The Government will file on March 16 the pension reform bill that seeks to establish a pillar system in which Colpensiones and the fund administrators pension and severance funds (AFP) complement each other, rather than compete.
The new system that has been discussed to date would be based on three pillars. The first of them is solidarity, since a basic income corresponding to half a current legal minimum wage would be given to all those people who do not manage to obtain a pension.
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The second is the contributory one, in which all people who earn up to four minimum wages will have to start making their mandatory contributions to the average premium scheme administered by Colpensions. And the third is the complementary one, so that those with incomes above can make additional contributions to the individual savings regime of the AFPs.
Before knowing the final project of the Government, the Fiscal Observatory of the Javeriana University presented his own pension reform proposal with the participation of the consultant Eduardo Lora, Daniel Mantilla García (U. de Los Andes), Oliver Pardo (U. Javeriana) and Mauricio Salazar (U. Javeriana).
“There is a fear that in this system workers’ savings will be diverted towards expenses that the government wants to prioritize, with negative consequences on financial savings and on the fiscal sustainability of the pension system in the medium and long term. There is also the fear that the reform will leave unresolved the problem of low coverage (both for pensioners and active affiliates) of the current system. These limitations can be overcome through a consensual reform that respects the priorities of the government and of the others and institutions of the current system”, reads the report presented.
What does the U. Javeriana Fiscal Observatory propose?
In the proposal of the Fiscal Observatory of the Javeriana University there are four pillars:
1. PILLAR 0 or SENIOR ADULT PROGRAM: It would continue to focus on the poorest, at least in the short term. It will grant a conditional subsidy that in principle will be less than half the minimum wage. However, the long-term objective will be to approximate it to half the minimum wage and grant it to everyone who does not have a pension at age 65.
2. PILLAR 1 or INDIVIDUAL NOTIONAL ACCOUNTS SYSTEM (RCNI): This pillar is based on the mandatory contribution of workers and their employees and will be administered by Colpensiones. It will be for salaries of up to 2 minimum wages. In this pillar, the contributions of each worker would go to a notional account. The “notional” nature of the account refers to the fact that the contributions are not actually invested.
What are nominal accounts?
Notional accounts are a concept used in the design of some social security systems. The basic idea behind notional accounts is to create an individualized account for each person in the system, into which contributions are credited and from which benefits are paid. This creates a direct link between the contributions a person has made throughout their working life and the benefits they will receive in retirement.
In a notional account system, contributions made by individuals and their beneficiaries are not actually deposited into separate accounts, but are used to fund current retiree benefits. However, individualized notional accounts allow the calculation of the benefits that a person will receive in the future based on their contributions.
It is important to note that notional accounts are not the same as individual savings accounts, such as those used in some private pension systems, since funds in notional accounts are not invested and do not accumulate real financial assets. Instead, the value of the notional accounts is determined by the actuarial calculations of the social security system and benefits are paid out of the current income of the system.
3. PILLAR 2 or MANDATORY SAVINGS REGIME (RAO): This pillar is based on the contributions of workers and their employees and allows workers to save for their future retirement. Here would be the salaries of more than 2 minimum wages. In this pillar, of a private and contributive nature, the contributions would go to an individual savings account (as in the current RAIS) or to another type of retirement savings.
4. PILLAR 3 or VOLUNTARY SAVINGS SCHEME: Workers can choose to participate in this pillar and save for their future retirement through investments in financial instruments, such as pension funds or individual savings accounts. The regulation of the system would be in charge of an autonomous commission.
Gloria Inés Ramírez, Minister of Labor, said that the labor reform will be announced on March 16.
Ministry of Labor.
According to the Observatory, this proposal respects the restrictions that the government has established, such as not changing the minimum ages to retire or the contribution rates and would only apply to those who on January 1, 2024 have not reached 52 years of age if they are men. or at 47 if they are women. Those who have reached these ages will continue in exactly the same conditions as they are today.
How would the Non-Contributory Pillar 0 or Senior Adult Program work with the proposal?
1. People over 65 who do not have a pension will have part of this non-contributory pillar, where you can receive an income from the Adulto Mayor program. Due to budgetary restrictions, the program will be focused on the poorest people over 65, at least in the short term.
2. The amount of Senior Citizens could progressively increase up to half the minimum wage depending on budget availability and cover all those over 65 who do not have a pension. In this case, there would not be a very large gap between minimum wage workers who will complete 1,500 weeks and those who will not. However, given the current fiscal constraints, that is a long-term goal.
3. Be a beneficiary of Elderly does not exclude the person from enjoying the «accumulated pension rights» of pillar 1 or the savings of pillars 2 and 3.
