After the government presented a blueprint of what pension reform would become, various doubts and uncertainties arose among pension funds, businessmen, and of course Colombians in general. The offer doesn’t have many details yet; It is certain that there will be reform.
EL NUEVO SIGLO met with Fedesarrollo’s executive director, Luis Fernando Mejía, to understand the system of pillars proposed by the Government and to analyze how appropriate this reform was as proposed.
NEW CENTURY: What is Fedesarrollo’s vision for his pension reform proposal?
LUIS FERNANDO MEJÍA: First, we undoubtedly share the need for a pension reform. It seems desirable to us that the government put a reform proposal on the table. It is clear that we have a very serious problem in the coverage of our protection system in the current table. Only one out of every four seniors can receive a pension.
This means that the mandatory system we currently have has unfortunately not fulfilled its main goal of covering all older adults of full retirement age.
In addition, with some very serious problems in terms of inequalities, different treatment of people who retire in some programs, private or public, and subsidy expenditures for public or medium-contribution pensions, which are unfortunately high. and it is very poorly targeted, especially at higher-income people.
ENS: How do you evaluate the column system proposed by the government?
LFM: We share the government’s idea of considering a pillar system. Competition between public and private systems in pensions must be eliminated, which is unusual around the world. Few countries have a similar system, including Peru and Colombia, so we believe this (the columnar one) is the right way. However, the current version outlined by the Government in this first presentation undoubtedly raises great concerns. Nearly 90% of employed citizens in the country have incomes below the four-month minimum wage, meaning that the current proposal will raise practically all people (90%) into the public system.
If the existing parameters of the benefits of the average premium regime, which is significantly higher than the special regime for people meeting certain requirements, are not changed, they can undoubtedly aggravate the financial problem, because this is the case. That the Executive is currently incapable of assuming that it will be placed at the head of the State.
In this sense, there is concern that only 10% of pension flows will reach private funds, which will ultimately have negative effects on such savings, which are important for private investment and for financing the national government itself. It should be noted that pension funds are large public debt holders.
ENS: How can I explain to people who have accumulated private funds that some of their resources are going to finance the public system?
LFM: What the president said at the time, and what was still unclear in this proposal, was that 90% of people whose incomes were below the four minimum wages would have their contributions go toward financing current expenditures, particularly expanding coverage for all seniors. adults who do not currently have a pension.
ENS: That is, the basic income proposed by the Government will be taken from there?
LFM: That’s right, it was a proposal announced by President Petro at the time, but I reiterate that it was not clear in the final proposal. But if this is the case, in practice this really means a deterioration in the Government’s financial situation, ie financing current expenditures with contributions from people who enter up to four minimum wages to contribute to the public fund. In this sense, investors will pay attention to this discussion, because the key point here is that pension reform should include not only the fundamental issue of old age protection, of course, but also fiscal restraint.
It should be noted that Colombia has a huge financial problem. The country is completing three consecutive years with a deficit of more than 7% of the Gross Domestic Product; then the financial space to undertake new spending or debt commitments is very limited, practically zero. In this sense, these two debates should be combined with a discussion of pension reform and the fiscal space necessary to make reasonable reform.
This draft, in its current form, raises concerns on these dimensions. The idea is to have a reform that could contribute to this debate, not just on the pension side, but in the tax area as well.
ENS: Which of Fedesarrollo’s proposals could be included in this reform?
LFM: We are preparing a range of offers from Fedesarrollo in various sizes covering tax, employment and pension issues, among other important topics. We put our proposal on the table, which we consider most desirable in terms of finances and coverage, and which also largely eliminates pension subsidies for upper-middle-class income.
At that time, we had forwarded our proposals on this matter to the national government and are fully prepared for dialogue with the State.
ENS: Will this offer increase the rate of non-retirements?
LFM: no doubt. Therefore, one of the important issues is that a pension reform should also reorganize the pension criteria in the public system; this remains beneficial for those who meet the requirements. In Colombia, for example, pension is calculated on wages earned over the last 10 years, which is not the case in most countries where all employment history is calculated on contributions made. Even at relatively high replacement rates of over 60%. The replacement rate shows how much of your salary was earned during your retirement period.
Therefore, this important element of being able to reform a system of middle bonus regimes that benefits the upper middle class should be discussed. If this is not done, and especially if the scope focusing on this public regime is widened, it may create financial pressures. Colombian society is relatively aging; that is, there are more and more older adults in relation to teenagers.
ENS: Can pensions be balanced under different special regimes?
LFM: In this discussion, it is important to consider the different dimensions of the special regimes that still exist, although many of them have long since disappeared with the passage of laws. But two very important ones will remain: the army and police forces and teachers. These require deep analysis.
Fedesarrollo has not done a detailed analysis to understand the diagnosis and possible solutions in these situations. However, I think it’s reasonable to include this discussion to fully understand how different retirement plans will call the country.
ENS: Are you optimistic about this reform?
LFM: Yes, while the president was campaigning and recently taking office, he suggested that one of the critical issues he wanted to solve was the pension system. In this sense, we are optimistic that this proposal will indeed be discussed in depth with all stakeholders in a public and transparent manner.
Our call is to include the fiscal element in pension reform, as it is difficult at the moment to extend pension coverage to a minimum income for those without a pension, and in this sense these two discussions should be combined: pension reform to gradually reduce the fiscal deficit. There will definitely be a gradual need.
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