In preparation for the discussion of the pension reform, I would like to highlight some elements of the current system. Today in Colombia there are two pension systems: the public, Media Premium Regime (RPM), administered by Colpensiones, and the private, Individual Savings with Solidarity Regime (RAIS), administered by the AFPs.
The RPM is a traditional pay-as-you-go system that has generated significant actuarial imbalances in all parts of the world, mainly due to the demographic transition. The problem is that, with the aging of the population, every day there are more pensioners for each active worker and, consequently, the pay-as-you-go systems are becoming unsustainable.
For this reason, since the 1990s, the countries that depended on these traditional systems have been reducing the role of the pay-as-you-go component and introducing complementary individual savings systems, in which the pension is more based on what is actually saved by the worker during his working life and the returns from his savings, than a promise of payment product of contributions from future workers.
Colombia was one of those countries. The reform of Law 100/93 created the individual savings system managed by the AFPs. The RAIS, seen in its entirety, is a system of pillars in itself in which a worker who complies with making his contributions and the weeks contributed, is entitled to a pension. The RAIS minimum pension guarantee acts as a first pillar, in which, if the total amount saved is not enough for a pension from an SMLV, the Minimum Pension Guarantee Fund (FGPM) covers the difference and the person accesses their minimum wage pension. If the individual’s savings exceed what is required for the minimum pension, the person receives a pension resulting from individual savings and the FGPM does not contribute anything.
The FGPM is an excellent solidarity mechanism and is largely financed, since of the contributions of all affiliates to the system, 1.5 percent goes to this Fund. Today, the Fund has accumulated more than 30 billion pesos and supports close to 100,000 RAIS pensioners. When the resources of the Fund are exhausted, the Nation must cover the shortfalls of the Minimum Pension Guarantee (GPM), but it is estimated that this would not happen before 2060.
The problem with Law 100 was that it did not articulate the RPM with the new individual savings system and kept the RPM as an alternative to choose, with the aggravating circumstance that the RPM maintained huge subsidies for all pensions, including those for high-income workers.
The GPM is a very powerful element of the Colombian pension system since a worker, regardless of whether he is in the RPM or the RAIS, is guaranteed a pension of 1 SMLV if he meets the requirements. If the actuarial calculation is made, with the contribution rates in Colombia, the real interest rates and the contribution densities observed, we find that people who contribute with salaries of up to 2.4 SMLV would obtain a pension equal to 1 SMLV.
This happens because the contributions of these people are insufficient to obtain a pension of 1 SMLV, with which the GPM represents a subsidy component close to 50 percent in the case of a worker who contributes with 1 SMLV throughout his life. The percentage of subsidies gradually decreasing to 2.4 SMLV and from this level, RAIS pensions no longer have a subsidy.
If everything else were the same, for a worker in these conditions it should be indifferent whether they belong to the RAIS or the RPM, since in the end they will obtain the same pension.
However, the existence of higher subsidies in the RPM makes the RPM preferable for people who contribute with salaries greater than 1.6 SMLV, but only if they are certain that they meet the pension requirements. If, on the contrary, there is a risk of not being able to meet the quoted weeks, and given that the return of contributions it is done with the returns accumulated in the RAIS and only with inflation updating in the RPM, it will be preferable for the worker to belong to the RAIS.
From the foregoing it can be deduced that for those workers who estimate to contribute with income of less than 1.6 SMLV throughout their working life (approximately 76 percent of Colombian workers) it is more convenient to have the RAIS than the RPM. This is because if they meet the pension requirements, the pension to which they will be entitled will be to access 1 SMLV in either of the two systems, but they can access it at the same age and with fewer weeks of contribution (1,150 in the RAIS vs 1,300 in RPM). Additionally, if they do not meet the requirements to retire, the return of contributions would be higher in the RAIS.
Consequently, a pension reform proposal in which all workers who earn 1.6 SMLV or less are forced to switch to the RPM, it would not be being done with the welfare of those workers in mind.
JUAN PABLO CÓRDOBA GARCÉS
PRESIDENT OF THE COLOMBIAN STOCK EXCHANGE