Only one in four Colombians is pensioned, so the goal should be to increase coverage, but also cut subsidies

"In pensions, it is impossible in Colombia to make a reform in which everyone pays what corresponds to them," said Finance Minister Alberto Carrasquilla, elected by President Iván Duque, in an interview with the newspaper El Tiempo.

Leer en español: Lo que se sabe de la reforma pensional de Duque: no ataca el principal problema

What Carrasquilla says has some truth, in this country, due to the high inequality and informality of the labor market, it is highly unlikely that the pension system’s contributors will receive the same amount they contributed once they retired. However, this does not mean that we should stop trying to make the system as fair as possible.

The most important thing, in this sense, should be to formalize the workers, integrate them IGNORE INTO the pension system and increase the base of contributors. Thus, although not all pensioners would receive exactly what they contributed, because of the imbalance between what the poorest and the richest contribute, at least everyone will receive something, more or less proportional, to what they contributed.

From the little that is known of the reform to the pension system of Iván Duque, the intention can be the correct one, but some details divert it from the main problem.

The newscast of Caracol reported that pension subsidies will increase from 75 thousand Colombian pesos a month to 250 thousand COP, something that indicates that if true, the proposal would be threatening the sustainability of the system.

A proposal with good intentions

Referring to a possible pension reform, RCN Radio quoted Iván Duque stating that "the pension age will not increase, but it is necessary to formalize the base of the contributors and establish the same scheme for all."

Also read: Is there a global crisis in the pension systems?

That is the real problem of the pension system in Colombia. Studies by ECLAC show that in the coffee country only 24% of pensioners receive a monthly amount above the minimum wage, and only 5% among women. According to the same organization, in other countries in the region such as Mexico, Argentina, and Brazil, the average number of pensioners receiving above the minimum wage is around 90%.

The primary objective of any pension reform in Colombia should be to increase the base of contributors, something that President Duque seems to have clear. Discarding the increase in retirement age, which does nothing to ensure the sustainability of the pension system before the 'social bomb' that is coming, Ivan Duque shows that, on that side, has a well-targeted proposal.

What is 'Social bomb'?

'Social bomb' is the term that was adopted to describe the population phenomenon in Colombia. Although before the population pyramid of the country had a triangular shape, with a broad base of young workers and a narrow tip of pensioners, with the aging of the worker base is now adopting a barrel shape. This is problematic, because soon, the bulk of the population that previously worked and contributed to guarantee the income of pensioners, will be pensioned and there will not be a working base of equal size to support it.

What Duque ignores

Even though the supposed increase in subsidies to pensions in general may mean that the state cost of the pension system increases, putting its sustainability at risk, this is not the only or the main threat.

Special retirement regimes, for example, like those of the police, military forces and magistrates, have negotiated favorable terms with the government, and receive benefits such as early retirement.

Special regimes are extremely expensive and are financed exclusively by the State. El Espectador reports that this year 41 billion Colombian pesos will be allocated to the so-called 'unfunded pensions'. This figure is equivalent to 4.2% of the national gross domestic product, and only benefits 2.1 million Colombians.

If Duque fears the increase in state spending on pensions, and seriously wants to change the solution of subsidies by one that prioritizes the increase in the base of contributors and the formalization of workers, he cannot ignore the huge expense involved in the special regimes. One should not be able to talk about pension reform and state spending without even contemplating this enormous outflow of resources: it is the white elephant of the pension debate.

LatinAmerican Post | Pedro Bernal