An Optimal Choice among Pension Systems: Evidence from Colombia

Octavio Martínez (), Ranjeeva Ranjan () and Kumar Sudheer Raj ()
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Octavio Martínez: Universidad Autónoma de Chile
Ranjeeva Ranjan: Universidad Católica del Maule
Kumar Sudheer Raj: Institute of Insurance and Risk Management

Lecturas de Economía, 2025, issue 104, 15-49

Abstract: This paper examines how Colombian workers choose between two pension regimes, pay-as-you-go (PAYG) and individual account (IA), in a context marked by widespread labor informality and uneven wage distributions. Drawing on a discrete choice framework, we hypothesize that there exists a critical wage threshold above which the higher replacement rate offered by PAYG outweighs the lower accessibility constraints. In contrast, while below this threshold, the IA system's more generous lump sum payouts become more appealing for individuals who may struggle to meet minimum contribution requirements. The model is calibrated to the data and then subjected to Monte Carlo simulations to gauge consistency with observed system preferences. Findings indicate that PAYG tends to favor higher earners through regressive subsidies and stricter qualification criteria, whereas IA proves more accommodating to low-income earners. The results underscore the need for nuanced policy reforms that acknowledge these distributional imbalances and address the challenges of labor informality

Keywords: Colombian Pension System; Individual account pension systems; Optimal choice; PAYG pension system; Regressivity (search for similar items in EconPapers)
JEL-codes: H55 J26 J32 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:lde:journl:y:2025:i:104:p:15-49

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DOI: 10.17533/udea.le.n104a359438

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