings, we continue the analysis comparing gender ratios of contributions
and benefits before and after the reform. Furthermore, the old system had a higher
contribution ratio that the new system. However, the contribution rate of the old system
had increased over time, making the actual estimate of contributions more difficult to
make.
Given the shortcomings of comparing dollar value of benefits across the two systems, we
move to a relative cost and benefits approach. Table 9 reports the gender ratio of
accumulated contributions and the gender ratio of the present value of benefits for
various categories of men and women. The first row in the top panel of Table 9 shows
that women with complete secondary schooling contribute 43% of the amount
contributed by a typical man in that same schooling category. The ratio of accumulated
contributions of women relative to men is always less than 1 and typically below 50
percent. A decomposition of the contributing factors towards this differential was
provided earlier (see Table 7), and include the fact that women retire at a younger age,
earn lower wages, and have a lesser degree of attachment to the labor force than men.
The first row in the second panel of Table 9 shows that, under the old system's rules,
working women in the secondary school category draw 82% of single men's benefits.
In the old system, there is no strict link between contributions and benefits and the
disparity between contribution ratios and benefits ratios by gender indicates a significant
pro women bias in the allocation of benefits. The pro women's bias is also regressive
since the gender ratio of benefits rises more than 30 points above the gender
contributions' ratio for women with secondary education. This compares with a
difference of less than 20 points between the ratio of contributions and the ratio of
benefits among women with less than secondary schooling.
25



The first row of the third panel of Table 9 shows that under the new system's rules, single
women draw 42% and married women 54% of the benefits that single men obtain.
In the new system, benefits for single men are calculated differently than for married men
because married men are required to make provisions for survivor's benefits. This is why
the ratio of benefits for married men relative to single men is less than one. Single
women are beneficiaries if they have made contributions, and married women are
beneficiaries if they are married to a contributor andlor if they have made contributions.
In the new system, there is a close link between contributions and benefits except for two
factors. The joint annuities provision requires a redistribution of benefits from husbands
to wives, and the minimum pension guarantee brings additional benefits from sources
outside the system to those that would otherwise draw pension below a minimum. As we
see in the bottom part of Table 9, single women's benefit ratios are just below their
corresponding contributions ratios2', except for the case of low schooling categories
where the MPG raises benefits significantly above contributions. Married women, on
the other hand obtain benefits ratios above their contribution ratios because they receive a
widow's pension. For the same reason, the ratio of benefits of married men to single
men, for a given ratio of contributions, is below 1.
A striking result from the benefit ratios presented in Table 9 is that, according to the old
system rules, all contributing women get better benefits ratios than their corresponding
contribution ratios. In addition, non-contributing married women get a benefit that does
not have a counterpart in reduced benefits for married men. There are only two ways to
have this result: either the system is in deficit, or aggregate benefits are below aggregate
contributions for the remaining contributors. This means that the old system contained a
significant labor tax component, a significant inflation tax component or both. In fact,
inflation and system's deficit were part of the picture at the time of reform, which bring
21 The difference between the ratio of contribution and the ratio of benefits in a system that is "defined
contributions" comes from the cost of annuities. In Chile, contributors pay a cost for transforming their
accumulated fund into an indexed annuity. This cost is assumed here to be higher for women because they
take their annuity through a longer period.
26



