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

30 Pages Posted: 27 Aug 2016

See all articles by Sergio Clavijo

Sergio Clavijo

Asociación Nacional de Instituciones Financieras

Alejandro Vera Sandoval

Asociación Nacional de Instituciones Financieras

David Malagón

ANIF

Laura Clavijo

Asociación Nacional de Instituciones Financieras

Andrea Ríos Serna

Asociación Nacional de Instituciones Financieras

Ekaterina Cuellar

Asociación Nacional de Instituciones Financieras

Nelson Vera

Asociación Nacional de Instituciones Financieras-ANIF

Date Written: August 22, 2016

Abstract

This document concludes that the sustainability of the RPM (Pay-as-you-go, defined benefits public regime) looks fragile and is threatened by massive transfers from the RAIS (defined contributions private regime) 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 9 million retirees towards the RPM. With this, budgetary pressure will increase as close to 90% of GDP (in NPV) as a result of the pension shortfall, making it very difficult to comply with the fiscal target of not exceeding the current budgetary allocation of 4% of GDP annually.

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 the 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 1 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 sustainable financial path.

Keywords: Pensions, Defined Benefit and Defined Contribution schemes, annuities

JEL Classification: Social Security and Public Pensions (H55), Private Pension Schemes (J32)

Suggested Citation

Clavijo, Sergio and Vera Sandoval, Alejandro and Malagón, David and Clavijo, Laura and Ríos Serna, Andrea and Cuellar, Ekaterina and Vera, Nelson, Risk of Disability, Old-Age and Death: Pension Sustainability in Colombia (August 22, 2016). Available at SSRN: https://ssrn.com/abstract=2827735 or http://dx.doi.org/10.2139/ssrn.2827735

Sergio Clavijo (Contact Author)

Asociación Nacional de Instituciones Financieras ( email )

Bogota
Colombia

Alejandro Vera Sandoval

Asociación Nacional de Instituciones Financieras ( email )

Bogota
Colombia

David Malagón

ANIF ( email )

Bogota
Colombia

Laura Clavijo

Asociación Nacional de Instituciones Financieras ( email )

Bogota
Colombia

Andrea Ríos Serna

Asociación Nacional de Instituciones Financieras ( email )

Bogota
Colombia

Ekaterina Cuellar

Asociación Nacional de Instituciones Financieras ( email )

Bogota
Colombia

Nelson Vera

Asociación Nacional de Instituciones Financieras-ANIF ( email )

Bogota
Colombia

Register to save articles to
your library

Register

Paper statistics

Downloads
17
Abstract Views
273
PlumX Metrics