On the Optimal Portfolio Policy for the Unemployment Insurance Funds in Chile

Abstract

One of the most recent innovations in the Chilean social security system is the introduction of an unemployment insurance that combines individual accounts and a solidarity fund. Since the benefits of the new system are funded in nature, it naturally emerges the issue of how the savings should be invested. This paper analyzes the optimal investment policy for the savings in the individual accounts and the solidarity fund, by means of the study of two dynamic portfolio choice problems, to then identify the main components of their optimal solutions. Our results suggest that the current practice of forcing a unique investment strategy for the individual accounts and the solidarity fund may be suboptimal, due to the differences in their investment goals, and the fact that the savings in the individual accounts represent the funded part of the liabilities of the solidarity fund. Additionally, in an scenario in which the solidarity fund presents a high level of solvency [e.g., Bravo et al. (2007), Fajnzylber and Poblete (2008)], our results suggest that the solidarity fund should be allowed to take advantage of the equity premium in the market.