A review of international experience

%
SOURCE: Author, based on data from the 2008 Korea Welfare Panel Study. W 1,125 ≈ $1.

174 
MATCHING CONTRIBUTIONS FOR PENSIONS: A REVIEW OF INTERNATIONAL EXPERIENCE
have a greater effect on lower-income households. The estimation results are reported in 
table 8.10.
As expected, among income reporters, the difference in contribution probability 
between subsidized farmers and fishers and the nonsubsidized group is substantially larger 
when the regression samples are restricted to low-income households: the estimated coef-
ficient for the contribution effect case is 12.2 percent (4.8 percentage points higher than 
the results shown in table 8.9) and statistically significant. No statistically meaningful 
change was found in the estimate of the dummy variable for differences in the probability 
of income reporting, however (column 2). The registration effect of the contribution sub-
sidy does not seem larger among low-income classes. Among low-income self-employed 
workers, the probability of paying contributions is 13.5 percentage points higher for farm-
ers and fishers. This value is 2.4 percentage points, or 22 percent, greater than the estimate 
in table 8.9.
The results in table 8.10 show that the difference in compliance behaviors between 
subsidized and nonsubsidized groups is more apparent among low-income classes. This 
evidence is consistent with the expectation that the marginal impact of the contribution 
subsidy should be larger for poorer households, which have more difficulty paying pen-
sion contributions. 
TABLE 8.10  Effects of income on pension behavior of self−employed workers in Korea
PROBIT REGRESSION RESULTS
Dependent variable
Contribution effect
Registration effect
Aggregate effect
dy/dx
Standard 
error
dy/dx
Standard 
error
dy/dx
Standard 
error
Male dummy
0.0047
0.068
0.0289
0.066
0.0293
0.072
Schooling years
0.0061
0.010
−0.0023
0.009
0.0024
0.010
Age
−0.0754**
0.038
0.0241
0.032
−0.0368
0.037
Age2
0.0010**
0.000
−0.0002
0.000
0.0006
0.000
ln(Disposable income)a
−0.0188
0.056
0.1133**
0.050
0.0673
0.058
agri_dummy
0.1220**
0.056
0.0630
0.058
0.1347**
0.066
Number of observations
261
365
365
Log pseudo−likelihood
−130.096
−209.744
−236.605
Pseudo R
2
0.0755
0.0383
0.0578
SOURCE: Author, based on data from the 2008 Korea Welfare Panel Study. 
NOTE: ***p < 0.01, **p < 0.05, *p < 0.1. Adjusted for family size using √n.

8.  MATCHING CONTRIBUTIONS AND COMPLIANCE IN KOREA’S NATIONAL PENSION PROGRAM 
175
Conclusion
Vast blind spots remain within Korea’s national pension. About a third of the country’s 
self-employed and nonregular workers fail to make contributions. The fact that most of 
them have low incomes suggests that many may fall into poverty in old age.
Compliance with the national pension may gradually increase, as public awareness 
and the government’s ability to gather accurate information on personal incomes grow. 
However, to prevent the spread of old-age poverty, more active measures are needed for 
improving the compliance of groups among which compliance is low (nonregular low-
income workers and self-employed small business owners). In addition, the administra-
tive capacity for gathering more accurate information on their income status needs to be 
reinforced (Moon 2011).
One measure for increasing compliance, which is under active discussion in Korea, 
is to provide economic incentives to participate in the national pension by subsidizing the 
contribution of low-income individually insured people. The subsidy could encourage 
compliance by people who are currently financially unable to make contributions.
Since 1995, the Korean government has been providing matching subsidies to farm-
ers and fishers worth up to half of their pension contributions. Simple empirical tests sug-
gest that the subsidy may have significantly contributed to increasing the compliance rate 
of farmers and fishers. In particular, the rate of delinquency among income reporters was 
significantly lower for farmers and fishers, after controlling for other variables. The effect 
of the subsidy on the probability of reporting income was positive but statistically insig-
nificant. Overall, the probability of contributing to the national pension system was more 
than 10 percentage points higher among (subsidized) farmers and fishers than among 
nonsubsidized self-employed workers. The difference in compliance rates was more pro-
nounced among low-income workers.
The results suggest that providing subsidies to other self-employed groups with low 
incomes could increase compliance with the national pension scheme. These preliminary 
results need to be supplemented by more rigorous empirical investigations before the con-
tribution subsidy program is expanded, however.
Notes
1.  This section relies heavily on chapter 2 of Moon (2011).
2.  Although a matching contribution subsidy is commonly applied to defined contribution 
schemes with individual accounts, it would not necessarily be confined to them. It can also 
be used for defined benefit schemes, as long as they are contributory schemes, as a measure 
to encourage pension participation of poor or vulnerable workers by alleviating their financial 
burden. This section examines the effectiveness of a contribution subsidy in promoting the 
participation of the concerned group when it is applied to the publicly provided defined ben-
efit scheme in Korea.
3.  The government spent W 87 billion (about $79 million) in 2011 on contribution subsidies to 
219,000 farmers and fishers.
4.  The difference in age between farmers and the other self-employed in the sample is natural 
as it reflects the fact that farmers in Korea are much older than workers in other sectors. This 