another difficulty in the direct comparison of benefits between the old and the new
system.
Another feature of the benefit's structure of the old system is that women married to high
wage men, receive a relatively larger unfounded benefit from the system than women
married to low wage men. This adds a regressive dimension to the old system biases,
where contributors in general finance widow's pensions, which are more generous for
widows that were married to high wage earners.
The old system appears to have a significant bias in favor of women, particularly, married
non-contributor women. However, inflation reduced the real value of benefits relative to
contributions for all groups. Did the gender bias remain? The answer is an empirical
one. However, we can say that the real gender bias was smaller than the nominal one.
The reason is that the system was characterized by a notorious absence of indexation
protections. This introduces a negative gender bias because women have longer life
expectancies and stand to loose a larger proportion of their pension benefits via inflation
tax. The new system reversed the regressive nature of the gender bias, as it forced each
married man to make provisions for his own widow. In addition, it removed the bias
against single men, whose funds do not help finance widow's pensions any longer.
6.    Summary and Conclusions
The Chilean pension reform benefited contributors on three fronts: it reduced
contributions; it established indexation of benefits; and made the system sustainable as it
tied benefits directly to contributions. The reform established a distributive pillar funded
directly from the government budget. All these elements reinforce the effect of reducing
the tax on labor, generally encouraging labor force participation and employment. At the
same time, the direct link of contributions to benefits required the elimination of cross
subsidies within the system, a source of complex effects on the relative position of
women.
27



The analysis reported in this paper shows that Chile's social security reform brought
about significant chang,es in women's incentives to participate in the labor market, to
save, and to use the social security system as a channel for their savings. First, under the
new system there is no minimum level of contributions to obtain a pension, while in the
old system contributors with less than 10 years of contributions could not get a pension
benefit. Second, the new system guarantees a minimum pension for those that have
contributed a minimum of 20 years. In the old system, the guaranteed rminimum was
available to whoever had contributed a minimum of 10 years. These two changes hurt
women with 10 to 20 years of contributions who would have qualified for the old
minimum pension and would not qualify for the new minimum, but generally encourage
women to work and contribute. Third, the new system requires married men to build a
joint annuity leading to a within-family distribution towards women. In addition, the new
system allows widows to keep their own pension benefits in addition to their widow's
pension, restoring the marginal benefit of own contributions for working women. Fourth,
the reform gives an increased weight to early years of contributions via compound
interest, instead of the heavy weight given to the last five years in determining the
pensionable wage under the old system. This change favors women relative to men
because women are more likely to hold paid jobs when young and later drop out of the
labor force. Moreover, even if women maintain a significant attachment to the labor
force, they tend to have flatter age-earnings profiles relative to men.
Overall, the new system is more fiscally sustainable and creates an incentive for greater
labor force participation. Which system is preferable? If one thinks of labor market
behavior as immutable and women's place as in the home, some method of subsidizing
women in old age may be necessary. But, given the distortions introduced by subsidies,
it may be more desirable to target public subsidies toward low-earning women, rather
than toward the middle-class women who are most likely to work for pay 10 to 20 years.
Middle class women can be protected by survivor's benefits and joint annuities financed
by their spouses, as in the new system. Moreover, if one views the role of women as
changing and responding to incentives, the new structure is more appropriate way to
provide a social safety net while encouraging work and discouraging dependency.
28



But the new system also contains its own equity-efficiency trade-offs, particularly with
respect to women. The MPG mainly benefits women, given their low rates of pay and
limited years of contributions. This study focuses on the work patterns of women
affiliates, a subsample of women with a relatively higher attachment to the labor force.
In this group, the typical woman now works around 20 years. Clearly, the new rules will
encourage everyone in this group to work to accumulate 20 years of paid work to qualify
for the guarantee. The guarantee is targeted toward low earners rather than middle class
women. However, once low-earning women (i.e. women without substantial post-
secondary education) qualify for the MPG, they get little if any additional benefit for
incremental years of contributions. In effect, they are subject to a heavy implicit marginal
tax rate on their labor. The MPG effectively becomes a ceiling as well as a floor. Thus,
the new policy is well designed to keep working women out of poverty in their old age,
given their current labor market behavior, but it also maintains that behavior, with
transitory labor market attachment, for women with limnited education. While this may be
an improvement over the previous policy, Chile may wish to re-evaluate this guarantee,
and tie it more continuously to years of contributions, in order to provide a safety net
with still more positive incentive effects.
The new system removed three biases that were associated to the funding of survivor's
pensions. In the defined contributions Chilean system, survivor's pensions are funded
directly by contributors. This is in contrast to the traditional pay-as-you- go design,
where survivor's pensions are funded from the general system funds. Thus, in the
traditional system when a rich old man married a young woman a few years before
retiring, he would draw a generous pension until his death and bequeath her widow a
generous pension funded from all contributors in the system. In contrast, in the new
system, the old man would draw a lesser pension so that the remaining fund after his
death would fund a proportional pension for his young widow, who is expected to live
many years. Therefore, the new system removed the bias that favored married men (who
did not have to make provisions for their widows' pensions), and the bias in favor of
widows from rich men who obtained a relatively generous pension financed from all
29



