A good pension reform involves achieving four objectives: more seniors with income in their old age (coverage); public resources for the most vulnerable (equity); a viable system for current and future older adults (sustainability) and finally, a pension amount that allows them to meet their needs (adequacy).
However, studying the effect of a reform on each of these variables can be complex, and in the vast majority of cases the proposals on the table generate clashes between these objectives. Hence, the ideal to evaluate a pension reform is to measure its effect on pension savings as a percentage of GDP, because the higher this variable, the more feasible a positive impact on the four objectives at the same time, and with total certainty with less savings the possibility of having a good system is dramatically reduced.
When analyzing the international context, we see a trend of pension reforms that increase savings, this is the case in Latin American countries with left-wing governments such as Mexico, with López Obrador, where contributions to individual accounts will go from 6.5% to 15.5%. , and Even in the current proposal in Chile, although with design problems, it also goes in that direction by increasing individual savings by close to 6 percentage points. OECD figures highlight Denmark, which went from having close to 100% in 2001 to more than 230% of pension savings as a percentage of GDP. Similar occurs with the Netherlands, Canada, the United States, and even Colombia, which along the same lines, went from almost 5% of GDP in 2001 to close to 40% of GDP (2021).
However, pension savings are not only key to achieving the desired objectives.
For an emerging country, it is the basis for companies, government and households to finance themselves in the long term. This is not a minor point, and in no case should it be left out of the analysis of a reform. Mandatory savings with a long-term vision have allowed the national government to finance its programs over 10, 20, 30 years, and to have a wide matrix of investors (without pension funds it is almost impossible to expect a great appetite for government bonds for part of the investors, and especially in long terms). Likewise, this saving has led to the expansion of large companies such as Ecopetrol and ISA, and very importantly: ordinary citizens have been able to access housing with long-term mortgages, at good interest rates.
Destroying pension savings, or allocating fewer resources to convert them into current public spending would be, as they say colloquially, a shot in the foot. The first affected, the government itself, having to pay higher interest, and finance itself in shorter terms, a time bomb! Companies would also be affected by not being able to access relatively long-term financing for large investments.
At the end of the day, access to financing would be a privilege only for a small elite, leaving the majority on the sidelines without having the possibility of improving their conditions and quality of life.
Jorge Plain
Vice President of Market Development at AMV.
The Self-regulator of the Colombian Stock Market
