Abstract

This paper concludes that the sustainability of the public “pay-as-you-go” pension regime in Colombia (RPM) looks fragile and is threatened by massive transfers from the private “defined contributions” regime (RAIS) 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 nine million retirees moving to the RPM. Pressure to the fiscal budget will increase towards 90% of GDP (in NPV) as a result of the pension shortfall, making it very difficult to comply with a fiscal target of 4% of GDP per year. 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 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 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 financially sustainable path.

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