176 
MATCHING CONTRIBUTIONS FOR PENSIONS: A REVIEW OF INTERNATIONAL EXPERIENCE
difference would not affect the regression results because age and sex variables are controlled 
in the analysis.
5.  Dummies for farmers and fishers might capture individual characteristics that are explained by 
other variables as well as the effects of the contribution subsidy. For instance, there could be 
differences in income instability between the households of farmers/fishers and other workers. 
If the incomes of farming and fishing households are more stable than the incomes of other 
self-employed workers, the compliance rate of farmers and fishers should be higher, everything 
else being equal. In this case, the coefficients of the dummies for farmers and fishers will over-
estimate the effect of the contribution subsidy.
References
Korea Institute for Health and Social Affairs. 2008. Korea Welfare Panel Study. (In Korean.)
Moon, Hyungpyo. 2011. “Managing Pension and Healthcare Costs in Rapidly Aging Depopulat-
ing Countries: The Case of Korea.” Paper presented at the ERIA-SP Project Workshop, Eco-
nomic Research Institute for ASEAN and East Asia, Singapore, March 5–6.
National Pension Service. 2009. National Pension Statistics. (In Korean.)
National Statistical Office. 2006. Population Projections for Korea: 2005–2050. Seoul.

PART III
Middle-Income 
Country Experience

179
CHAPTER 9
Complementing Chile’s Pensions with 
Subsidized Youth Employment and 
Contributions
Hermann von Gersdorff and Paula Benavides
Replacement rates of Chile’s pension system have been lower than expected, forcing the govern-
ment to top off the pensions of a significant share of retirees. Chile’s recent experience with 
youth employment subsidies provides some useful evidence on the effects of employment subsi-
dies on social security coverage and replacement rates. That experience indicates that most of 
the impact was short term, raising questions about the suitability of subsidies in promoting 
social security among the target population. Except for some impact on employment and labor 
force participation, it is unlikely that the subsidies will provide a relevant alternative to the 
solidarity pillar as an instrument for addressing the issue of low pensions. Youth employment 
subsidies seem more suitable as a countercyclical policy in times of high unemployment.
T
his chapter describes and analyzes two youth employment subsidy schemes in Chile. 
The first, Subsidio Previsional a los Trabajadores Jóvenes (Social Security Subsidy for 
Young Workers—SPTJ), was established in 2008, through Law No. 20.255, which deep-
ened Chile’s pension reform. The second, Subsidio al Empleo Joven (Youth Employment 
Subsidy—SEJ), was established in 2009, through Law No. 20.338. Both subsidies have 
the objective of promoting formal youth employment through incentives for both the 
supply of and demand for labor. The SPTJ provides an explicit and direct subsidy for 
social security contributions.
The chapter is organized as follows. The first section describes Chile’s pension sys-
tem and provides some indicators on the youth labor market in Chile. The second section 
describes the objectives and design of both subsidy schemes and examines the effects of 
the subsidies on social security coverage, employment, and fiscal costs. It presents the 
results of an impact evaluation of the SEJ that could provide valuable lessons for reform of 
the schemes. The last section summarizes the experience with the programs.
The Chilean Pension System and the Labor Market for 
Young Workers
THE CHILEAN PENSION SYSTEM 
Since the latest pension reform in 2008, the Chilean pension system has had three pil-
lars: a mandatory, a voluntary, and a solidarity pillar. The mandatory pillar—established 
through Law No. 3.500 of 1980 and reformed in 2008 through Law No. 20.255—is a 
defined contribution system with individual capitalization and private management of 

