Instituto de Economía

Abstract: In Chile, more than 60% of eligible retirees voluntarily purchase annuities from the private market. Chile’s annuity market differs from the US in two important ways: first, retirees who don’t purchase annuity must take a programmed withdrawal of their retirement savings under the rules of Chile’s privatized social security system, and second, retirees shop for annuities through a government-run exchange that lowers search costsand allows highly personalized pricing. We use a novel administrative dataset on all annuity offers made toChilean retirees between 2004 and 2013 to investigate the role of regulation in creating a successful annuity market in Chile. To do so,we build a life cycle consumption-savings model and show through calibrations that the Chilean setting is likely to have lower welfare loss from adverse selection and is more robust to market unraveling than the US. We then present a flexible demand model that aims to identify unobservable consumer types, and use the estimates from this model to simulate how the Chilean equilibrium would shift under alternative regulatory regimes and to compare retiree welfare across the systems. Preliminary results show that reforming the Chilean system to more closely resemble the US social security system would likely make the annuity market fully unravel.