contributors. In addition, according to the rules that apply to the majority of
beneficiaries of the old system, if a widow has her own benefits, corresponding to her
own labor force participation, she has to choose between those and her widow's pension.
In contrast, own pension and survivor's pensions are complementary in the new system.
Thus, the reform eliminated a bias against married - working women.
Current evidence from the living arrangements and poverty levels of the elderly indicate
that elderly females rely heavily on extended household arrangements, and that they
typically contribute with incomes below that of the per capita income of the nuclear
family with which they live. Projecting the expected population aging to the future with
the same living arrangements would imply a threefold increase in the fraction of extended
households living with elderly individuals. This is unlikely to happen. Instead, the
incentives to work and save built in the new social security system rules are likely to help
the current generation prepare for a self-sustained living in old age.
The aging of the female population presents a more difficult social challenge in Chile not
just because working women accumulate less funds and live longer, but because a
significant fraction of women do not save on their own. The fact that women have a
lower attachment to the labor force is naturally explained by traditional patterns of
division of labor within households. These choices are protected within the new social
security system's rules, by a mandated redistribution of savings from husbands to wives.
However, in Chile there is a striking gender difference in labor force participation. In
1994, 91% of the 15 and above male population had been in the labor force, and only
70% of the female population in the same age category had done so.
Women that never enter the labor force are in a more vulnerable position in old age, and
this vulnerability is likely to expand with aging. The fact that the social security reform
improved women's incentives to work for pay, offers hopes for changes in behavior that
would reduce women's risk of poverty in old age.
30



References
Baeza Valdes, Sergio, and Raul Burger Torres. 1995. Calidad de las pensiones del
sistema privado chileno. In Quince anios despu6s: Una mirada al sistema privado de
pensiones, edited by S. Baeza and F. Margozzini. Santiago: Centro de Estudios Publicos.
Baeza Valdes, Sergio and Rodrigo Manubens (eds) (1988) Sistema Privado de Pensiones
en Chile. Santiago: Centro de Estudios Piblicos
Barrientos, Armando (1998): "Pension Reforrn, Personal Pensions and Gender
Differences in Pension Coverage" World Development 26 #1 pp.125-37.
Cepal (1998) America Latina: Proyecciones de Poblaci6n 1970-2050. Boletin
Demografico # 62 Julio
Cheyre, Hernan (1991) La Prevision en Chile Ayer y Hoy: Impacto de una Reforma
Santiago :Centro de Estudios PuIblicos.
Davis, E. P.1998. ""Pensions in the Corporate Sector", in Redesigning Social Securitv,
H. Siebert (Ed.)
Diamond, Peter and Salvador Valdes-Prieto (1994): "Social Security Reforms," in The
Chilean Economy: Policy Lessons and Challenges, edited by B. Bosworth, R. Dornbusch,
and R. Laban. Washington DC: Brookings.
Edwards, Alejandra Cox (2000) "A Close look at living standards of Chilean elderly men
and women," -manuscript. August.
Edwards, Alejandra Cox (2000): " Pension Projections for Chilean Men and Women:
Estimates from Social Security Contributions." -- manuscript August.
Edwards, Gonzalo (1997) "Introducci6n al andlisis de las rentas vitalicias," Trabajo
Docente # 58, Instituto de Econornia U. Catolica.
Gruber J. and D. A. Wise, (Eds) 1999. Social Security and Retirement around the World,
University of Chicago Press.
Iglesias, A., Rodrigo Acufia. and Claudio Chamorro (1990) IOAiios de Historia del
Sistema de AFP: Antecedentes Estadisticos. Santago: Habitat.
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Plans in Chile, Working Paper 867, The World Bank.
INP Estadisticas (December, 1998) : Divisi6n de Pago de Beneficios
31



