By Sergio Clavijo, Alejandro Vera Sandoval, David Malagón, Laura Clavijo, Andrea Ríos Serna, Ekaterina Cuellar & Nelson Vera
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.

Full Content: SSRN