THINKING

Pension reform in Colombia: history repeats itself

Colombia implemented a major reform of its social security system in the early nineties. Influenced by international geopolitics, the reform included neoliberal elements that reduced the involvement of the state in the administration of social welfare on several fronts. That meant that both healthcare and pension systems were completely redesigned.

The new social security system was based around a massive increase in coverage for its citizens, protecting Colombians financially from catastrophic health events and old age and, eventually, achieving social equality across the population.

Healthcare coverage at the time was in crisis. Just 25% of Colombians had insurance, most of them through their formal employers. 90% of state subsidies to providers ended up being allocated to the quintiles of the population who were best able to pay while public healthcare spending overall was around 5% of GDP, far lower than the internationally accepted standard.

Twenty-five years later, one might say that the original objectives for the healthcare system have been achieved with great success: today there is universal coverage; over 95% of the population possesses some kind of insurance. Public healthcare resources are allocated to specific recipients and subsidies are channeled to the two most vulnerable quintiles of the population thanks to the incorporation of a classification instrument called the Selection System for Recipients of Social Programs (SISBEN). In addition, healthcare spending in Colombia is now above 7% of GDP, only 15% of which is spent out of pocket while the rest is public spending, making it one of the most financially protective systems (if not the most) in the developing world.

However, although they were both part of the same reform, the story of the Economic System for Protection against Old Age (the pension system) in Colombia is very different. A quarter of a century later, the pension system is not just performing poorly, given the lack of proper regulation, it would seem to be getting worse. Like the healthcare system in 1990, coverage is currently given to just 23% of the Colombian population while 73% of subsidies benefit the two quintiles with the highest pensions. There are currently two pension regimes: Prima Media (Average Premium) and Ahorro Individual (Individual Savings), the former, run by the state, subsidizes pensions regressively, incentivizing and exacerbating the inequality of the system. To make things even worse, the pension system is running a deficit of 3% of GDP (contributions aren’t covering expenditure) and it is estimated that national expenditure will increase by 8% in 2018.   

So, today a reform of the pension is just as, or even more necessary than the reform of the entire social security system was two and a half decades ago. As can be seen, said reform will involve, in addition to debates over an increase in the retirement age, major institutional change and a complex incentive scheme in addition to significant political capital. The governability of Colombia following the elections on 8 August will thus be a major factor in determining this urgent reform.