James, Estelle & Dimitri Vittas (1999): "Annuities Markets in Comparative Perspective:
Do Consumers Get Their Money's Worth?" The World Bank (September) Paper
presented at New Ideas About Old Age Security Conference - World Bank, Washington
DC.
Murphy, Kevin and Finis Welch (1990) "Empirical Age-Earnings Profiles," Journal of
Labor Economics, vol 8 #2 pp 202-229.
Superintendencia de Administradora de Fondos de Pensiones Boletin Estadistico (various
issues)
Torche, Arfstides and Gert Wagner (1997) Previsi6n Social : Valoraci6n Individual de un
beneficio mandatado," Cuadernos de Economia 34, # 103 pp.363-390.
Valdes Prieto, Salvador (1997) Seguros en los Sistemas de Pensiones. Instituto de
Estudios Bancarios Guillermo Subercasaux. Serie de Estudios Financieros #3.
Valdes Prieto, Salvador and Eduardo Navarro Beltran (1992) "Subsidios Cruzados en el
Seguro de Invalidez y Sobrevivencia del Nuevo Sistema Previsional Chileno" Cuadernos
de Economia 29, #88, pp. 409-41. December.
Valdes Prieto, Salvador, and Gonzalo Edwards (1998) "Jubilaci6n en Sistemas de
Pensiones Privados," El Trimestre Econ6mico. March.
Wagner, Gert (1983) "Estudio de la Reforma Previsional: Previsi6n y Reforma, efectos
en la industria y en el pais." Universidad Cat6lica. Instituto de Economfa (Mayo).
Wagner, Gert. (1991). "La seguridad social y el programa de pensi6n minima
garantizada." Estudios de Economfa, Vol. 18, No. 1 (June): 35-91. Santiago: Universidad
Cat6lica de Chile.
World Bank (1997): "Poverty and Income Distribution Dynamics in a High Growth
Economy: The Case of Chile, 1987-94."
Zurita, Salvador. (1994). "Minimum pension insurance in the Chilean pension system."
Revista de AnAlisis Econ6mico, Vol 9. N° 1. (June): 105-126. Santiago: ILADES.
32



TABLE 1: In what types of families do elderly men and women live?
URBAN
Unipersonal    Nuclear         Nuclear/adult   Extended
Male elderly    7.16           37.23            12.81          42.81
Female elderly  13.05          21.62           12.83           52.50
RURAL
Unipersonal    Nuclear         Nuclear/adult   Extended
Male elderly    9.60           36.56           12.10           41.74
Female elderly  9.79           26.45           13.90           49.85
33



TABLE 2: HOUSEHOLD POVERTY RATES
Poverty line = $30,100 pesos pc per month
(using adult equivalence scales)
by gender of elderly household members
URBAN AREAS
# of elderly   Deaton    OECD        Cutler      Chile       Income per
in household  equivalency  equivalency  equivalency  equivalency  capita
scale      scale                    scale
None        16.0         10.1        23.8        19.8        28.9
1         10.7         6.1         25.3        12.3        17.2
2          9.7         3.5         29.8         9.2        13.5
3          5.1         2.4         30.3         4.0        6.8
4          2.0         0.0         42.6         2.0         2.0
5          0.0         0.0         69.7         0.0         0.0
Total       14.3         8.6         24.7        17.2        25.0
RURAL AREAS
# of elderly   Deaton    OECD        Cutler      Chile       Income per
in household  equivalency  equivalency  equivalency  equivalency  capita
scale      scale                    scale
None        36.3         23.6        49.8        42.2        56.6
1         29.2         17.1        52.3        31.6        38.1
2          24.6        9.8         57.4        22.8        31.4
3          20.2        4.6         55.0        18.9        23.6
4          15.1        12.2        35.8        15.1        15.1
5       l                                                   ___l_l__  _
Total       33.3         20.5        51.2        37.5        49.5
34



