Did the PAYG pension systems fail?

According to pension fund managers, the pension system needs reforms due to increased life expectancy and changes in the labor market.

The union of pension fund administrators in Colombia (Asofondos) and its counterpart in the world (Fiap) presented studies and figures that question the success of pay-as-you-go pension systems, that is, those in which workers contribute to a Common fund managed by the government with the commitment to guarantee them an income in their retirement, which in Colombia Colpensiones does.

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The president of the International Federation of Pension Fund Administrators (Fiap), Guillermo Arthur, assured that the pay-as-you-go systems failed and did not fulfill their promise to grant defined benefits. “Nobody says that more than 70 countries had to increase the amount of the contribution in the last 10 years, nor that more than 60 countries had to increase the retirement age and decrease the amount of pensions,” he said.

He even insisted that little is known about the levels of indebtedness that many countries have incurred to finance pensions, amounts that he explained “exceed several times their GDP” for demographic reasons. “Most of the countries with a pay-as-you-go system have already incorporated capitalization mechanisms to finance their pensions,” he concluded.

And it is that several studies show that there is substantial capacity to work more, since there is a probability of living up to 94 years in up to 64% for one of the members of a couple. Research has also revealed what low fertility rates mean in terms of the solvency of pay-as-you-go pension systems.

According to Santiago Montenegro, president of Asofondos, today there are half of the young people there were 50 years ago for each older adult (only 5.4 to 1), and “if we add informality, that ratio today is not 5.4 but only 1.9 formal active workers for each pensioner. In the middle of I follow it will only be 1 to 1 ”.

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This does not mean that reforms are not needed. According to Olivia Mitchell, executive director of the Wharton Pension Research Council, among the risks facing pension systems around the world are low savings, informality, changes in monetary and fiscal policies, and political factors. “There can be expropriations and a lack of transparency when governments control pension assets and they are not transparent; sometimes there is even fraud and public mistrust ”, he warned.

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Other challenges are related to gender gaps, given that men are more likely to access a pension than women and the effects of changes due to technology towards new forms of work.

The analysts concluded that it is essential to have new regulations and conditions in accordance with the new labor realities in order to include new workers in the labor market; make greater efforts to save both in amount and time, and incorporate new instruments for this; improve financial education and design policies focused on the care of older adults so that they guarantee their well-being at this stage, among others.

In Colombia, the pension savings of 20 million Colombian workers deposited in private funds exceed $ 318 billion. The figure, under this conjuncture, constitutes a great asset to promote economic reactivation, product of “resources invested in securities issued by the National Government, in the financing of infrastructure works, in flagship companies of Colombia and, also, in the exterior ”, according to Miguel Largacha, president of the Board of Directors of Asofondos and president of Porvenir.

But beyond what this figure means for families, the union highlighted what it represents for the entire country. Pension fund managers (AFPs) have contributed more than $ 20 billion, equivalent to 2 points of GDP, to energy and gas infrastructure, renewable energy projects and road infrastructure.

In addition, the AFPs are the main market holders with an investment that exceeds $ 104.3 trillion, equivalent to 10.3 points of GDP and a 30% share.

For this reason, the president of Fiap highlighted the importance of protecting savings, and rejected the decision of countries such as Chile and Peru, where partial withdrawals of pension resources were approved that will “dramatically affect the future pensions of workers”, to the point , which, according to estimates, to date “in Chile 5 million workers have no balance in their accounts, while in Peru there were 6 million, while pensions will drop between 25% and 30%,” Arthur revealed.

This will be one of the conversations that will take place within the framework of the Fiap Asofondos Congress. According to the event’s agenda, it will be discussed around savings, investments, markets and the economy, in one of the most complex and challenging contexts for Colombia and the world.