180 
MATCHING CONTRIBUTIONS FOR PENSIONS: A REVIEW OF INTERNATIONAL EXPERIENCE
pension funds under strong public regulations of both asset and accounts management. 
Membership in and contributions to the system are mandatory for all dependent workers 
and gradually for independent workers. As of 2012, independent workers are required to 
make contributions for pensions and workers’ compensation on the first 40 percent of 
their taxable income unless they formally opt out. The percentage of their income subject 
to contributions will increase to 70 percent in 2013 and 100 percent in 2014. Beginning 
in 2015, contributions will be mandatory, without the possibility of opting out. Begin-
ning in 2018, contributions for health insurance will also become mandatory. People 
without labor income may also join the pension system, on a voluntary basis.
The pension contribution rate is 10 percent, paid entirely by the employee; employ-
ers contribute 1.49 percent for disability and survivorship insurance of the employee. The 
management fee of the asset manager is paid by the worker as a share of his or her wage 
(not a share of assets under management); it ranges from 0.77 percent to 2.36 percent of 
wages.
1
 Including health insurance contributions (7 percent) and workers’ compensation 
(0.95 percent), total social security contributions represent about 21 percent of wages. 
Mandatory contributions are capped at a wage of about $3,000 a month in 2012.
As of August 2011, assets under management were $150 billion, which represents 
60 percent of gross domestic product (GDP). About 8.9 million people participated in 
the pension system. Of the 4.4 million people making contributions in July 2011, 98 per-
cent were dependent workers and 61 percent were men (Superintendencia de Pensiones 
2011) (table 9.1).
The number of funded pensions paid in March 2011 was 887,255, two-thirds of 
which were old-age pensions; about half of old-age pensions received a complement from 
the government (figure 9.1). The average pension was $353 a month. The average value of 
pensions is low because of the significant number of women who benefited from a public 
transfer for each child but made few contributions into their pension accounts.
The voluntary pillar includes several saving mechanisms, including Voluntary Sav-
ings Accounts (1987), Voluntary Pension Savings (2002), and Collective Voluntary Pen-
sion Savings (2008). As of June 2011, the number of voluntary accounts was of 927,558, 
with total assets of $7 billion.
The Collective Voluntary Pension Savings is a new pension saving mechanism 
that allows enterprises to match pension savings of their employees. Offering the plan is 
TABLE 9.1  Number and average income of 
contributors to Chile’s pension program, 
July 2011
Sex
Number of 
contributors (millions)
Average 
income ($)
Men
2.70
1,060
Women
1.74
936
Total
4.44
1,010
SOURCE: Superintendencia de Pensiones.
FIGURE 9.1  Number and percentage of 
pensioners in Chile, by type of pension
disability
9%
 81,183  
old age
67%
 597,775 
survival & other
24%
208,297
SOURCE: Authors, based on data from Superintendencia 
de Pensiones 2011. 

