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Technical Vice-Minister of Finance, and former Advisor to the Commission on Public Spending in Colombia and Professor at the Faculty of Economics and Researcher at The Center for Economic Development Studies (CEDE) at the Universidad de los Andes in Bogota. The author would like to thank the IMF for the appointment as Visiting Scholar in the Western Hemisphere Department while he was writing this paper and also “La Fundación Tecnológica del Banco de la República” for its support. The author would like to express thanks for comments made by M. Bonangelino, O. Gronlie, P. Neuhaus, K. Baer, R. Krieger, J. Thornton, G. Kopits, C. Cuevas, and to the members and technical staff of the Commission on Public Spending.
Comprising Cajanal, about 55 other national pension funds, and 991 regional pension funds.
The highest pay-off for the contributor (or the highest fiscal cost for the government) occurred at the moment of completing 25 years of contributions; the implicit return on contributions declined rapidly thereafter. Workers who entered the pension system late or contribute only for a short period obtained real returns that exceed their contributions by 300 to 400 percent.
The six excluded the pension schemes of the security services, teachers and the state oil company.
The original proposal envisaged an increase in the retirement age by five years in the case of females (to age 60) and three years in the case of males (to age 63). However, an increase of only two years was approved in each case. Given that life expectancy in Colombia has been increasing steadily in recent decades and now averages nearly 71 years, there appear to be valid demographic reasons to justify a further increase in the retirement age to 62/65 years (female/male). Such an increase would bring Colombia’s retirement age closer to that in most other Latin American countries.
The proposal taken to congress in 1992 called for a short period of transition to be new conditions, so that new retirement ages and replacement rates would apply only to workers retiring after 2003 (a ten year transitional period). However, congress decided to extend the transitional conditions for another ten years, delaying the effect of the adjustment until 2013.
Although this earmarking represented an attempt to prevent the central government from assuming the full obligation for the low income groups, it has been associated with new problems of avoidance and under reporting at the firm level.
Employers are required to provide severance benefits of one month’s salary for each year of employment; the severance program that has been administered by private firms since 1990 provided the basis for the establishment of the new private pension system.
Pension liabilities are usually netted out of expected contributions during the projection period, which is the case here for calculations involving the ISS and the AFPs during the period 1995–2025. However, for special public sector schemes excluded from the reform it is not yet clear how contributions will be shared between the central government and the public servants. In these cases, the preliminary calculations presented in Table 3 are only partially net of contributions (for instance, military contributions are computed at a rate of 5 percent of payroll, instead of the 13.5 or 14.5 percent established under Law 100 for other sectors).
It is worth noting that the expected amount of unfunded pension liabilities stemming from the ISS alone (10 percent of GDP) represents about half of the (net present value) of known oil exploitation and that the accelerated exhaustion of oil reserves actually pose a threat for maintaining net positive exports of oil by 2010.