TABLE 3: Proportion of INDIVIDUALS below the poverty line
($30,100 pesos pc) by age and gender
(using adult equivalence scales to calculate per capita income)
URBAN AREAS
age group    Deaton      OECD         Cutler       Chile         Income
equivalency  equivalency  equivalency  equivalency   per capita
scale        scale       scale        scale
Males 0 -17    20.4          13.5         35.1         26.3        40.2
Fem 0 -17      20.0         13.2         34.2         26.0        40.0
Males 18-59     14.3          7.5         21.7         16.1        24.6
Fem 18-59      15.3          8.5         23.4          17.5        26.6
Males 60+      9.5           3.8         25.9          9.6         14.4
Fem 60+       10.5          5.5         29.0          11.3        15.6
RURAL AREAS
# of elderly   Deaton     OECD        Cutler       Chile         Income
in          equivalency  equivalency  equivalency  equivalency   per capita
household   scale         scale       scale        scale
Males 0 -17     42.7         29.2         63.2         50.9        69.5
Fem 0 -17      43.4         30.4         64.1         52.1        70.6
Males 18-59     34.1         18.6         47.8         36.6        50.9
Fem 18-59      38.0         21.4         52.6         41.4         55.8
Males 60+      26.6         13.1         52.9         26.4         34.1
Fem 60+       44.1         33.6         49.5          44.4        47.4
35



TABLE 4: Proportion of elderly population below the poverty line
($30,100 pesos p.c.) by living arrangement
Living          Deaton       OECD         Cutler       Chile        Income per
arrangements    equivalency   equivalency   equivalency   equivalency   capita
scale       scale                      scale
URBAN
Male elderly   .
Uniperson        6.6           6.6         28.5          9.1         6.6
Nuclear         7.5          2.3          22.9          7.6         8.7
Nuclear/adult     8.0           3.4          17.2         7.0          8.7
Extended        12.3          4.8          30.8         12.3         22.2
Female elderly
Uniperson        7.7           7.7         30.2          9.8         7.7
Nuclear         6.8           1.9         25.6          6.7         7.3
Nuclear/adult     9.4           3.7          21.9         8.3          0.1
Extended        12.9          7.0          31.9         14.2         22.4
Non- elderly*
Uniperson        7.7          7.8           7.7          9.1         7.8
Nuclear         15.1          8.8         22.0         18.4         26.6
Nuclear/adult     8.7           3.1          14.4         7.3          9.8
Extended        16.3          7.7          26.8         17.1        28.5
RURAL           _            __ _ _
Male elderly      ___
Uniperson       22.0          22.0         48.6         24.1         22.0
Nuclear        21.9          11.5         46.6         21.3         24.7
Nuclear/adult     25.8          7.1         45.9          22.3        25.6
Extended        32.0          14.1         61.4         32.6        47.4
Female elderly
Uniperson        19.8         19.8         62.9         26.7         19.8
Nuclear         19.7         9.4          48.9         18.5         20.9
Nuclear/adult     29.7          9.6         53.6          26.8        30.0
Extended        30.5          14.5         61.0         31.7        45.3
Non- elderly *
Uniperson        12.5         12.5         12.5         14.7         12.5
Nuclear        36.3          23.2         49.4         41.9         55.7
Nuclear/adult     26.6          9.1         38.7          25.1        28.8
Extended        39.5          17.7         57.6         39.8        57.6
* above 16 years of age
36



