Pension: How to Counteract the Impact of the Aging of the Population in Latin America?

Recently, the pension issue has been one of the most critical in Latin America, with countries like Colombia developing plans to reform this item. With the arrival of President Gustavo Petro in the South American country, not only a change in the pension system has been raised, but also the possibility of increasing the retirement age in that nation.

Although the first president of the Colombians assured on his Twitter account that: “I resign before raising the pension age”, according to various experts, this is an option that cannot be ruled out, taking into account that the idea is to make the system is sustainable over time.

As explained by the Colombian authorities in May 2022, its citizens are getting older, reaching a life expectancy of 76.9 years in 2022. Actually, “73.8 for men and 80.13 for women,” explained the former Minister of Health, Fernando Ruíz, within the framework of the National Plan for Aging and Old Age in Colombia. “The estimates that are made indicate that, by the year 2050, life expectancy in Colombia will be very close to 80 years: 79.2 years; 76.3 in men and 82.2 in women. This indicates the progression of the longevity of the Colombian population,” Ruíz added at the time.

For this reason, for Antonio Alonso González, dean of the Faculty of Economic and Administrative Sciences at El Bosque University, it is not unreasonable to think of increasing the retirement age in the country. For he is important to taking into account that the higher the life expectancy is, there will be fewer young people contributing and more old people collecting.

"The recommendations that have been implemented in other economies in recent years would be to increase the years or weeks of contribution, delay the retirement age to at least 65 years, making this increase progressively," González explained in conversation with La República newspaper.

You can also read: Will Young Latinos Have A Pension When They Get Old?

Change the Pension Model?

However, this is a situation that is not only evaluated in Colombia, but in Latin America, and even in Europe. In recent years, some of the most influential powers of the Old Continent have considered raising the retirement age, in order to counteract the impacts of the aging of their citizens. Thus, countries like Spain already expect that by 2027 the retirement age will be around 67 years. A threshold that has already been reached in Germany for all people born after January 1, 1964.

Now, a crucial point to take into account so that the increase in age is balanced (which seems to be constant advice from the Organization for Economic Cooperation and Development (OECD) and the European Union) is precisely a change of system pension. In this, it is ideal that people have the obligation to contribute to a public fund, but still have the right to save voluntarily in a private pension fund.

At least that is what Norway, Switzerland, and Iceland demonstrate, in which the implementation of the mixed pension system has placed them as the three best countries to grow old, according to the Natixis 2022 Retirement Index.

With some differences in its three pillars (state pension, professional pension and private pension), these three countries, as well as the Netherlands and other European nations, have managed to achieve a balance between the minimum age for retirement and the income received by adults elders in their territories. It should be remembered that the three-pillar concept offered by the mixed pension system is based on not only ensuring a minimum and decent pension for people who worked throughout their lives, but also providing financial assistance to who could not do so.

For example, in the case of the Netherlands, its state pillar guarantees all its citizens over the age of 66 and a half a salary equal to 70% of the Minimum Interprofessional Salary that the country manages each year, whether they have paid a pension. To cover this expense, the Government is in charge of administering the citizens' taxes, as well as the contributions made by the workers. That strategy makes this strategy 100% state-owned and with zero interventions from the private sector.

For their part, to counteract public spending and alleviate somewhat the consequences of the increase in life expectancy, these countries have also been able to develop a private pension system. In this, people can freely decide to add programmed savings that will be added to what is obtained after contributing to the mandatory pension system.

In fact, the success of this pillar is such that even socialist China has also had to adapt to private pension systems as a way of guaranteeing a better retirement for its elderly.

In the case of the Asian giant, the birth crisis (2022 was the first time in 60 years with a reduction in its population) as well as the increase in life expectancy and its increasingly aging people, led it to take on this option as an opportunity to balance their pension coffers in the future.

“Around the world, pension systems are facing the challenge of population aging, which makes pay-as-you-go systems unsustainable. More and more countries introduce savings pillars (capitalization), in this case China. Without a doubt, more will come,” said Daniel Wills, technical vice president of Asofondos.

In this way, the great powers are betting on the non-compulsory individual savings of their populations as a cushion to counteract the pension impact derived from the increase in people's life expectancy. However, a question arises from this situation: Is this a way for States to disassociate themselves from their responsibilities by creating a pension gap between those who can and cannot save voluntarily in private pension funds?