Colombia's pension reform

No AccessWorld Bank Discussion Papers12 Aug 2013Colombia's pension reformFiscal and macroeconomic effectsAuthors/Editors: Klaus Schmidt-HebbelKlaus Schmidt-Hebbelhttps://doi.org/10.1596/0-8213-3506-5SectionsAboutPDF (0.4 MB) ToolsAdd to favoritesDownload CitationsTrack Citations ShareFacebookTwitterLinked In Abstract:In 1994 Colombia started replacing its state-run and pay-as-you-go (PAYG) pension system by a privately-run and fully-funded scheme. This study analyzes prospective fiscal and macroeconomic implications of this reform. It compares the features of Colombia ' s old and new pension system, puts them into broader international context, and looks at the reform transition. Numerical simulations for the government ' s reform transition reveal implicit PAYG debt levels and corresponding reform transition deficits that are high relative to other countries, considering that Colombia ' s old pension system was characterized by low coverage, low system maturity, and a young population. Simulation results show that output could increase by 10 percent due to higher future saving caused by financing the pension deficit by a fiscal contraction - but this would occur only in the very long term. Sooner and possibly larger gains could be reaped from higher employment and production in formal sectors, and the development of capital markets spurred by the reform. In addition, Colombia ' s new pension system - which includes a redistributive pillar targeted at the poor -- is potentially more equitable than the old scheme. To reap these efficiency and equity benefits, however, the Colombian government would have to adopt complementary reforms. They include giving the private fully-funded pension pillar a commanding role, supporting the development of capital markets, and bolstering formal-sector employment by the reduction of deadweight tax burden of non-pension programs that are currently financed by payroll taxes on labor. Previous bookNext book FiguresReferencesRecommendedDetailsCited ByPension Reform and Macroeconomic Stability in Latin AmericaIMF Working Papers, Vol.07, No.108Tax Systems Under Fiscal Adjustment: A Dynamic CGE Analysis of the Brazilian Tax ReformIMF Working Papers, Vol.05, No.142Fiscal Effects of the 1993 Colombian Pension ReformIMF Working Papers, Vol.98, No.158Liberalizing foreign investments by pension funds: Positive and normative aspectsWorld Development, Vol.25, No.7 View Published: November 1995ISBN: 978-0-8213-3506-2 Copyright & Permissions Related RegionsLatin America & CaribbeanRelated CountriesColombiaRelated TopicsSocial Protections and LaborPrivate Sector DevelopmentFinance and Financial Sector Development KeywordsPENSIONSINCOME DISTRIBUTIONCAPITAL MARKETSPAYROLL TAXESFORMAL SECTORCAPITAL MARKETCONTRIBUTIONCONTRIBUTION RATESPENSIONPENSION COVERAGEPENSION REFORMPENSION SYSTEMPUBLIC PENSIONPUBLIC PENSION SCHEME Loading ...