If approved, the new Colombian pension system would end competition between the public sector and the AFPs, but it imposes a controversial contribution threshold that generates criticism among opponents and analysts.
Colombia's pension reform is in its final phases of debate, but victory is not certain: there are representatives of the parliamentary opposition who reject its approval and even others who resort to non-attendance to boycott the debate. These tensions make it difficult to approve this initiative by Gustavo Petro's government, which must be defined no later than June 20. The positions are defined: the Colombian Executive plays the “social justice” card to defend its project, while the right-wing opposition accuses Petro of mortgaging the country's future.
“It is a matter of humanity,” declared the Colombian president in his X account, on June 11, when referring to the coverage of two million older adults in a state of vulnerability who would benefit from the reform. On the other side, deputies Juan Felipe Corzo (Democratic Center) and Betsy Pérez (Cambio Radical) have promoted the alternative of shelving the project, arguing that it does not increase the number of pensioners nor does it promote insertion into the labor market. Another key point is the high cost that its application would have for the public treasury.
In fact, at the beginning of this month, the Minister of Finance himself, Ricardo Bonilla, revealed an official document that stated that if approved, the pension reform will have a fiscal cost equivalent to 5.3% of Colombia's GDP by 2070. We are talking about an economic impact that will involve an expense close to $78.5 billion (US$ 19,567 million).
By then, the public savings fund established by the reform will also be exhausted, which will force the State to finance 100% of the value of pension allowances. As if that were not enough, spending will skyrocket to $500 billion (US$124,634 million) by 2100, representing 33.46% of GDP.
These indicators reflect a bleak future for Colombian finances dependent on subsidies and external debt in order to maintain the new pension system. Now it is appropriate to analyze the limitations of the current model that led to this reform and the conditions of said project.
TWO SYSTEMS, ONE UNSOLVED PROBLEM
At a global level and in recent decades, two contribution regimes have operated for pension systems: pure pay-as-you-go and individual capitalization. In the first, the State manages the contributions of current workers and employers to pay the pensions of current retirees.
On the other hand, in the second model, the contributions of each employee are accumulated in an individual account belonging to a pension fund administrator (AFP). The accumulated funds are invested and, upon retirement, the worker receives a pension based on the accumulated amount and the returns generated.
According to Camilo Cuervo, labor lawyer at the Holland & Knight firm in Bogotá , pure distribution, also known as average premium, is not viable, because it is guided by obsolete criteria.
“We are talking about a system that works in the world practically from the models imposed by Otto von Bismarck in Germany at the end of the 19th century. At that time, it worked, because very low pensions were given and secondly, they were granted from the age of 70 at a time when life expectancy was much lower. So, there were no possibilities for many to actually retire, so there were few affiliates,” Cuervo explained for AméricaEconomía .
In Colombia, pure distribution has been in force since 1967, when Social Security began to administer pensions and establish their corresponding contributions. Later, in 1993, faced with the global trend towards the privatization of assets, the government of César Gaviria enacted Law 100. This ruling introduced the individual capitalization system, governed by the AFPs and, since then, both models have coexisted in society. Colombian.
Although capitalization has notable disadvantages such as the charging of commissions and the reduction of salaries, Cuervo maintains that it is a system with greater scope for action, because the citizen has his or her own account. “It's a more sincere system in the sense that it's 'you against yourself.' It is up to you whether you save or waste the funds. However, all systems in the world have solidarity systems that force the State to provide subsidies. Or through high pension contributions, these individual funds are subsidized so that oneself, with the same conditions, can receive a pension.”
From his perspective, Cuervo considers that the great mistake of successive Colombian governments was refusing to dismantle the coexistence of the two models due to union pressure. The labor lawyer affirms that it is a system that does not work anywhere in the world, because it is financially unviable.
In this way, if in 1993, an independent member had to contribute 6% of their income to the state pension fund, currently the figure is 16%. It is a reality that implies that the pure pay-as-you-go system is heavily subsidized and generates many expenses for the national treasury. The differences between both systems come to light when the benefits are analyzed.
For example, in the AFPs, a Colombian receives on average 35 to 40% of his salary in his final pension. While in Colpensiones, the public system, the value can rise to 60 or 65%. And if contributions are made for 10 more years, the figure rises to 80%. Even if we remove subsidies from the discussion, in this system also citizens with lower incomes end up giving up a good part of their contributions to members with the highest pensions.
THE ANALYSIS OF THE REFORM
Against this backdrop, the Petro government reform seeks to eliminate competition between the two systems, as well as “mega pensions.” In addition, the final proposal approved in the Colombian Senate imposes a contribution threshold of 2.3 minimum wages ($2,990,000 or US$ 745). That is, any person who has a lower income at this level is obliged to contribute to Colpensiones. Those who pass it will be able to bet on the private fund system.
For Andrés Londoño, a lawyer specializing in financial services and columnist for the Colombian newspaper La República , this is a questionable decision, because the majority of his compatriots earn figures below the established threshold, which again generates large expenses for the Colombian State, since the salary average in Colombia is 1,800,000 pesos (US$ 448).
To this situation must be added the additional subsidies implied by the “solidarity pillar”, a basic income of $232,000 (US$57), aimed at people in extreme poverty who have not obtained a pension. And, on the other hand, the fact is taken into account that new members of Colpensiones will no longer be able to capitalize their savings as they did in the AFP system.
“So in practical terms, there is a loss in practice. There is a loss of ownership of the resources destined for pension savings. Because one loses the possibility of choosing whether to trust a state institution that allows you to retire under certain conditions or trust a private system where you ensure that the only important thing is the profitability of your savings over time. But the most important thing is that one loses ownership of one's personal savings and now the State begins to manage it,” declared Londoño for AméricaEconomía .
In short, Colombians would be condemned to pay more and more taxes to finance the largest deficits of this system. Furthermore, the lawyer assures that due to the new contribution threshold, 88% of the annual flow of contributions currently invested for the AFPs will be diverted to the payment of state pensions. “So, the savings and attractiveness of the Colombian stock market will be lost, where its main agents are the AFPs. And the arrival of foreign currencies to a stock market that will increasingly have fewer players and employees will be discouraged,” warns Londoño.
Likewise, although the reform is characterized by introducing greater facilities for vulnerable sectors, many of these ideas are not entirely new. As an example, the solidarity pillar, officially known as “Solidarity Income for Vulnerable Older Adults” is a continuation of previous programs.
“It is not a pension, it is a subsidy, although Petro previously criticized this type of measures. We have had the Colombia Senior Adult program in force for many years. In addition, indigent benefits have increased over time. That story that we need the reform to give small pensions to grandparents in poverty is a lie,” warns Cuervo.
