Colombia’s Pension Reform Hampered By Political Tension

According to a new report by Colombia Risk Analysis, the debate underway over pension reform in Colombia is plagued with misinformation and confusion resulting from the current divisive political climate in the country, and conflicting objectives by various political actors.

Current protests and strikes over a myriad of grievances have partially paralyzed the country literally and figuratively. The current administration of President Ivan Duque enjoys only a 26% approval rating according to recent polls and thus lacks political capital to push through major reforms of any type, though they were able to move a modest but unpopular tax reform package through congress this month.

According to the report and Colombia Risk Analysis, the Colombian pension system urgently needs reform, as in its current form, it is insolvent over the long term. Added to this is the large sector of the population that works in the informal economy, thus does not qualify for traditional government backed or private pensions. In 2018, the public pension system cost almost 4% of GDP, so $12.2 billion pesos went to service pensions of only 2.1 million retirees—even though the country has an elderly population (ostensibly deserving pensions) exceeding 6.5 million.

President Duque is unlikely to manager pension reform during the remainder of his term in office.

Similar to the US, Colombia has a combination public-private pension arrangement with the public RPM functioning similar to the US Social Security System, and suffering from the same fatal flaw: current pensions are financed by current contributors rather than an actuarily sound  defined benefit plan.

The private portion allows employees during their working life to allocate contributions among various government approved funds and managers much like a 401k plan in the United States. The four fund managers are Porvenir, Protección, Old Mutual (Skandia), and Colfondos. Protección is owned by banking conglomerate Grupo Aval, and Porvenir is owned by Insurance giant Grupo Sura. Regulation creates a high barrier to entry for new managers, thus contributors are effectively limited to an oligopoly of 4 fund managers.

Almost half the Colombian workforce is employed in the informal sector and typically contribute nothing to the private or traditional public pension plan. They are covered by poverty subsidies Colombia Mayor (old-age Colombia) and the Periodic Economic Benefits Program run by the government. There are also special pension regimes for the military and other public sector employees.

There are several pension reform proposals being floated. Two domestic, by Colombian entities Asofondos and Fedesarrollo, plus alternate proposals by the Interamerican Development Bank and the OECD (Organization of Economic Cooperation & Development) of which Colombia is an aspirant.

For detailed coverage read the full report here, or contact Colombia Risk Analysis for in-depth analysis, context and projections on this and other political, economic and social developments affecting Colombia.