Public versus Private Pensions in Colombia

In Colombia, the pension system is regulated by Regulation 100 from 1993. This regulation divides the pension system into two major 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 non-public capitalization fund overseen by pension fund directors (AFP’s).

The non-public capitalization fund acts as if it had been a kind of financial savings account, during which every energetic 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 forth. On this means stated pension financial savings are capitalized, as curiosity is added and upon reaching retirement age; an gathered yield may have been generated with which the month-to-month disbursements can be paid.

The non-public 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 technique emphasizes particular person accountability, as every contributor’s pension quantity relies upon instantly 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. Nonetheless, these contributions don’t go to particular person accounts however are pooled into a standard fund. In contrast to the non-public system, this cash isn’t invested to develop over time. As a substitute, it’s instantly used to fund present pensions. Basically, at the moment’s staff help the pensions of present retirees.

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

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

In consequence, whereas the general public pension fund accumulates debt, the non-public fund accumulates generated worth. As well as, the non-public funds have completely different modalities; one is free to decide on which one they want to belong to, they usually even have brief and long-term investments, guaranteeing higher monetary safety for the contributor.

The Mercer CFA Institute’s world report on pensions compares 47 pension techniques world wide, and by learning the newest report, Colombia ranked twenty fourth, whereas the Netherlands is in first place.

Within the Netherlands, the Future Pensions Act was not too long ago authorised, with the targets of attaining a supplementary pension that rises quicker, a extra particular person and clearer pension accumulation, and a pension system extra in keeping with individuals who not work for a similar employer for 40 years. 

Pension techniques world wide are beneath nice strain attributable to monetary crises which have produced relentless inflation, geopolitical uncertainty, financial instability, and different unfavourable 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 Regulation 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 can be particular, equivalent to just for aged people dwelling in poverty, or accessible universally to everybody over 65. This distinction is important as not differentiating can lead to sizable fiscal deficits.
Contributory: The typical 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 can be mandated to contribute to Colpensiones, even when they like to not. This alteration may 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 wanting the retirement standards. Notably, the same system exists throughout the non-public solidarity-based financial savings scheme. Right here, a fraction of financial savings in non-public 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 further funds right into a separate non-public pension plan.

Moreover the outlined system, the proposal would scale back girls’s minimal contribution interval by 50 weeks for each youngster, capped at three youngsters. This adjustment has a twin impact. On one hand, it expedites girls’s retirement. On the opposite, it could have an effect on their employability, as firms may hesitate hiring girls 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 greater 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 might inadvertently danger their long-term monetary stability.

This doesn’t imply that such reforms aren’t obligatory, as targets like enhancing residents’ high quality of life ought to all the time be pursued in a society. Nonetheless, the means employed to realize these targets should be rigorously examined. Nonetheless, the methods to realize these targets require thorough scrutiny, necessitating collective participation.

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