Estelle James

Finance, Management, and Costs of Public and Private Schools in Indonesia.

Abstract This paper investigates the impact of public vs private finance of education and public vs private management of schools on school cost and efficiency, using school-level data on revenues, expenditures, enrollments, examination scores and student characteristics from Indonesian primary schools. We find that in Indonesia, where schools generally operate at very low funding levels, more money is likely to bring better school quality. Private management is more efficient than public management in achieving academic quality. Private funding also improves efficiency whether the schools are publicly or privately managed, but the incremental effect declines as the local funding share increases.

The gender impact of pension reform : a cross-country analysis

Pension systems may have a different impact on gender because women are less likely than men to work in formal labor markets and earn lower wages when they do. Recent multipillar pension reforms tighten the link between payroll contributions and benefits, leading critics to argue that they will hurt women. In contrast, supporters of these reforms argue that it will help women by the removal of distortions that favored men and the better targeted redistributions in the new systems. To test these conflicting claims and to analyze more generally the gender effect of alternative pension systems, the authors examine the differential impact of the new and old systems in three Latin American countries-Argentina, Chile, and Mexico. Based on household survey data, they simulate the wage and employment histories of representative men and women, the pensions they are likely to generate under the new and old rules, and the relative gains or losses of men and women because of the reform. The authors find that women do accumulate private annuities that are only 30-40 percent those of men in the new systems. But this effect is mitigated by sharp targeting of the new public pillars toward low earners, many of whom are women, and by restrictions on payouts from the private pillars, particularly joint annuity requirements. As a result of these transfers, total lifetime retirement benefits for women reach 60-80 percent those of men, and forfull careerwomen they equal or exceed benefits of men. Also as a result, women are the biggest gainers from the pension reform. For women who receive these transfers, female/male ratios of lifetime benefits in the new systems exceed those in the old systems in all three countries. Private intra-household transfers from husband to wife in the form of joint annuities play the largest role.

The Political Economy of Social Security Reform: A Cross-Country Review

Over the past two decades, many countries have been adopting multi-pillar old age security systems that include a substantial role for a privately managed fully funded (FF) defined contribution (DC) pillar, accompanied by a publicly managed tax financed defined benefit (DB) pillar to redistribute to low earners. Many other countries are currently contemplating such a switch. This contrasts with traditional systems which rely on a single public pay-as-you-go (PAYG) DB pillar. In a PAYG DB plan the benefits are defined in advance, usually based on years of contributions and average earnings during some part of the lifetime, and are financed through payroll taxes; tax rates change through time to cover the benefits promised to todays pensioners. In a DC plan the contributions are defined in advance, accumulated and invested, but the benefit is uncertain. When workers retire they get an annuity that depends on their lifetime contributions plus their investment earnings. This special issue of Annals presents case studies of several Latin American and OECD countries that have reformed their systems, in an attempt to explain why they made this decision, how they selected the particular forms for their first and second pillars, what old problems this solved and what new problems were created. Besides summarizing these case studies, this overview draws on other evidence to evaluate the reforms and the political economy factors involved. Part I contrasts three structural reform models that are now being implemented-the Latin American individual account model in which workers decide how their retirement savings will be invested, the OECD employer-sponsored model in which employers and/or union representatives control the investment strategy for an entire enterprise or occupation, and the Swedish model in which workers have large notional accounts which are simply bookkeeping entries, supplemented by small funded accounts with real savings and investments in them. The menu of choices for covering transition costs, and the political economy factors behind these choices, are discussed in Part II. Part III examines empirical evidence on the positive efficiency 2 and growth impact of these reforms and Part IV discusses new problems that have emerged. The Conclusion summarizes these recent policy developments and the implications they hold for countries that have not yet reformed.

Is There a Quantity-Quality Tradeoff as Enrollments Increase? Evidence from Tamil Nadu, India

