A New Contributory Pension Model – Evidence from Chile

We develop a model of individual account (ia) pension systems that considers the wage distribution of the economy and models the density of contributions or so-called “lagunas” (gaps) as a function of wage inequality. people with lower wages are forced to work in the informal market where they do not contribute to their individual pension accounts. this model allows us to find the entire distribution of pensions; with the possibility to evaluate the effects of policies on average pensions as well as changes in distribution. we applied the model to the chilean pension system and found that for workers who have contributed less than 18 years an increase in contribution rates has a greater effect than an increase in the interest rate. the people most affected by labor informality benefit more from a marginal increase in the contribution rate than from a marginal increase in the interest rate. along the same lines, we find that the marginal effect of increasing the contribution rate is greater than the marginal effect of increasing the retirement age. from our study, we find a recommendable policy due to its positive effects in increasing the level of pensions as well as reducing the level of inequality in the contribution rate in the account of each individual at the time of birth.