US embassy cable - 05BOGOTA6060

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. 
 
-------------------- 
What's in the Reform 
-------------------- 
 
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. 
 
--------------- 
The 14th Month 
--------------- 
 
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.