Table 5: Individual income sources of the elderly, and contribution to
total household income. 1994 pesos/month
URBAN
Elderlv women                   Elderly men
% with  Average   Share of    % with  Average   Share of
income  amount   total        income  amount   total
source I (of those   household  source  (of those   household
with      income (of          with       income (of
income    those with          income    those with
source)    income              source)    income
source)                       source)
Salaried work      11.2    93,962        26.6    37.8   153,204         35.3
Inputed rent(a)    37.7    31,007         17.6    72.2    36,107         12.9
Own pensions       59.7    71,859        35.7    70.1    124,703        43.7
Old age   *     30.9    78,413        36.2      62    133,160        44.7
Dissability *    4.5    48,363        32.0      5.6    64,233        39.8
Survivor's *    19.4    77,206        36.8      1.2   125,943        48.5
(PASIS)   *      6.2    15,139        18.6      3.2    15,835        19.1
Total Income       73.5   108,161        47.2    97.9   226,814         62.1
* included in the own pensions calculation
RURAL
Elderly women                   Elderly men
Salaried work       6.1    70,003        27.0    41.4    92,102         31.0
Inputed rent (a)   32.2    13,775         13.0    64.6    18,795         10.8
Own pensions       60.2    36,515        31.3    64.9    59,085         40.4
Old age   *     18.8    55,193        37.3    46.2    70,028         43.6
Dissability *    6.9    32,304        31.5      7.5    46,418        35.4
Survivor's *    14.5    40,754        37.4      0.8    50,751        36.7
(PASIS)  *      23.3    14,912        18.2    14.2    15,001         22.3
Total Income       74.2    56,045        43.0    97.6   134,606         64.2
* included in the own pensions calculation
(a) from owner-occupied housing
37



Table 6: Elderly males raise the extended household pc income,
elderly females tend to lower it.
Urban areas
Elderlv males              Elderly Females
Effect on the          Houshls.   Average            Houshls.  Average
extended household           in      change in            in    change in
per capita income    100   Poverty  income per   100   Poverty   income
(YN-Yna)                           capita                    per capita
Increase      85.0    12.9        32,376    44.3    19.4      18,917
Reduce        15.0     9.1       -14,054    55.7    9.9      -24,814
Rural areas
l__________  Elderly males          Elderly Fe ales
Effect on the          Houshls.   Average            Houshls.  Average
extended household           in      change in            in    change in
per capita income    100    Poverty  income per   100   Poverty   income
(YN-Yna)                           capita                    p er capita
Increase      84.3    33.2       20,214     41.9    43.1      12,156
Reduce      l 15.7    29.4       -11,198    58.1    22.9    -13,060
YN= Household Income/Household Members
Note: Nominal figure refer to monthly incomes.
38



