Colombia’s Proposed Pension Reform Seen Falling Short

Asfondos chairman of the board Marcela Giraldo tells Bloomberg Línea the government’s proposed reform will not be sufficient without a wider labor reform

Colombian President Gustavo Petro signs the bill for the country's pension reform.
November 22, 2023 | 10:55 AM

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Bogotá — Colombian President Gustavo Petro’s proposed pension reform has been controversial from the outset, partly because of its impact on the capital markets, but also because, as it stands, it is seen as not able to solve Colombia’s pension problems.

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This is one of the conclusions drawn following an interview by Bloomberg Línea with the president of the country’s pension management institution, Colfondos, Marcela Giraldo, who said that Finance Minister Ricardo Bonilla is aware of the problems with the proposed reform submitted to Congress.

Marcela Giraldo, presidente de Colfondosdfd

“To me the truth surprises me, that the fiscal endorsement has been given after the Ministry of Finance proposes, with figures that we qualify as optimistic due to the growth rates that Colombia has not seen in its entire history, even though the common [pension] fund will be exhausted by 2070,″ said Giraldo.

Regarding the government’s statements concerning the pension reform, having acknowledged that the common fund will be exhausted in 2070 and that another pension reform will be required, Giraldo pointed out that “a person who was born in 2000 is 23 years old today, that is, and just starting their working life, and we are in Congress saying that we are going to make a reform that, in 2070, when that person is 70 years old and requires the payment of their pension, there will no longer be money to pay pensions”.

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She questions what kind of incentive the pension reform offers for new workers entering the labor force.

“How do young people feel about such an approach? An approach in which they are asked to contribute, because what they are being asked with that bill is that they put all their effort and contribution into saving, what the finance minister refers to as a forced saving, but it is a person’s savings, and those savings go into a common fund, and in 2070 it will no longer be there, and that is when it is projected that they are going to need to start receiving their pension,” Giraldo said.

Giraldo assures that Finance Minister Ricardo Bonilla himself understands the problems that the pension system will continue to have if the reform is approved as proposed.

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“The minister knows the pension system very well, and he knows that a fundamental pension reform involves sitting down to talk about the special and exempted regimes in depth, and parameters, this pension issue by itself and in isolation does not improve the pension situation unless it includes labor reforms aimed at improving job creation, formal employment and also encouraging more people to want to contribute, and even freeing the minimum wage barrier so that more than half of Colombians who do not earn a minimum wage can contribute,” she added.

“The pension system is not taking care of that, and when I listen to the minister I know that he is clear about it, and I hope that these issues will come up during the debate [in Congress] and that there will be the in-depth discussion that is so necessary,” Giraldo said.

Her request regarding a change to the minimum-wage barrier refers to allowing informal workers who do not earn a minimum wage to make contributions for a lower amount because, she explains, today they are excluded from all social security contributions.

“It is in the Constitution that a pension can be derived from the minimum wage, but today a person who does not earn the minimum wage remains outside the social security benefits, not only from pension contributions but from contributions to all social security and in Colombia, according to the counsel for private competitiveness, nine out of 10 companies have fewer than nine employees, this reality calls for transitional schemes where people can begin to have their employment situation formalized, but without requiring the payment of salaries equal to the minimum wage, because what reality reflects is that this is not viable for the vast majority of companies.”

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One of the biggest debates that has taken place regarding the proposed pension reform is the contribution to be made to Colpensiones. The bill refers to three minimum wages, while industries have asked to reduce the threshold to one or 1.5 minimum wages.

However, Giraldo says she does not support any kind of threshold.

“We insist that we do not agree with any threshold,” she said.

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The structural situation proposed by the reform of reverting the great majority of Colombians to an average premium base regime is an unsustainable situation in terms of structure,” she added.

“The issue of lowering the threshold from three minimum salaries to one reduces the percentage of the population that loses the possibility of having a savings in an individual account in their name from 90% to 60%, but it is still a majority of Colombians who would remain in an unsustainable system”, she explained.

In spite of the controversy the bill has caused, Giraldo said that, in the forums that have been held to discuss it, improvements have been made.

“We have talked about the issues that are of concern to us, the representatives of the pension fund managers (AFPs), and Congress members have also been there, both in the Senate and the lower house, and I see a Congress that is better informed on very detailed issues of the reform,” she said.

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