Elements for the Pension Reform in Colombia

By Paola Riveros, MPP’21, former Advisor to the Directorate of Economic Regulation of Social Security at the Ministry of Finance in Colombia

Social movements in Colombia have risen in the streets demanding social changes. One of the demands was related to the Pension Reform that the government is proposing. Some of the substantive elements of this reform involve: increasing coverage, modifying the level of subsidies people receive relative to their income and increase the rate of savings. Having a stable income during the elderly period is one of the most pressing challenges taking into account the increase in life expectancy. Usually, citizens do not think enough about their needs in the future because it may be seen as a far-away problem. Nevertheless, the State is compelled to plan ahead in order to secure an income for the elderly. 

Basic needs are day-to-day concerns in the developing world and some studies have evidenced that scarcity has an adverse effect on our capacity to plan for our future. As Banerjee and Duflo suggest, when you are facing scarcity and have money at hand, using it to help someone close (procuring medicine for an ill relative, sending kids to school, etc.) oftentimes appears to be the only choice  (Banerjee & Duflo, 2006). Instead, wealthier citizens have more elements, not just for having better jobs and have a higher rate of savings, but for planning their retirement. 

During college, I was impressed by the theory that the lack of access to the pension market can influence the number of children a family decides to have. For some, having more children makes it more likely that someone will take care of them in the last stage of life. When health is also a concern for the future, having children is a complementary mechanism to ensure possible caregivers through retirement (Ray, 1998).

The Social Security System in Colombia is tied to the labor market. Formal workers have access to a pension equivalent to at least one minimum wage. On the other hand, workers, usually informal workers, who couldn’t achieve sufficient amount for having a pension can access the programs Colombia Mayor and Beneficios Económicos Periodicos-BEPS and few have a subsidy to reach a minimum wage. Each program has specific requirements of income, and Colombia Mayor and BEPS can complement each other. Although poor people have access to Colombia Mayor which offers them around 40 USD per month, this is not enough to help them surpass the poverty line. In addition, BEPS provides a voluntary saving system for workers earning less than one minimum wage, offering a subsidy from the government according to the saving amount. 

The current pension system increased coverage, including disability and survivor pensions, from 31% of the labor force in 2010 to 40% by 2019 which is still low. Higher-income citizens receive a higher subsidy to their pension; for example, between formal workers, who can be entitled to a pension, people who earn 25 minimum wages have a subsidy approximately 8.5 times higher than people who earn minimum wage. Paradoxically, having more income is equivalent to having more subsidies. The net present value of the pension debt is estimated at 110% of the GDP and it is recognized as one of the spending rigidities of the government’s budget. One of the most worrisome aspects of the pension system in Colombia is the inheritability, because that income may be transferred to spouses and through one generation of descendants, increasing the resource burden to the state. 

The proportion between coverage and level of spending gives us many indicators for the required changes. Moreover, Colombians are getting older, life expectancy has increased, and coverage is becoming harder to procure under the current system. The Pension Reform is an opportunity to address main policy issues in Colombia: reduce subsidies to the wealthiest and offer them to the most vulnerable who currently have low access or no income when they get old, make the system financially sustainable, and last but not least important, find additional policy mechanisms to take care of the elderly. This discussion should be the principal demand of people in the streets; better regulation to make sustainable a pension system for all citizens. The government should create mechanisms to increase saving rates, but most importantly, provide tools to plan their future. 

Banerjee, A. V., & Duflo, E. (2006). The Economic Lives of the Poor. Journal of Economic Perspectives.

Ray, D. (1998). Development Economics.

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