Table 7: Gender differences in fund accumulation and their components.
(Estimated fund assumes 5% return and 2% secular growth in wages)
Incomplete    Incomplete    Secondary    Up to 4years  more than 4
Primary          Secondary                         Post Sec        years Psec
Women at 60 assuming                  $5,611,611    $7,831,774  $13,808,015  $22,801,463   $41,918,370
female work pattems
Women at 65 assuming                  $7,329,864  $10,016,482  $17,716,552  $29,215,282                    54,947,302
female work Patterns                                 _       __                  ___                            _
Women at 60 assuming                  $8,503,6171  $11,611,013  $18,700,506  $25,314,871    $43,017,496
men's working patternsl
Women at 60 assuming                  $7,600,612j $10,624,350  $16,143,792  $25,971,681    $67,483,964
same wages as men                                                                    II
Men at 65                           $1 ~5,578,851   $21,962,848  $32,354,342  $43,970,743  $100,470,055
Three steps to eliminate the gender difference in fund accumulation
Women's fund at 60/Men's                  36.02%           35.66%           42.68%           51.86%            41.72%
fund at age 65l
(1) Effect of raising                     11.03%            9.95%           12.08%           14.59%            12.97%
retirement age/Men's fund at
age 65
(2) Effect of increasing work             18.56%           17.21%           15.12%            5.72%              1.09%
experience/Men's fund at 65
(3) Effect of eliminating                 12.77%           12.72%            7.22%            7.21%            25.45%
wage differentials/Men's
fund at 65
(4) Effect of the interaction             21.62%           24.47%           22.90%           20.63%            18.77%
of the various changes
Initial ratio                            100.00%          100.00%          100.00%          100.00%           100.00%
+ (1) + (2) + (3) + (4)
Note:
To calculate the effect of step (1) we assumed women continued to work and contributed according to the average expenence accumulation and wages for
women between the ages of 61 and 65.
To calculate the effect of step (2) we assumed that women worked as men but continued to cam the same salaries. and retired atage 60 (from Table 9).
To calculate the effect of step (3) we used female work pattems. but assumed that women were paid as men.
The sum of these three separate effects does not fullv make up for the differences in fund accumulation between men and women. The reason is that there
are important interaction effects. For example. if women are paid as men and also work as men, the wage differential effect is higher than if the wage
differential effect is valued assuming female work pattems. Therefore. the unexplained difference represents interaction effects of having the three changes
take place. We report this difference as a one step because the values of partial interaction depend on the order in which these are applied.
39



Table 8: Estimated Retirement Incomes under the new and old systems.
Urban contributors. 1994 pesos/month
(5% return on funds and 2% secular wage growth)
MARRIED MALES RETIRING AT 65
Incomplete  Incomplete  Secondary  up to 4years More than 4
Primary    Secondary               of post-    years of post
isecondary  secondary
NEW SYSTEM         $107,219   $151,1551  $222,6731   $302,618,  $691,467
OLD SYSTEM*          $86,775   $136,7761  $214,990   $335,491'  $764,117
FEMALES
Incomplete Incomplete  Secondary  up to 4      More than 4
Primary    Secondary               years of   lyears of post
post-      secondary
Isecondary
NEW SYSTEM
Own pension         $37,738;    $43,302     $76,346   $126,071    $231,770
adjusted for MPG
Age 60-77**                  _
Widow's pension     $64,3311    $90,693   $133,604   $181,5711   $414,880
Age 78-83       1          l                             __
Own + Widow's***    $64,331    $133,995    $209,9501   $307,642   $646,650
Age 78-83                                ____       i_
OLD SYSTEM
Own pension         $28,508      $48,661    $116,798   $185,780   $333,517
working women
Age 60-77****
Widow's pension     $43,388      $68,388   $107,495   $167,746   $382,059
Age 78-83
Own OR Widow's    $43,3881    $68,388,  $116,798'  $185,780   $382,059
Age 78-83
The calculation of benefits under the old system's rule is based on the concept of "basic salary,"
or the average amount earned during the 10 years preceding pension benefits.
* These benefits are at the maximum (.7 of the basic salary)
The estimated annuity for the typical female in the lowest schooling categories falls below the
minimum pension. The estimated income is replaced by the minimum pension ($37,738).
*- Since the widow's pension is significantly above the minimum pension, it is assumed that the
beneficiary would stop receiving the minimum pension (and her own funds would be exhausted).
**** Estimated monthly income under the old SSS system starts at age 60
**-**Old system benefits for women in the two upper schooling groups are at the maximum.
Benefits are very close to the maximum for the lower schooling categories.
40



