Public versus Private Pensions in Colombia

In Colombia, the pension system is regulated by Legislation 100 from 1993. This legislation divides the pension system into two most important regimes: the typical premium regime, which is public and managed by Colpensiones. The Colombian pension administrator is a state-owned industrial and industrial firm, organized as a particular monetary entity, related to the Ministerio del Trabajo (Ministry of labor). The opposite is the person financial savings regime with solidarity, a personal capitalization fund overseen by pension fund directors (AFP’s).

The personal capitalization fund acts as if it had been a kind of financial savings account, during which every lively employee who’s contributing has an account in his title, during which he deposits his pension financial savings each month; such financial savings are invested by the AFP’s within the inventory market, shopping for shares of firms, currencies, public debt, and so on. On this method stated pension financial savings are capitalized, as curiosity is added and upon reaching retirement age; an collected yield may have been generated with which the month-to-month disbursements will likely be paid.

The personal pension system represents a person’s financial savings for his or her retirement. The precept is easy: the extra one saves, the upper the eventual payout. This method emphasizes particular person accountability, as every contributor’s pension quantity relies upon immediately on their private contributions.

For the general public pension system, contributors to Colpensiones allocate a portion of their wage each month towards what is taken into account pension financial savings. Nevertheless, these contributions don’t go to particular person accounts however are pooled into a typical fund. Not like the personal system, this cash isn’t invested to develop over time. As a substitute, it’s immediately used to fund present pensions. Basically, as we speak’s employees help the pensions of present retirees.

That is the place the principle downside of the general public pension system lies, and it’s that the extra pensioners there are in Colpensiones and the less individuals are contributing on this public system, the much less cash will likely be left to pay the present pensions. This occurs yearly. In response to the report on the scenario ready by the Contaduría Basic de la Nación, in the course of the years 2021 and 2022, there’s a development that Colpensiones’ earnings is decrease than its bills and prices, by billions of pesos.

So, it’s as much as the State to seek out the assets to pay the present pensions. In gentle of this, cash from public expenditure is used to satisfy the funds in query. All Colombians could be compelled to pay extra taxes to defray such expenditure. In response to Azuero (2020), up till the yr 2018, the debt introduced by the Colombian State with Colpensiones was 787 billion pesos.

Because of this, whereas the general public pension fund accumulates debt, the personal fund accumulates generated worth. As well as, the personal funds have totally different modalities; one is free to decide on which one they want to belong to, they usually even have quick and long-term investments, guaranteeing higher monetary safety for the contributor.

The Mercer CFA Institute’s international report on pensions compares 47 pension programs around the globe, and by finding out the newest report, Colombia ranked twenty fourth, whereas the Netherlands is in first place.

Within the Netherlands, the Future Pensions Act was lately accredited, with the goals of reaching a supplementary pension that rises quicker, a extra particular person and clearer pension accumulation, and a pension system extra in step with individuals who not work for a similar employer for 40 years. 

Pension programs around the globe are below nice strain as a result of monetary crises which have produced relentless inflation, geopolitical uncertainty, financial instability, and different detrimental penalties that have an effect on people.

Pension Reform Proposed By The Authorities Of Gustavo Petro

The federal government of Gustavo Petro has proposed a pension reform in Colombia that goals to change the present workings of the system. The reform goals to dissolve the 2 pension regimes created by Legislation 100 of 1993 and undertake a multi-pillar system as follows:

Solidarity: This could grant a month-to-month stipend of 233,000 Colombian pesos to people over 65 years of age. Notably, the federal government has but to make clear if this support will likely be particular, corresponding to just for aged people dwelling in poverty, or accessible universally to everybody over 65. This distinction is crucial as not differentiating may end up in sizable fiscal deficits.
Contributory: The common premium regime, managed by Colpensiones, will collect contributions as much as the equal of three minimal wages. In the meantime, AFPs will handle contributions past this sum. Basically, these incomes as much as three minimal wages will likely be mandated to contribute to Colpensiones, even when they like to not. This alteration would possibly problem the monetary well being of the AFPs, given their broad funding actions.
Semi-contributory: A provision will cater to those that have contributed, but fall in need of the retirement standards. Notably, an analogous system exists throughout the personal solidarity-based financial savings scheme. Right here, a fraction of financial savings in personal accounts aids people who contributed however missed the mandatory pension threshold.
Voluntary Particular person Financial savings: These incomes above three minimal wages and contributing to Colpensiones can optionally deposit extra funds right into a separate personal pension plan.

Apart from the outlined system, the proposal would scale back ladies’s minimal contribution interval by 50 weeks for each baby, capped at three youngsters. This adjustment has a twin impact. On one hand, it expedites ladies’s retirement. On the opposite, it might have an effect on their employability, as firms would possibly hesitate hiring ladies foreseeing a shortened work tenure. 

Mandating people incomes as much as three minimal wages to contribute to Colpensiones may bolster the system’s short-term and mid-term viability. The system’s construction resembles a pyramid, the place youthful contributors’ funds maintain these larger up. Absent these funds, the construction dangers instability, jeopardizing future pensions for present contributors. Due to this fact, whereas reforms concentrating on weak populations are commendable, they could inadvertently danger their long-term monetary stability.

This doesn’t imply that such reforms aren’t needed, as goals like bettering residents’ high quality of life ought to all the time be pursued in a society. Nevertheless, the means employed to attain these targets should be fastidiously examined. However, the methods to achieve these goals require thorough scrutiny, necessitating collective participation.

Omar Camilo Hernández Mercado is a legislation pupil on the Universidad Libre de Colombia, Senior coordinator of College students for Liberty in Colombia, and a seminarist in “The Austrian Faculty of Economics” on the Worldwide Bases Basis.