Public versus Personal Pensions in Colombia

In Colombia, the pension system is regulated by Legislation 100 from 1993. This regulation divides the pension system into two principal regimes: the typical premium regime, which is public and managed by Colpensiones. The Colombian pension administrator is a state-owned industrial and business 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 have been a sort of financial savings account, during which every energetic employee who’s contributing has an account in his identify, 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 corporations, 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 accrued yield may have been generated with which the month-to-month disbursements will probably be paid.

The non-public pension system represents a person’s financial savings for his or her retirement. The precept is straightforward: the extra one saves, the upper the eventual payout. This method emphasizes particular person duty, 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. Nevertheless, 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. Primarily, at the moment’s employees assist the pensions of present retirees.

That is the place the primary drawback 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 probably be left to pay the present pensions. This occurs yearly. In line with the report on the state of affairs ready by the Contaduría Common de la Nación, through 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 search out the assets to pay the present pensions. In gentle of this, cash from public expenditure is used to fulfill the funds in query. All Colombians could be pressured to pay extra taxes to defray such expenditure. In line with Azuero (2020), up till the 12 months 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 non-public fund accumulates generated worth. As well as, the non-public funds have totally different modalities; one is free to decide on which one they want to belong to, and so they 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 methods 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 permitted, with the goals 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 now not work for a similar employer for 40 years. 

Pension methods around the globe are beneath nice stress resulting from 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:

1. Solidarity: This might 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 help will probably be particular, comparable to just for aged people residing in poverty, or obtainable universally to everybody over 65. This distinction is crucial as not differentiating may end up in sizable fiscal deficits.
2. 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. Primarily, these incomes as much as three minimal wages will probably be mandated to contribute to Colpensiones, even when they like to not. This variation would possibly problem the monetary well being of the AFPs, given their broad funding actions.
3. Semi-contributory: A provision will cater to those that have contributed, but fall in need of the retirement standards. Notably, an identical 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 required pension threshold.
4. Voluntary Particular person Financial savings: These incomes above three minimal wages and contributing to Colpensiones can optionally deposit extra funds right into a separate non-public pension plan.

Moreover the outlined system, the proposal would cut back girls’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 girls’s retirement. On the opposite, it could have an effect on their employability, as corporations would possibly hesitate hiring girls foreseeing a shortened work tenure. 

Mandating people incomes as much as three minimal wages to contribute to Colpensiones might 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. Subsequently, whereas reforms focusing on susceptible populations are commendable, they might inadvertently threat their long-term monetary stability.

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

Omar Camilo Hernández Mercado is a regulation pupil 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.