Risk of Disability, Old-Age and Death: Pension Sustainability in Colombia

This paper concludes that the sustainability of the public i°pay-as-you-goi± pension regime in Colombia (RPM) looks fragile and is threatened by massive transfers from the private i°defined contributionsi± 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 annuitiesi¯ 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.