4. Any beneficiary of the Adulto Mayor program will progressively lose the assistance of the program when all their «plus income» exceeds 2 minimum wages, it will disappear until completely when all other income exceeds 4 minimum wages. “Plus income” includes any implicit homeownership income (the imputed value if the home is rented).
People over 65 who do not have a pension will have part of this non-contributory pillar.
How would Pillar 1 or the Regime of Individual National Accounts (RCNI) work with the proposal?
1. This pillar will be managed by Colpensiones and will replace the current Average Premium Regime with Defined Benefit. This pillar will receive the same 16% of the current contribution (4 points paid by the employee and 12 points paid by the employer or on the contribution base income in the case of independent workers), for income of up to 2 minimum wages. Salaries in excess of 2 monthly minimum wages, without any limit, will make contributions to pillar 2 with the same basic rates of the current RAIS.
2. This pillar will be called the Individual National Accounts Regime (RCNI). A notional account is understood as an individual record of contingent liabilities that, however, does not have a counterpart in the assets or reserves of Colpensiones and that, therefore, does not give capital withdrawal rights or constitute property of the individual (see box on notional accounts). .
3. Of the 16 points of contribution to RCNI, 3 points will go to life and disability insurance and administration expenses (as in the current RPM).
4. Contributions to the RCNI will make up “accumulated pension rights”. These contributions will have a fixed real rate of return of 4.5%. This rate may be reviewed periodically by the Autonomous Commission for the Regulation of the Pension System, CARSP (see below). Anyone who meets the requirement of contributing 1,500 weeks may request their pension.
5. To every worker under 52 years of age if a man or 47 if a woman on January 1, 2024, who has made contributions to the old Colpensiones Media Premium Regime (RPM) until December 31, 2023 The value of these contributions will be credited to your individual RCNI account with a return equivalent to inflation plus 4.5 percentage points per year.
6. Those who are at least 62 years old if they are men or 57 years old if they are women, who have contributed at least 1,500 weeks, adding those of the old RPM and RAIS, will be entitled to a pension.
7. The savings of people over 52 (men) and 47 (women) affiliated to the current RAIS will remain intact. For all other people, upon reaching pension age, the weeks and capital amounts accumulated by their funds from contributions to administrators by the AFPs up to two minimum wages will be taken into account. Ownership of this capital will continue to belong to the individual, but it will be administered by Colpensiones when the individual reaches retirement age. Colpensiones will proceed to gradually manage and decumulate those assets in order to finance pillar 1 of the individual.
8. Due to the design of the abutment system, there will be no possibility of transfer between systems.
9. Transfers between mechanisms currently help to reduce the Colpensiones cash deficit. However, in the medium term, the suspension of transfers will reduce the fiscal pressure on the system given that currently the resources that Colpensiones receives for transfers are a very expensive way of getting into debt, since for each person who transfers from an AFP to Colpensiones, the latter assumes the obligation to pay your pension by granting a subsidy that is greater the higher the base contribution income of the people.
How would Pillars 2 and 3: Mandatory Savings Regime (RAO) and voluntary savings work with the proposal?
1. The basic mandatory contribution rates to the Mandatory Savings Regime (RAO) will be the same as those currently in force (4 points paid by the worker, 12 points paid by the company), but will only be applied for wages in excess of 2 minimum wages, with no maximum limit.
2. Of the 16 contribution points to the RAO, 3 points will go to life and disability insurance and administration expenses (as in the current RAIS) and 1.5 points will go to the Minimum Pension Guarantee Fund (FGPM). The resources of the FGPM will be used, as now, to complete the capital required so that AFP affiliates who today are at least 47 years old if they are women and 52 if they are men can receive life annuities worth a minimum wage.
3. In pillar 2, the contributions on high salaries paid by the worker will be maintained, which are currently allocated to the Pension Solidarity Fund (between 1 and 2 points on salaries of more than 4 minimum wages). You are contributing to finance the Adulto Mayor del Pilar 0 non-contributory program.
4. Those who have reached retirement age and the 1,500-week requirement will receive a life annuity or programmed withdrawal corresponding to their accumulated balance in the RAO.
5. This life annuity or programmed withdrawal will be received in addition to the RCNI of pillar 1. Unlike the old RAIS, in the new RAO there will be no minimum amount of programmed withdrawal income or life annuity.
6. Financial entities other than the AFPs may be authorized by the Financial Superintendence to offer individual savings programs that can be approved for pillars 2 and 3. Every company will be free to choose the AFP or the approved savings program to which its workers will be affiliated for make contributions for wages in excess of 2 minimum wages. Every worker will have the option of changing to an AFP and/or an approved savings program different from the one chosen by the company.