9.  COMPLEMENTING CHILE’S PENSIONS WITH SUBSIDIZED YOUTH EMPLOYMENT AND CONTRIBUTIONS 
181
voluntary for the enterprise, which can define the terms of the plan.
2
 However, once the 
plan is part of the labor contract, the employer has to make the committed payments. 
Employees have the right, not the obligation, to individually join the plan offered by the 
employer. This mechanism has been slow in taking off, with only 1,904 accounts in place 
as of June 2011.
The 2008 pension reform included tax benefits and subsidies to promote voluntary 
pension saving. Workers who do not take advantage of the tax benefits but who do make 
voluntary pension savings can obtain a matching contribution into their pension savings 
account of 15 percent of the saved amount, with a maximum of $470 a year.
The solidarity pillar covers people who did not save enough for their pension to 
protect them from poverty in old age or in case of disability. These benefits are integrated 
with those of the individual capitalization system. Once a person in the poorest 60 percent 
of the population complies with age and residency requirements, he or she can receive a 
basic pension (Pensión Básica Solidaria [PBS]), for people who have no pension at all; or 
a social pension complement (Aporte Previsional Solidario [APS]), for people who have a 
pension funded by their own savings that provides less than the maximum pension with 
social complement (Pensión Máxima con Aporte Solidario [PMAS]). Four types of pen-
sions are provided: an old-age basic pension, a disability basic pension, an old-age social 
pension complement, and a disability social pension complement.
As of December 2011, 1.08 million Chileans were beneficiaries of the solidarity pil-
lar (figure 9.2). Public spending on these pensions was 0.7 percent of GDP. Beneficiaries 
of the old-age social pension complement were the largest group (436,791). The basic 
pension was $157 a month; the average monthly complement for the old-age social pen-
sion complement was $92.
FIGURE 9.2  Number of beneficiaries of Chile’s solidarity pension pillar, by type of benefit, 
December 2011
405,116  
disability basic pension
213,801  
436,791  
25,904  
disability social
pension complement
old-age social
pension complement
old-age basic pension
SOURCE: Authors, based on data from Superintendencia de Pensiones 2011. 

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MATCHING CONTRIBUTIONS FOR PENSIONS: A REVIEW OF INTERNATIONAL EXPERIENCE
THE YOUTH LABOR MARKET IN CHILE
Chile’s population was 17.1 million in 2010. The population is projected to grow by 
about 19 percent, to 20.4 million, by 2050, with the share of the population older than 
65 growing faster than the population as a whole. The number of economically active 
people will continue to grow, however, because the largest cohorts of the population are 
currently age 15–24.
The average labor force participation rate for people age 15–64 was 66.2 percent in 
2011. The rate for men was 78.6 percent, very close to the average for Organisation for 
Economic Co-operation and Development (OECD) countries (79.7 percent in 2010). 
The rate for women was 53.9 percent, a low rate relative to the OECD average (61.8 per-
cent in 2010). The average unemployment rate was 8.4 percent in 2010 and 7.4 percent 
in 2011. The participation rate among people age 15–24 was 38.4 percent, well below 
the average participation rate in Chile of 66.2 percent (see annex) in 2011. This rate 
was lower than the participation rate for the same age group in the OECD, which was 
47.4 percent in 2010.
The unemployment rate among people age 15–24 was 17.5 percent in 2011, more 
than twice the 7.4 percent rate for people age 15–64. The rate was higher than the 16.7 per-
cent unemployment rate for the same age group in the OECD in 2010 (figure 9.3).
FIGURE 9.3  Unemployment rate among people 15–24 in selected countries, 2010 
0  5  10 15 20 
%
25 30 35 40 45 
Switzerland 
Netherlands 
Austria 
Japan 
Norway 
Mexico 
Germany 
Korea, Rep. 
Australia 
Israel 
Denmark 
Luxembourg 
Slovenia 
Canada 
Iceland 
OECD 
New Zealand 
Czech Republic 
United States 
Chile 
United Kingdom 
Finland 
Turkey 
Portugal 
Belgium 
France 
Poland 
Sweden 
Hungary 
Italy 
Ireland 
Estonia 
Greece 
Slovak Republic 
Spain 
SOURCE: OECD 2011. 

