Pension reform: Government and CARF uncover letters about how much it will cost

One of the central issues on which the debate on pension reform in Colombia has revolved has to do with the cost that the changes that the government of President Gustavo Petro would have on the nation’s finances would have, since there is no updated technical concept of the Ministry of Finance on the matter and The calculations that have been made by different study centers warn that it will be very high.

This is a discussion that has been approached from different angles depending, in most cases, on the mandatory contribution threshold in the savings fund that will be managed by Colpensiones, which was initially agreed upon at 2.3 minimum wages, while some sectors ask that be lowered to 1.5 and others to be raised to three or even four minimum wages, to guarantee better coverage.

While this initiative is in progress in Congress, where it awaits its last debate in the plenary session of the House of Representatives, the warnings regarding its effects focus on the importance of preventing a large fiscal burden from being generated for the Nation in the future, since otherwise the new pension scheme would become unsustainable.

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This Tuesday – June 4th – an update on the projections was released and recommendations of the Autonomous Fiscal Rule Committee for the pension reform, in which this project is analyzed from three perspectives, the first being a scenario without any change, the second a reform of 2.3 salaries and the third one with a threshold of 3 monthly salaries with mandatory contributions.

This Thursday, the Seventh Commission approved the pension reform in the third debate.

Sergio Acero Yate/Portfolio

With this, the CARF left aside the possibility of the increase being four minimum wages, as suggested a few months ago by President Gustavo Petro and recently proposed with insistence by the labor confederations, which argue that it is a measure necessary to generate better coverage.

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However, it is worth highlighting that Congress itself made it clear that the agreement with the Government was $2.3 salaries, same range that the Fiscal Rule Committee uses for its base projections.

This Thursday, the Seventh Commission approved the pension reform in the third debate.

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According to the Carf analysis, the first thing to say is that the solidarity pillar of the pension reform in Colombia is estimated to cost around $7.5 billion annually starting in 2026, assigning a monthly extreme poverty line of $223,000 to 2.8 million older adults who meet the age and vulnerability requirements.

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Likewise, in terms of fiscal impact, the solidarity program It presents a net cost of $4.8 trillion annually (0.3% of GDP), accumulating an expense of 3% of GDP in the first ten years. Faced with this, CARF warns that this financing must be approved annually by Congress and adhere to the established fiscal limits, which implies significant pressure on public finances in the long term.

Older adults

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“This amount is not explicitly contemplated in the Nation’s accounts presented in the 2023 Medium-Term Fiscal Framework. It is worth mentioning that this calculation considers a fixed amount of beneficiaries, which means that as the population grows The percentage of the eligible population decreases,” they explained.

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Secondly, for the semi-contributory pillar, it starts by saying that this group will receive a life annuity made up of their contributions adjusted for inflation and a return of 3%, in addition to a subsidy of 20% or 30%, which is why it will imply additional fiscal spending of 0.2% of GDP in 2025, gradually increasing to 0.6% of GDP in 2100.

Colombian pesos

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The CARF also reviewed the Net Present Value (NPV) of this pillar and provided an estimate of 35.6% of GDP, which represents an approximate cost of almost $560 billion if it is taken into account that the base Gross Domestic Product data used for them for this calculation was $1,564 billion.

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Finally, in the contributory pillar, the CARF maintains that, Under a scenario of 2.3 minimum wages, the implementation of this reform will increase Colpensiones contributions by 1.3% of GDP in 2026, with a projected additional impact of 0.7% of GDP for the year 2100. This is how things are , the Net Present Value (NPV) of the contributory pillar, considering the government transfers to Colpensiones, increases by 62.3% of GDP, which is equivalent to $979.46 billion.

Elderly

Courtesy – DPS

The Ministry of Finance also joined this discussion, which through a letter to the House of Representatives made known its technical concept on the fiscal impact of the pension reform, in which it projected two scenarios, one to the year 2070 and another with a cutoff to the year 2100 in which it explains how much it will cost to implement this project.

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“As for the contributory and semi-contributory pillars, compared to the scenario without reform, the bill reduces the balance of Colpensiones measured in Net Present Value (NPV) to 2070 by 4.2 percentage points. However, when incorporating the income from financial returns generated by the savings fund of the contributory pillar (12.25pp), the final variation in the NPV to 2070 represents a net saving of 8.1pp compared to the scenario without reform. this Ministry initially said.

Greater Colombia

Department of Social Prosperity

On the side of the solidarity pillar, the NPV of the fiscal impact to 2070 would amount to 20.1% of GDP, which would represent an increase of around 13.4 pp compared to the current transfer program, Colombia Mayor. In general, the provisions of the reform of the comprehensive protection system for old age would imply an increase in the fiscal cost in NPV to 2070 of 5.5 percentage points of GDP.

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In simpler terms, the Ministry of Finance maintains that in 2070, the pension system without reform will have a cost of 66.59% of GDP, while if this initiative is implemented, the cost would go to -71.82%. of GDP, revealing the impact for which the country will have to prepare.

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Meanwhile, regarding the accounts for the year 2100, Minhacienda says that the fiscal cost will go from -87.6% of GDP to -121.12% of GDP. This, according to experts, puts the country in a scenario of great challenges. facing the management of their finances and the need to ensure fiscal sustainability.

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However, the document says that “the implementation of the reform proposal, consistent with the provisions of the presentation articles proposed before the Plenary of the House of Representatives, would imply a net fiscal impact that is within the financial possibilities of the Nation in the framework of current and projected fiscal restrictions.”

Minister of Labor, Gloria Inés Ramírez

Courtesy – Ministry of Labor

Based on this, the Ministry of Finance closed by saying that “Given all of the above (…) it issues a favorable opinion to the text of the presentation report for the second debate before the plenary session of the House of Representatives” of the pension reform.