US embassy cable - 04BOGOTA2912

UNCLAS SECTION 01 OF 03 BOGOTA 002912 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, ELAB, PGOV, CO 
SUBJECT: COLOMBIA GOES BACK TO THE DRAWING BOARD ON PENSION 
REFORM 
 
Sensitive but Unclassified -- please protect accordingly 
 
SUMMARY 
1.    (SBU) Faced with the impending default of the Public 
Pension Fund (managed by the Institute for Social Security), 
the GOC is once again attempting to overhaul its public 
pension system. This marks the Uribe administration's third 
attempt to fix the problem, after the 2002 pension reform was 
gutted in the Congress and the referendum's attempt to push 
through reforms failed in October 2003.  The GOC cannot 
afford its current public system, which covers only 20 
percent of all workers and is an odd mix of special regimes 
educators, petroleum and military) that give the top five 
percent benefits 180 times greater than the basic levels. 
Central government pension spending has quadrupled over the 
past decade and now accounts for about 3.4 percent of GDP. 
Moreover, pension debt is the second largest contributing 
factor to the GOC's chronic financial deficits (just behind 
fiscal transfers to regional and local governments).  As a 
result of the funding imbalance of the public pension system, 
the GOC's total indebtedness is expected to rise from 
slightly over 50 percent to almost 60 percent of GDP by 2010 
unless serious reforms are enacted.  President Uribe has 
formed a multi-sectoral group that includes businessmen, 
labor leaders, members of Congress and civil society leaders 
to develop a comprehensive reform package that he hopes to 
have approved by the Congress this year.  While many 
recognize the dire pension situation, the necessary reforms 
are unlikely to be politically viable.  End Summary 
 
THE CURRENT SITUATION 
 
2.    (SBU) Over the past decade, pension spending has 
drained the budget.  The Ministry of Finance and Public 
Credit reports that 16 percent of the total central 
government budget and 22 percent of the operational budget is 
destined to pay pensions.  Despite such heavy spending, the 
public social security system will run out of reserves in 
2004. The National Financial Association (ANIF) projects that 
as a result public debt as a percentage of GDP will grow from 
52.7 percent last year to 59.6 percent by 2010. 
 
3.    (SBU) The current system evolved from 1993 reforms 
modeled after the pension system in Chile.  It is a 
two-pillar system where employees can choose to join a 
private, defined contribution plan, or join the state social 
security plan.  Private pension plans are well-funded, with 
over USD 8 billion currently invested in the system.  The 
public system, however, has run out of funding.  Unlike other 
countries that adopted such systems, Colombia's system had 
neither a clear transition mechanism that would induce 
workers to transfer to a private system nor a final-end date 
for participation in the public system.  Worse yet, lucrative 
special pension regimes were maintained, making it more 
beneficial for individuals to remain in these public regimes 
rather than opting for private systems. As a result, a decade 
after the initial 1993 reform, the public system still covers 
50 percent of the insured. 
 
4.  (SBU) In late 2002, the Colombian Congress approved a 
pension reform plan that will increase the contribution rate 
to 15.5% in 2006 and will also gradually increase the minimum 
required for coverage from 500 to 1300 weeks. A critical 
reform, the elimination of the special pension regimes, was 
taken out of the 2002 reforms by the Congress and also failed 
to pass in the October 2003 referendum.  These regimes 
account for approximately 50 percent of the benefits in the 
public pension system and allow some workers to contribute 
for less than a year to receive a pension at 55 (50 for 
women) that is 90 percent of their highest salary. Other 
reforms required would eliminate the Mesada 14 (an additional 
allotment given to pensioners as a way to secure their 
savings against inflation, which prior to the late nineties 
averaged 20 percent per year) and standardize the minimum 
benefit at a level below the minimum monthly wage of 
approximately USD 1500 a year (which represents the current 
floor for pension benefits). In addition a major element of 
the proposed reforms would have been to remove the tax exempt 
status of pension beneficiaries. Had the full reforms sought 
in the 2002 draft law or in the 2004 referendum vote been 
approved, the pension system would have significantly moved 
toward long-term balance. In addition, such reforms would 
have made the private pension plans, which are adequately 
funded, more attractive, thereby reducing the number of 
individuals in the public system. Instead, the GOC will give 
the Social Security Institute 713 Billion pesos to cover the 
second half of 2004. 
 