Developing countries have been quite successful at expanding school enrollment, especially at lower levels. But for any given level of educational efficiency, increased enrollments require inreased resources, in order to maintain quality. If those resources are not forthcoming, the increase in educational quantity may come at the expense of educational quality. When public budgets are constrained, is there a tradeoff between quantity and quality of education? If so, what public policies can diminish the decline in quality? The authors find a negative effect of expanded enrollments on school conditions and learning, using a cross-district time series analysis of Tamil Nadu, India. A wide array of initiatives undertaken by the government of Tamil Nadu has made schools accessible and attractive to families. But the resources have not kept up with enrollments and those resources that exist have not always been efficiently utilized. Most notably, the student-teacher ratio has risen dramatically over the past decade. In addition, while many new schools have been started, many of them do not have buildings, or have only meager buildings. The quality of education, as measured by the pass rate on the statewide tenth grade examination, has suffered as a result. The study shows that the rise in the student-teacher ratio and the consequent diminution of the growth rate in examination passes has been greatest in districts with the fastest enrollment growth -evidence of a quantity-quality tradeoff. Districts with a high proportion of privately-managed schools perform better. Policy changes such as greater use of private management and finance and greater local discretion in publicly-managed schools might improve the situation.

Crowd-Out, Adverse Selection and Information in Annuity Markets: Evidence from a New Retrospective Data Set in Chile

Annuitization is often considered a socially desirable payout mode from pension plans, because it provides a lifelong income stream and therefore ensures that retirees will not run out of money. However, annuitization is rare in most countries. This project examines workers’ choices during the payout stage in Chile, the only country that has had mandatory personal accounts long enough to have had substantial experience with payouts. Upon retirement, workers in Chile have limited options for payouts: they must either annuitize or take gradual withdrawal. Two-thirds have annuitized. We expect that retirees are less likely to annuitize if their accumulation finances a pension in the vicinity of the minimum pension, whose value is guaranteed by the state. In that case, publiclyfinanced longevity insurance is likely to crowd out private annuity insurance. We expect that retirees with health problems are also less likely to annuitize, possibly leading to adverse selection. Finally, we expect that individuals with greater risk aversion, smaller time preference and better knowledge about the system are more likely to annuitize. A new retrospective data set from Chile yields evidence that is broadly consistent with these hypotheses.

Is there a quantity–quality trade-off as pupil–teacher ratios increase? Evidence from Tamil Nadu, India

Abstract Developing countries have been quite successful at expanding enrollments in education, especially at the lower levels. But for any given level of efficiency, increased enrollments require increased resources, in order to maintain quality. If these resources are not forthcoming, the increase in educational quantity may come at the expense of quality. Is there a quantity–quality trade-off and what public policies can diminish it, in the face of strong constraints on public budgets? This paper explores the negative impact of such an enrollment expansion—unaccompanied by increased numbers of teachers—on school conditions and learning, using a cross-district time series analysis of Tamil Nadu, India as a case in point. It examines alternative policies which can be used to avoid such negative effects—by more efficient use of existing public resources and by expansion of over-all educational resources through greater reliance on private management and finance.

The Impact of Private Participation on Disability Costs: Evidence from Chile

Social security systems in many countries face problems of high and escalating disability costs. This paper analyzes how disability costs have been controlled in Chile. The disability insurance system in Chile is much less well-known than the pension part, but it is equally innovative. It differs from traditional public disability insurance in two important ways: 1) it is largely pre-funded, sufficient to cover a lifetime disability annuity and 2) the disability assessment procedure includes participation by private pension funds (AFPs) and insurance companies, who finance the benefit and have a direct pecuniary interest in controlling costs. We hypothesize that these procedures and incentives will keep system costs low, by cutting the incidence of successful disability claims. Using the Cox proportional hazard model based on a retrospective sample of new and old system affiliates (ESP 2002), we conclude that observed behavior is broadly consistent with this hypothesis. Disability hazard rates are only 20-35% as high in the new system as in the old, after controlling for other co-variates. Furthermore, analysis of mortality rates among disabled pensioners (using probit and proportional hazard models) suggests that the new system has accurately targeted those with more severe medical problems.

Payout Choices by Retirees in Chile: What are They and Why?

