Regulating the Selection of Products under Investment Accounts Pension System: A Study of the Chilean Experience

点击翻译按钮获取中文摘要

This award is funded under the American Recovery and Reinvestment Act of 2009 (Public Law 111-5).Many pay-as-you-go social security systems in the United States and Europe face impeding insolvency as the number of pensioners per worker rises. Among the possible reforms being considered is transiting to fully funded privatized accounts system. Chile was the first country to switch from a pay-as-you-go system to a fully funded private retirement accounts system in 1980. Chile's pension system has served as a prototype for pension reform in many Latin American countries, most recently in Mexico. U.S. and European policy makers are also looking with keen interest at the Chilean experience. This project investigates the choice of product and subsequent pricing in an oligopolistic pension investment industry under regulatory constraints on fund performance. Specifically, we develop and estimate an equilibrium model of consumer pension fund choices and of firm product and pricing choices. The pension investment industry exposes consumers to market risk. The government plays the role of a guarantor of last resort, supplementing pension accumulations that are insufficient either due to low income or unfavorable returns. Risky pension investments can therefore lead to a high level of government obligations. Additionally, the government guarantee may induce risk seeking behavior in low income individuals, and a competitive industry would likely over risky investment portfolios to meet this demand. The selection of investment products that firms offer to the market is therefore an important factor in the overall success of a privatized pension system. The Chilean government addresses this problem by regulating returns in a way that shifts the risk from consumers to money managers. We use our estimated model of decision-making by consumers and by pension fund companies (i) to investigate the effectiveness of the existing Chilean regulation in limiting risk in the system, (ii) to compare the current system to alternative forms of regulation, (iii) to investigate the socially optimal choice of pension products and (iv) to explore the effects of competition on the investment products offered on fee structures. Our focus is on Chile, but the results of this study should be of a more general interest. Pension reform proposals in the US and in Europe assume that the government supplements pension income in the case of insufficient accumulations. Therefore, these countries may face similar concerns about the selection of investment portfolios available to consumers through the pension system.Broader Impacts: The proposed research agenda will enhance the understanding of product choice and pricing decisions in the markets with differentiated products. It will also inform on the effects of alternative kinds of regulatory restrictions on firm decisions and on consumer welfare. For example, regulation that was designed to limit risk in the pension market can actually have the unintended consequences of increasing risk-taking by firms. The modeling framework proposed can also be extended to investigate the impact of the moral hazard on product selection as well as non-linear pricing in the market without adverse selection. This research fosters the understanding of the complex issues involved in design and operation of a fully funded pension system. It also contributes to the assessment of the viability of fully funded systems as a possible alternative to pay-as you go system currently in place. In addition, the project has broader impacts on teaching and training. Graduate students will participate in the data analysis. The results from this research will be widely disseminated through seminars, conferences and publications and the authors expect to include results from this research in their undergraduate and graduate course material.