CONGRESS PASSES PENSION REFORM

UNCLAS BOGOTA 006060

SIPDIS

E.O. 12958: N/A
TAGS: PGOV EFIN CO
SUBJECT: CONGRESS PASSES PENSION REFORM

Ref: Bogota 5017


1. Summary: On June 20, the Colombian Congress sent
pension reform legislation to President Uribe for his
signature. The reform, which required a constitutional
amendment, will save the GOC over USD 17 billion over the
next 50 years. The Uribe administration originally proposed
a reform package twice the size, but exceptions, exemptions,
and long grace periods cut the projected cost savings of the
reform in half. There will be very little savings to the
pension system over the next 5-6 years, as the 2010 grace
period approaches, but the GOC expects financial
institutions (including the IMF) will see the reform as an
example of Colombia taking serious steps to reduce the
fiscal deficit. Top finance ministry officials have
suggested that further reforms might be necessary to address
issues left out of this package, such as raising the
retirement age. End summary.


2. Reftel gives background on the GOC's public pension
system, which covers approximately 25% of Colombia's
workers. In each of the past two years, the public pension
shortfall has reached nearly USD 1.5 billion. The deficit
was paid out through the GOC general fund. While the public
pension deficit will continue to run high in the short-term,
the long-term viability of the public pension system should
improve as a result of the reform. During its recent review
of Colombia's macroeconomic stability, the International
Monetary Fund identified passing pension reform as a
priority for the GOC.

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What's in the Reform
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3. The constitutional amendment on pension reform contains
the following measures:

- After July 31, 2010, government funded pensions cannot
exceed 25 minimum wages (approx. USD 4200 per month). This
will likely affect only a small group of workers, including
retirees from the Congress, courts, and the Fiscalia.
- Upon entry into force (most likely August of 2005),
public employees cannot enter into social agreements to
change the nature of their public pensions.
- Teachers are exempt from this pension reform.
- The President and members of the armed forces are
allowed to keep their special pension plans.
- Special pension plans (other than those of teachers,
the President, and the armed forces) will no longer be
available to new retirees after July 31, 2010.
- Allows an additional transition period for workers who
have a minimum of 15 years of service by July 31, 2010;
their transition period will end in 2014.
- Eliminates an extra "14th month" pension payment (a
sort of Christmas bonus) as of entry into force for new
retirees.
- Allows workers who receive pensions of 3 minimum wages
or less to continue receiving the "14th month" payments
until July 31, 2011.

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The 14th Month
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4. The pension reform legislation was nearly scuttled in
the Senate over the issues of the "14th Month" payment
issued to nearly every retiree. This extra payment
represents a sort of unofficial, and now expected, bonus to
retirees. While all parties recognized that the GOC was not
legally required to pay the "14th Month", senators were
reluctant to take away the extra money from the poorest
retirees. A compromise was reached that set up a transition
period for poor retirees (those receiving pensions of 3 or
fewer minimum wages) until July 31, 2010. After that date,
the 14th Month will no longer be part of the public pension
system.


5. Comment: The GOC is generally pleased that pension
reform passed through Congress, albeit significantly reduced
in size. According to the Minister of Social Protection,
the GOC may attempt to present a second round of pension
reform in 2006 or 2007. The second round would focus on
raising the retirement age by two years and addressing the
method of funding the pension system through employee
contributions.