9.  COMPLEMENTING CHILE’S PENSIONS WITH SUBSIDIZED YOUTH EMPLOYMENT AND CONTRIBUTIONS 
183
Data from the 2009 National Socioeconomic Survey reveal significant differences 
among participation rates at different income levels (figure 9.4). In particular, the differ-
ences between labor participation rates by the first four deciles and the other six deciles are 
large for people age 18–29. The differences are smaller in the age 18–24 group, because 
people in the upper deciles are more likely to be enrolled in higher education, which keeps 
them out of the labor market.
FIGURE 9.4  Labor participation rate for young workers in Chile, by income decile, 2009
0 
10 
20 
30 
40 
50 
60 
70 
1 
2
3
4
5
6
7
8
9
10
%
age 18–24 
age 18–29 
income decile 
SOURCE: National Socioeconomic Survey 2009.
Low-income youth have the most difficulty entering the labor market (figure 9.5). 
The 18–24 age group has the highest inactivity and unemployment rates. In the lowest 
decile, 56 percent of the population is either inactive (37 percent) or looking for work and 
not attending school (19 percent). This low-income age group is at high risk of remaining 
unemployed. The share of unemployed declines with each decile, reaching 9 percent in 
the 10th decile. The unemployment rate of people age 18–24 in the first income quintile 
was more than 50 percent in 2009 (figure 9.6).
These labor market conditions for youth are not unique to Chile; many OECD 
countries face similar challenges. However, in Chile, the situation of young workers in the 
lower quintiles is particularly grave, prompting recent efforts to bring these workers into 
the labor market and under the coverage of the social security system.
Youth Employment Subsidy Schemes
The introduction of employment subsidies was triggered by the discussion of Chile’s low 
pension levels and the need to promote contributions into pension funds to improve 
future pensions.
3
 Policy makers debated whether this labor subsidy should be provided ex 
ante or ex post. The solidarity pillar introduced an ex post subsidy that rewards pension 

184 
MATCHING CONTRIBUTIONS FOR PENSIONS: A REVIEW OF INTERNATIONAL EXPERIENCE
FIGURE 9.5  Activity of population age 18–24 in Chile, by income decile, 2009
 
1
2
3
4
5
6
7
8
9 
10
inactive 
37 32 25 21 19 15 14 12  7  6 
looking for work 
19 
16 
12 
8 
8 
8 
6 
5 
3 
3 
attending school/
looking for work 
2 2 3 3 3 2 2 3 
3 4 
attending school
and working
2 2 4 5 8 8 9 
11 
11 
12 
attending school
28 29 29 27 28 27 29 35 
46 53 
working 
12 19 28 36 35 40 40 34 
30 22 
income decile 
0 
20 
40 
60 
80 
100 
%
SOURCE: National Socioeconomic Survey 2009.
FIGURE 9.6  Unemployment rate among people 18–24 in Chile, by income quintile, 2009
0 
10 
20 
30 
40 
50 
60 
1 2
3
4
5
%
income quintile
SOURCE: National Socioeconomic Survey 2009.
saving and provides low-income workers with incentives to contribute by topping up the 
pension so as not to fully tax away the additional savings until the pension reached a 
maximum level. Similarly, the child benefit for women is paid only at retirement. The 
main arguments for ex post subsidies are that they delay the fiscal cost of the measure 

