Date of Award
Croft Institute for International Studies
In 1981, Chile was the first country in the world to implement a privatized elderly social security system: the Administradoras de Fondos de Pensiones (AFP). The system's creators argued that the forces of market competition would improve pension amounts and that the AFP would promote nation-wide equality in the pension systemâ€”the former pension system was not one system, but a collection of pension systems that were highly stratified by class. In 2017, pension payouts have not met expectations, and the AFP is one of the most salient and contentious issues in Chilean politics. The overarching objective of this thesis is to add to the scholarly discussion of the ability of the AFPâ€”and privatized systems more generallyâ€”to provide social protection to the elderly. This thesis tries to illuminate how market competitiveness in the AFP affects individuals in Chile, especially those of lower incomes. To that end, I use the Herfindahl-Hirschman Index (HHI) to measure market concentration within the AFP at the regional level and the level of different income tax brackets. Market concentration can be measured empirically and used to assess the level of market competitiveness, which is a normative judgement. I argue that competition in the AFP is most vigorous in wealthy regions and for wealthy Chileans. I further argue that both high competition and low competition are self- reinforcing. As a result of these findings, I make the policy recommendations of improving financial literacy & knowledge of the pension system and of expanding licitación, the auction mechanism in which AFPs bid for new affiliates by offering the lowest commissions, to improve competition. I conclude that the most important contribution of my thesis is that I show that the class segmentation of the old Chilean pension system, which the AFP supposedly eliminated, is still present.
Mahoney, William, "Market Competition and Individual Security in the Chilean Pension System" (2017). Honors Theses. 953.