15 January, 2013

Individual unemployment accounts in Chile

The best part of the Chilean unemployment insurance system is how its individual-linked personal accounts clearly highlights the incentive to work for all, and it does so in a way that those who earn least still find advantageous.

Reforms to the system in 2002 increased coverage from barely a third of all those in work, to now include a huge majority of the workforce – while joining is mandatory for those joining the workforce after the reforms, it is voluntary for all who started employment prior to the change, of whom many have joined. Chile was the first in the world with individual unemployment accounts and has the longest experience with this system.

Funding for the insurance relies on three sources of contribution. The individual pays 0.6% of their own wages into a personal unemployment account (for a maximum of 11 years per employment). The employer pays an additional 1.6% of the individual’s wages into the same account and another 0.8% to a general fund. The national government adds USD 12 million annually to the general fund.

When the individual becomes unemployed, the insurance program pays out from their account – on the condition they’ve made at least 12 consecutive monthly payments into the account. All causes of unemployment are accepted when the individual requests payment from their own account, including voluntary termination or discharge. The amount of each insurance payment decreases over the period of unemployment, and is also dependent on the length of previous employment and total payments into the insurance account. But the payment period is limited to only five months.

Those with insufficient funds in their individual account (for any reason) can receive payments from the general fund only after emptying their personal account. Payments from the general fund are further conditioned on the individual actively seeking work, and they cannot decline any job offer paying at least 50% of their previous wages. Payment from the general fund is also available only to those who lost their jobs involuntarily (and not terminated for cause). In this situation, the individual is entitled to receive two withdrawals from the general fund over a 5 year period.

Temporary employees work under slightly different rules, where they do not contribute themselves, though their employer pays a 3% fee (based on the individual’s wages) into their personal account, which follows the employee to their next job as well. They cannot access the general fund and so receive no government funding.

Since all causes of unemployment are accepted in relation to receiving unemployment insurance payments, workers have an added security when seeking another job. This has the practical effect of promoting labour market mobility to a greater extent. Moreover, the short payment period provides strong incentive to avoid long-term unemployment, and more so since payments first come out of the individual’s own personal account. A further incentive to find work quickly is that funds remaining in their personal account revert to the individual on retirement. This final incentive allows those who never become unemployed to gain from the system also.


Unemployment Insurance Savings Accounts in Latin America: Overview and Assessment, Ana M. Ferrer and W. Craig Riddell, The World Bank, 2009

Unemployment Insurance in Chile: A new model of Income Support for Unemployed Workers, Germán Acevado, Patricio Eskenazi and Carmen Pagès, The World Bank, 2006.

Tino Sanandaji commentary:

Chile is a developing country, so cannot afford the same high ambitions for national welfare as Sweden. The five month limit for unemployment insurance payment is, from a Swedish perspective, entirely too short. In Sweden it is also important that even temporary employees be included in the unemployment system. One solution would be to extend the unemployment payment period in business cycle downturns, but have shorter periods during upswings when jobs are easier to find. This minimizes the conflict between security and higher unemployment levels – which research shows is caused by the current unemployment insurance fund system.

This system ostensibly involves the ‘employer’ paying into the funds. However, these employer contributions are allocated as a percentage of the annually negotiated wage rise for employees. Thus, it is the employee who pays a monthly percentage of their earnings, and it is also a portion of the employee’s annual wage rise that is counted as the employer’s contribution. Other countries considering reforming their unemployment systems based on similar models should, on democratic and transparency principles, openly account for these contributions so the employee can fully understand their actual contribution to their own unemployment insurance.

The individual personal account solution, as in Chile, has the advantage that even high earners can be included within the system and still not cause negative consequences to the labour supply, as opposed to the current system where these high earners must also take out private unemployment insurance. As well, having the individual unemployment accounts revert to the individual on retirement is an excellent solution to maintain incentives for employees with a strong position on the labour market to also participate. One possible compromise for Sweden could be to have a guaranteed payment from the today’s unemployment insurance funds (as with the current ceiling payments), with a private account system operating for any insurance payments in excess of the ceiling.

Malin Sahlén

15 January, 2013