How urgent is a pension reform in Colombia

One of the issues that currently most intrigues Colombians has to do with pension savings.

(What happens to pension savings if the member or pensioner dies?).

According to the most recent Mercer CFA Institute Global Pension Index 2022, Colombia is waiting to consider a pension reform in Colombia that includes benefits of the public regime and those of an individual capitalization system.

How is pension coverage in the country? What does the index measure?

(Relentless inflation becomes a weight for pensions in America).

In this episode of Economicast, David Cuervo, Director of the Wealth and Financial Welfare Business Unit for Mercer Andina, CA and the Caribbean, provides details of the index and how urgent the pension reform is in Colombia, among other topics.

According to the fourteenth annual edition of the Mercer CFA Institute Global Pension Index (MCGPI), compiled by Mercer and the CFA Instituteonce again, the Icelandic pension system tops the list, while the Netherlands and Denmark retain second and third place, respectively.

The MCGPI is a comprehensive study of pension systems globally, covering 65% of the world’s population. It compares pension systems around the world, highlights some of their shortcomings, and suggests possible areas for reform that would make it possible to offer more adequate and sustainable retirement benefits.

(The country that approved that women retire at the same age as men).

According to the report’s findings, Colombia with a weighted rating of 63.2 is located in position 21, behind other countries on the continent such as Uruguay (71.5), Canada (70.6), Chile (68.3) and the United States (63.9).

According to the Institute Global Pension Index, Colombia improved its rating compared to 2021, the year in which it ranked 25th with a weighted score of 58.4, a symbolic improvement as it occurs as a result of net replacement rates and greater coverage of private pensions. However, and according to Mercer experts, it is important to take into account some recommendations for this system to increase its coverage and sustainability.

This year’s analysis highlights the importance of generating an allocation of risks to which a pension system is exposed. Leaving the individual alone, so that he alone assumes his longevity and investment risks through defined contribution plans is not appropriate. But neither is it that the state assumes all responsibility regarding the pension issue.

“Colombia is facing the great challenge of carrying out a structural reform of its pension system. For this, very clear objectives must be defined and all interest groups must be considered equally. Thinking about a reform model like the one that is being proposed could create gaps in some issues and situations that are a priority to consolidate an effective system of protection of old age”, says David Cuervo, Director of the Wealth and Financial Welfare Business Unit for Mercer Andina, CA and the Caribbean.

According to Mercer, the strength of a pension system is largely related to the savings strategy established in the present for the payment of tomorrow’s pensions. In the case of Colombia, it is important to take into account that one of the elements that greatly weakens the pension system is the unlimited and excessive access to the resources that have been allocated for the payment of allowances.

An element that must be avoided at all costs, in order to consolidate a sustainable model.

Governments must ensure that citizens are aware of the importance of these savings and avoid to the maximum, -except in a few and extreme situations-, that people can access these resources. This will have great consequences on the purpose and functionality of the system, as it will make it exclusively a savings model.

“Mercer’s opinion has always been in line with the need to establish a correct balance between the benefits of a public system that guarantees protection for the least favored, with the virtues of an individual capitalization system in which savings, investments and its yields generate greater protection for old age”, Complete Raven.

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