9.  COMPLEMENTING CHILE’S PENSIONS WITH SUBSIDIZED YOUTH EMPLOYMENT AND CONTRIBUTIONS 
185
and reduce the cost of providing a subsidy for a target group that has a high probability 
of having to rely on social assistance for old-age income anyway; it does not make much 
administrative sense to set up a system to pay the subsidy ex ante each time a contribution 
is made and to pay management fees to pension fund managers if most beneficiaries will 
not collect a pension based only on their own savings.
The debate was settled in favor of an ex ante subsidy for young workers, for two 
main reasons. First, one of the objectives was to establish a culture of contribution among 
young workers. Seeing a growing pension savings account without lower net wages was 
expected to provide this incentive; the learning effect of contributing regularly into the 
pension account was expected even with a subsidy that could be paid for as quickly as 
24 months. Second, Chile created a pension reserve fund to cover future public pension 
liabilities. Making the subsidy ex post for young workers would generate future pension 
liabilities that would at least offset some of the payments made into the pension reserve 
fund. The economic crisis of 2008, together with the findings of an equity commission, 
increased the priority of countercyclical labor market measures, settling the decision for a 
more generous ex ante labor employment subsidy that was expected to have a more imme-
diate impact on the unemployment rate.
THE SOCIAL SECURITY SUBSIDY FOR YOUNG WORKERS 
A key element of the pension reform of 2008 was a stronger solidarity pillar. The demand 
for this improvement arose because of the large number of low pensions the pension sys-
tem was producing. A key explanation for the low pensions was the low density of contri-
butions by workers due to few contributions during youth and the frequent movement of 
workers between the formal and informal labor markets.
The SPTJ was established during the pension reform of 2008 to promote formal 
employment and increase social security coverage and pension savings of the target popu-
lation. It has two independent components, which were implemented at different points 
in time.
The first component was launched October 1, 2008. It provides a subsidy to 
employers who hire workers age 18–35 earning less than $540 a month (1.5 times the 
minimum wage of $360). The subsidy is equivalent to 50 percent of pension contribu-
tions at the minimum wage and is paid on the first 24 contributions of the worker into 
the pension system. Payment of the subsidy to the employer is made only for months in 
which the employer pays the worker’s contribution on time. The subsidy was started with 
a payment to the employer to get workers hired by lowering the effective wage before the 
second component was implemented.
The second component, a subsidy to the contribution, was launched July 1, 2011. 
It is received by workers who comply with the same requirements as the first compo-
nent. Workers can apply for the subsidy independently of employers. This component, 
which is equal in value to the subsidy to employers, goes directly into the worker’s pension 
account. Every time the young worker returns to formal employment, the subsidy kicks in 
for a total of 24 contributions.
Figure 9.7 shows the average number of monthly beneficiaries of the subsidy and the 
amount paid for the period between March 2009 (when payments started) and Decem-
ber 2011. The average subsidy was $12.50 a month. Most subsidies were paid between 

186 
MATCHING CONTRIBUTIONS FOR PENSIONS: A REVIEW OF INTERNATIONAL EXPERIENCE
October 2009 and February 2010, although there was a peak, at 23,317, in April 2010. 
The number of subsidies for hiring dropped sharply starting in mid-2010, when the SEJ 
was introduced. The SEJ pays a higher subsidy, and employers may use only one of the 
two subsidies. Activation of the subsidy to contributions is noticeable by the end of 2011 
because employees can have access to both the SPTJ and SEJ subsidy schemes. During the 
period, 55 percent of the beneficiaries were women. Public expenditure on the subsidy 
peaked in 2009, with annual expenditure of $1.8 million (table 9.2).
THE YOUTH EMPLOYMENT SUBSIDY 
To address the consequences of the economic crisis, and following recommendations by 
the Equity Commission, in March 2009 the government implemented a new employment 
subsidy, the SEJ, for dependent young workers and their employers and for self-employed 
TABLE 9.2  Public expenditure on Chile’s youth employment subsidies, 2008–11
$, MILLIONS
Year
SPTJ
SEJ
2008
0.0
0.0
2009
1.8
10.6
2010
1.3
71.6
2011
0.8
88.1
SOURCE: Chilean Budget Office.
FIGURE 9.7  Number and average amount of subsidies paid in Chile under the Social Security 
Subsidy for Young Workers, March 2009–December 2011
0
5
10
15
20
25
Mar. 2009 
May 2009 
July 2009 
Sept. 2009 
Nov. 2009 
Jan. 2010 
Mar. 2010 
May 2010 
July 2010 
Sept. 2010 
Nov. 2010 
Jan. 2011 
Mar. 2011 
May 2011 
July 2011 
Sept. 2011 
Nov. 2011