How Colombia created its Private Pension System

By Juan Manuel Santos.

 

On March 1990, close to the end of the electoral campaign in Perú to succeed Alan García, an important forum took place in Lima. It was organized by the “Movimiento Libertad” and led by its presidential candidate Mario Vargas Llosa.

In that occasion I had my first contact with José Piñera. I was most impressed to hear his speech explaining the experience about the 1980 Pension Reform in Chile. I appreciated the logic of his proposals to confront the problem of pension debt, which at that time was just beginning to be discussed in Colombia, and almost exclusively in academic circles. But, over all, the results of the Chilean reform that Piñera presented caught my attention. The pension funds were by then the main factor in the recovery of savings in that country, and were dynamizing the national capital market.

But it was not until later, when I visited Chile, that I was able to appreciate the full impact of the reform. Cab drivers in Santiago would show me their private pension fund booklet and proudly displayed their retirement accounts passbooks in the private pension system. They showed it a personal achievement, and they paid attention to the fund’s performance. I was sure then that if I would ask a cab driver in Colombia about his pension, he would surely complain about queues and delays – and only if I were lucky enough to find a cab driver who had a pension plan, to begin with!

Months later, César Gaviria was elected the new president of Colombia. His working team worked feverishly to design substantial structural reforms that the new president would implement. Among them was the Labor Reform, which sought to introduce flexibility to the rigid Colombian labor system. In the discussion about reforms, the need to address the issue of social security became evident.

I talked to Gaviria about José Piñera’s views and the need to invite him to Bogotá. I organized a public conference to present the Chilean Pension Reform and to encourage necessary debate on social security in Colombia.

The forum took place on Monday, June 11th, 1990, at the Hilton Hotel in Bogotá. The elected president and several of his future ministers attended. The event was a success. The arguments and the results presented by José Piñera had deep impact among those familiar with the issue, and especially with the Colombian press.

Later that day, Piñera met with the elected president and his team of economic advisors. It was an intense five-hour meeting after which Gaviria’s economic team was convinced about the need to push the Pension Reform forward and pursue the Chilean private pension fund model.

The next step was a trip of the economic team to Chile to observe first hand the Chilean private pension funds system. The economic team included Luis Fernando Ramírez, who became Labor Minister; Santiago Pardo, an expert on fiscal issues, and Ulpiano Ayala, an academic economist who during the campaign had been in charge of labor issues and social security. Rudolph Hommes was unable to travel, because on the eve of the trip he was nominated Finance Minister. At later date, César Gaviria announced the Pension Reform in his presidential acceptance speech.

During the first months of the new Gaviria administration, special attention was placed on other needed structural reforms, such as foreign trade, which was largely associated with the opening of the Colombian economy.

One of the first reforms that passed through Congress was the Labor Reform. Here, the ideas and arguments of José Piñera, together with the enthusiasm of those who heard his ideas, were determinant to convince and motivate the presenters of the Labor Reform -- two well prepared young senators -- that the natural step was to do also the social security reform.

The debate on Pension Reform in Colombia was strenuous and long. It began in early 1992 and the law was approved in December 1993. It was surrounded by heated discussions on the technical, political, and academic spheres. It is important to highlight the role of President Gaviria, who actively participated in the debate and was the decisive political force.

The Government proposed to Congress to substitute completely the public regime for one of personal retirement accounts , as the one in Chile, but the offer was not accepted. A political deal was reached to move to a hybrid system in which the public and private systems coexist and compete. The first administered by the old state monopoly and the new one by private pension fund administrators.

The former was kept as a pay-as-you-go regime, while the later is a system of personal retirement accounts. Regrettably political negotiation resulted in a disequilibrium between the competitive conditions in the two coexisting systems, which favors public system’s affiliates and thus adds to the national pension debt. Additionally, the negotiations excluded from the reform three groups that enjoyed substantial pension systems: school teachers, the state owned oil company Ecopetrol, and the Armed Forces.

A fundamental objective during the political negotiation was to reach minimum necessary conditions to consolidate the private system for the reform. Today we assess that that has been achieved, and any reform will be centered on this system. After two years of operation the private fund system is functioning satisfactorily with 1.9 million Colombians affiliated to the private pension funds.

As of today, more Latin American countries have reformed their pension system towards the private capitalization model. Each country has adopted the original Chilean model and adapted to according to their economic and political conditions. I am convinced that these reforms are indispensable to guarantee necessary conditions for sustainable economic development and prosperity for our people.