Table 9: Gender Differences in Contributions and Benefits by:
Schooling, Marital Status, and System
(System Generates 5% return - with 2% secular growth in wages)
Ratio of Accumulated Contributions
Incomplete Incomplete Secondary up to   QMore than
Primary    Secondary             4years of  14 years of
post-      post
|secondary  secondary
Women / Men            0.36       0.36       0.43       0.52        0.42
Married Men/           1.00       1.00       1.00;       1.00       1.00
Single Men
Ratio of Present Value of Benefits
IncompleteAIncomplete Secondary !up to 4    !More than
Primary   Secondary             'years of   4 years of
post-     post
Isecondary  seconday
OLD SYSTEM
Single women/         0.50M       0.54       0.82       0.84        0.66
Single men
Married women/        0.56        0.59       0.821      0.84        0.68
Single men
Non working           6 0.19.     0.19!      0.19       0.19        0.19
married women/
Single men
Married men /         1.00        1.00       1.00       1.00       1.00
Single men                            I
NEW SYSTEM
Single women/         0.43        0.35       0.42       0.51        0.41
Single men
Married women!        0.48        0.47       0.54       0.63        0.53
Single men                                                 -
Non working           0.12        0.12       0.12       0.12~    0.12
married women/
Single men
Married men /         0.93       0.93        0.93       0.93       0.93
Single men 
Source: Author estimates. Calculation assumes women retire at 60 and men retire at 65.
The ca]culations apply to urban contributors
41






Policy Research Report on Gender and Development Working Paper Series
No. I  Gender Inequality, Income, and Growth: Are Good Times Good for Women? David Dollar and
Roberta Gatti. May 1999.
No. 2   Intrahousehold Allocation and Gender Relations: New Empirical Evidence. Agnes R. Quisumbing
and John A. Maluccio. October 1999.
No. 3   Gender and Preferences for Malaria Prevention in Tigray, Ethiopia. Julian A. Lampietti, Christine
Poiulos, Maureen L. Cropper, Haile Mitiku, and Dale Whittington. October 1999.
No. 4   Are Women Really the "Fairer" Sex? Corruption and Women in Government. David Dollar,
Raymond Fisman and Roberta Gatti. October 1999. Also forthcoming in Journal of Economic
Behavior and Organization 2000.
No. 5  The Structure of Social Disparities in Education: Gender and Wealth. Deon Filmer. November
1999.
No. 6   Protecting Women and Promoting Equality in the Labor Market: Theory and Evidence. Yana van
der Meulen Rodgers. November 1999.
No. 7   Does Gender Inequality Reduce Growth and Development? Evidence from Cross-Country
Regressions. Stephan Klasen. November 1999.
No. 8   Gender Earnings Differentials: The European Experience. Patricia Rice. November 1999.
No. 9   Towards a Feminist Politics? The Indian Women's Movement in Historical Perspective. Samita
Sen. April 2000.
No. 10 Effects of Child Care Prices on Women's Labor Force Participation in Russia. Michael M.
Lokshin. April 2000.
No. 11  Consumption Expenditure and Female Poverty: A Review of the Evidence. Julian A. Lampietti
and Linda Stalker. April 2000.
No. 12 The Gender Imbalances in the Export Oriented Garment Industry in Bangladesh. Pratima Paul-
Majumder and Anwara Begum. June 2000.
No. 13 The Intra-household Allocation of Time and Tasks: What Have We Learnt from the Empirical
Literature? Nadeem Ilahi. June 2000.
No. 14 Changing Gender Relations in Vietnam's Post Doi Moi Era. Lynellyn D. Long, Le Ngoc Hung,
Allison Truitt, Le Thi Phuong Mai, and Dang Nguyen Anh. June 2000.
No. 15 The Effect of Early Childhood Development Programs on Women's Labor Force Participation and
Older Children's Schooling in Kenya. Michael M. Lokshin, Elena Glinskaya and Marito Garcia.
July 2000.
No. 16  State Policies and Women's Autonomy in China, The Republic of Korea, and India 1950-2000:
Lessons from Contrasting Experiences. Monica Das Gupta, Suhwa Lee, Patricia Uberoi, Danning
Wang, Lihong Wang and Xiaodan Zhang. December 2000.
No. 17 Social Security Reform and Women's Pensions. Alejandra Cox-Edwards. February 2001.