CURRENT REFORM PLANS 
 
5.    (SBU) Vice Minister of Social Protection, Jairo Nunez, 
told econoff that the Presidentially-mandated commission to 
reform the pension system has agreed on four main areas for 
action.  First, the public and private sector agree that 
Mesada 14 is an exceptional drain. President Uribe disagrees 
because he understands it is an important political issue and 
has stated that it can not be completely cut. Second, there 
is universal agreement that special regimes, especially for 
some government workers and oil workers, must be cut. The 
government has said that special regimes for the military 
will continue, though there are some that believe that these 
benefits should be reduced.  Third, discussions concerning a 
reduction in the minimum pension will be politically 
difficult, yet the savings to the system are critical. 
Finally, there are many workers under special contracts that 
receive benefits not contained in the basic system, which the 
commission believes should be cut. 
 
6.    (SBU) These excessive benefits are bankrupting the 
system.  For example, 16 percent of pension costs go just to 
pay Mesada 14, and 60 percent of public-sector pensioners 
receive the minimum pension which is the same as their last 
monthly, working wage.  Minister of Social Protection Diego 
Palacio believes that fully reforming the system could reduce 
the fiscal deficit by about USD 700 million in the short run 
while also stabilizing the system for 20 to 25 years. 
According to Minister Palacio, eliminating the Mesada would 
save the GOC USD 19 million in the first year while minimum 
salary reforms could save USD 46 million. 
 
7.    (SBU) Minister of Finance Carrasquilla, while 
announcing the goals of the multi-sectoral commission, urged 
the public to understand the fiscal importance of these 
reforms. Minister Palacio echoed this and cast the issue as a 
rational decision for the Congress -- either reform the 
system or let the government go bankrupt. The administration 
hopes such arguments, and close cooperation with Congressmen 
on the multi-sectoral commission, will allow the reforms to 
go through Congress quickly.  Some reforms, such as lowering 
the minimum level of pensions and taxing pensions, require 
constitutional amendment which require eight separate votes 
over two different Congresses. If successful in the 
March-June congressional session (majority vote by quorum of 
legislators), the bill would also have to pass by a qualified 
majority (majority of total members) in the July-December 
session. According to many observers, the most costly (both 
politically and fiscally) of the reforms, the elimination of 
Mesada 14 and, most especially the establishment of a minimum 
pension, will not pass.  Vice Minister Nunez suggested that 
the next step would be to tax Mesada 14 at such a high rate 
that it is virtually eliminated (but President Uribe opposes 
this).  In addition, the commission is  considering a scaled 
system where lower pensions would receive a full month's 
wages and those with higher pensions would receive a lower 
percentage of their final salary. 
 
COMMENT 
 
8.    (SBU) Only 20 percent of the population is covered 
under the current pension system, yet public pensions cost 
about 3.4 percent of GDP.  This number will grow to 6 percent 
in 2010, in effect consuming all new revenues projected from 
the 2002/2003 tax reforms. Opinions within government as to 
the possibility of pension reform are split. An official at 
the central bank noted that he is not optimistic about 
passage of any pension reforms while a senior official at the 
Ministry of Finance noted that pension reforms will face a 
hard fight, but that they will pass.  On March 15, 
legislators within the multi-sectoral commission formed by 
President Uribe announced its intention to support 
legislative reforms which would eliminate special pension 
regimes and Mesada 14 benefits for new retirees while 
maintaining them for existing pensioners.  Other issues, such 
as reducing the minimum pension level and taxing pensions, 
were put on the back burner.  Despite government assurances 
to the contrary, political difficulties will prevent a 
definitive solution to the problem.  At best the politically 
acceptable reforms are likely to delay the pension system 
reckoning day. END COMMENT. 
DRUCKER