This study examines the investment performance of the privately managed Chilean pension system. Chilean pension funds (AFP's) are subject to regulations that determine individual contributions, investment limits, and minimum rates of return. Individuals contribute 13 percent of their monthly salary to the AFP of their choice. The AFP retains roughly 2 percent to cover expenses and 1 percent to finance disability insurance coverage for the participant. The remaining 10 percent is invested. Participants are restricted to holding their account balances in a single AFP at any one time, but may change AFP's as often as every four months. In a preliminary paper, the researchers show that investment returns have varied greatly over the funds' 18-year history (1982-1999), with some of the highest returns occurring in years of economic conditions unique to Chile. The authors identify three years – including the first two years of the funds' existence – as anomalous, and show that when these years are excluded, the average annual rate of return in the Chilean pension system is approximately 8.5 percent.
