Risk of Disability, Old-age and Death: Pension Sustainability in Colombia

Sergio Clavijo, Alejandro Vera, David Malagon, Laura Clavijo, Andrea Rios, Ekaterina Cuellar and Nelson Vera

Journal of Management and Sustainability, 2017, vol. 7, issue 1, 103-114

Abstract: This paper concludes that the sustainability of the public ¡°pay-as-you-go¡± pension regime in Colombia (RPM) looks fragile and is threatened by massive transfers from the private ¡°defined contributions¡± regime (RAIS) to the RPM. The fiscal deficit of the RPM could be rising from 140% of GDP (in NPV) to 228% of GDP during the next three decades on account of the migration of close to nine million retirees moving to the RPM. Pressure to the fiscal budget will increase towards 90% of GDP (in NPV) as a result of the pension shortfall, making it very difficult to comply with a fiscal target of 4% of GDP per year. In addition, the life annuities¡¯ market is quite shallow in Colombia due to: i) the State guarantee of a pension equivalent to 100% of a legal-minimum-wage (1 LMW); which in turn is fully indexed to annual inflation; and ii) the risk of assuming longer periods of pension enjoyment via judicial sentences (elevating the current expectations of 20-25 year period of enjoyment). Limiting the pension guarantee to 50-75% of a LMW, allowing for life-annuities recalculation, and decreasing the cost-margin of insurance companies would help place the Colombian life annuities market in a more financially sustainable path.

Keywords: social security; public pensions; private pension schemes (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:ibn:jmsjnl:v:7:y:2017:i:1:p:103-114

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