In 1981 Chile adopted its new multi-pillar system, which featured privately managed individual accounts. Starting in 1983 payouts from the accounts were permitted and detailed rules about payouts were put in place. The Chilean scheme therefore gives us an opportunity to examine how pensioners and pension providers react to individual account systems during the payout stage and how regulations shape these reactions. We use aggregate time series data obtained from the pension fund and insurance industry regulators, individual-level data on all annuitants in the system, and interviews with pension providers and regulators for this analysis. Retirees in Chile have a choice between early versus normal retirement from the system and between annuitization versus programmed withdrawals (PW); lump sum withdrawals are largely ruled out. These choices determine the time stream of benefits and the eventual financial burden that will be placed on the public treasury. Almost twothirds of all retirees have annuitized, but this proportion differs greatly between early and normal age retirees. Currently 60% of all retirees have chosen to retire early, many before age 55. (Early retirement means that they stop contributing and start withdrawing; it does not mean that they stop working). Most (85% of) early retirees have annuitized, while most (66% of) normal age retirees have taken PW. We present evidence that this disparate behavior is explained by incentives and constraints stemming from guarantees and regulations on pensioners and pension providers. These rules have lead workers with small accumulations to take PW at the normal age, with the minimum pension guarantee providing longevity and investment insurance. They lead workers with large accumulations to retire early, with annuities providing insurance. Regulations have given insurance companies selling annuities a competitive advantage in marketing to this group, and they do so aggressively. Early access to retirement saving through early retirement or front-loaded PW imposes a potential financial burden on the government because of the minimum pension guarantee, which has been rising in real value through time. As a result, the expected public share of the total pension payout grows with a cohort’s age and may exceed expectations as cohorts that retired under the new system grow very old. Annuitization mitigates (but does not completely eliminate) this cost to the public treasury. This analysis suggests that, with appropriate incentives, a high proportion of pensioners will purchase annuities in countries with individual account systems. But these countries need to coordinate early withdrawal conditions with minimum pensions and other safety nets, in order to avoid moral hazard problems and unexpected public liabilities.

How to Integrate Disability Benefits into an Individual Account System: The Chilean Model

El sistema de seguro de invalidez en Chile es mucho menos conocido que el de pensiones, pero es igualmente innovador. Difiere de los sistemas mas tradicionales de dos maneras: (1) las prestaciones son en gran medida financiadas por las cuentas individuales de retiro, y complementadas adicionalmente al determinarse la invalidez permanente del individuo; y (2) el proceso de evaluacion de invalidez incluye la participacion de los fondos privados de pensiones y las companias de seguro, quienes financian el complemento a la cuenta individual y tienen un interes directo en controlar sus costos. Si un trabajador es declarado invalido permanente, el saldo de su cuenta individual recibe un aporte complementario tal que permite financiar una renta vitalicia por un monto de 70% de salario de referencia en el caso de invalidez completa, y de 50% en caso de invalidez parcial. Cada fondo de pensiones debe adquirir un seguro grupal que permita financiar dicho aporte. Este articulo describe la activa participacion en el proceso de calificacion que tienen los fondos de pensiones y companias de seguro que proveen el aporte complementario y que tienen el incentivo de limitar la probabilidad de siniestros por invalidez. El articulo tambien simula el impacto sobre los costos de esta prestacion de beneficio definido que tiene el pre-fondeo provisto por las cuentas individuales. En relacion a esto, encontramos que el pre-fondeo incrementa el costo anual en el corto plazo pero lo disminuye en el largo plazo. En estado estacionario el monto acumulado en la cuenta individual de un trabajador cubre cerca de la mitad del costo total anual, y el aporte adicional se reduce incluso mas, hasta cerca de un cuarto de lo que seria en un sistema de reparto puro. El pre-fondeo hace el costo del seguro de invalidez menos sensible al envejecimiento de la poblacion, pero mas sensible a la volatilidad de la tasa de interes. El cobro de una prima unica por el seguro genera subsidios cruzados, y en un mercado competitivo, incentivos a seleccionar los mejores riesgos. Parte de las reducciones de costo a las companias de seguro pueden implicar una obligacion fiscal futura mayor, debido a la pension minima garantizada. .

Social Security Rules and Labor Force Participation of Older Workers: Evidence from Chile

Recent research has argued that incentives stemming from social security systems influence the worker’s decision to retire. The experience of Chile, which radically changed its system in 1981, offers an opportunity to test this hypothesis. The new system tightened access to early pensions, replaced an actuarially unfair defined benefit plan with an actuarially fair defined contribution plan, exempted pensioners from the pension payroll tax and allowed widows to keep their own pension in addition to their survivor’s benefit. Although the old system is being phased out, since 1981 the two systems have co-existed. Using probit analysis of the behavior of a retrospective sample of new and old system affiliates, we estimate the impact of the new social security rules on the probability of dropping out of the labor force, for older workers. We find large effects. Age of pensioning has been postponed. Labor force participation is much higher among affiliates of the new system compared with the old, especially for pensioners and women. This is not simply due to selection: Aggregate participation rates have increased as the new system’s share of total affiliates has risen.