Michigan University of ResearchRetirementCenter DISABILITY INSURANCE WITH PREFUNDING AND PRIVATE PARTICIPATION : THE CHILEAN MODEL

Introduction Many countries have adopted old age systems that include individual accounts—funded, privately managed defined contribution plans. Such a system has been under discussion in the US. It is particularly difficult to figure out how to incorporate disability benefits into a social security system with a defined contribution component, since disabled people may not work long enough to accumulate large balances. The system might generate reasonable replacement rates for workers who contribute throughout their lifetimes, but very low replacement rates for those who become disabled when young. Yet, if disabled people continue to receive their benefits from the traditional pay-as-you-go (PAYG) system, this will take an increasingly large percentage of total social security taxes in the future. Moreover, it may encourage workers with small accumulations to apply for disability rather than old age benefits, which will raise taxpayer costs further.