Minimun Pension Insurance in the Chilean Pension System Minimun Pension Insurance in the Chilean Pension System

One of the "social" features of the Chilean individual capitalization pension system is the minimum pension scheme. which guarantees its members a minimum pension irrespective of the funds they accumulate, with the only requirement of twenty years of social security tax payments. The purpose of this paper is to estimate the implicit fiscal subsidy, using an option-based approach. We capture the risk associated to the returns on the pension fund account of a worker by modeling its value as a diffusion process and show the correspondence between the minimum pension insurance and a financial put option. Our results are the present value of the minimum pension benefit, equivalent to 3 percent of Chilean GDP for current active and non-active affiliated workers. These estimates are notoriously higher than previous results based on deterministic models, and strongly suggest the importance of explicitly considering the risk associated to pension assets when estimating the cost to the government of the insurance implied by the minimum pension benefit. One of the "social" features of the Chilean individual capitalization pension system is the minimum pension scheme. which guarantees its members a minimum pension irrespective of the funds they accumulate, with the only requirement of twenty years of social security tax payments. The purpose of this paper is to estimate the implicit fiscal subsidy, using an option-based approach. We capture the risk associated to the returns on the pension fund account of a worker by modeling its value as a diffusion process and show the correspondence between the minimum pension insurance and a financial put option. Our results are the present value of the minimum pension benefit, equivalent to 3 percent of Chilean GDP for current active and non-active affiliated workers. These estimates are notoriously higher than previous results based on deterministic models, and strongly suggest the importance of explicitly considering the risk associated to pension assets when estimating the cost to the government of the insurance implied by the minimum pension benefit.