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Colombian Senate Prepares Final Vote on Bill Curbing Pensions

By Andrea Jaramillo, Bloomberg news

Colombia

June 14, 2005

 

Colombia's Congress is set to approve changes to the country's social security law today, aiming to reduce the government's budget deficit by more than 990 billion pesos a year ($423 million) for the next 50 years. 

Action on the pension bill was delayed last night while the Senate granted a waiver to members concerned about possible conflict of interest because the legislation would affect family members. The new law would eliminate one of 14 annual payments for new retirees and cap monthly social checks at 25 times the minimum wage for anyone retiring after July 2010. 

``Its approval will be good news, allowing the government to maintain investor confidence,'' German Verdugo, head analyst at Corfinsura, Colombia's second-biggest financial holding company, said in a telephone interview. ``Still, the government will need to reduce its budget deficit further in the medium term, meaning another pension reform will be needed by 2010.'' 

The proposed changes in the social security system are part of an 18-month, $613 million loan agreement reached with the International Monetary Fund in April. The Washington-based IMF said in its annual economic assessment of the South American country in May that controlling social security expenditures is key to Colombia's gaining control of its budget. 

The government expects to cover about 4 trillion pesos of the 6 trillion pesos owed pensioners this year because the social security system lacks adequate funding. 

``The problem with pension liabilities is in today's pensioners plus the people who will retire in the next few years, all of them under a system which is very generous,'' said Luis Fernando Alarcon, president of the National Pension Funds Association in an interview in Bogota. 

More Changes

Colombians can choose to accept fixed payments from the social security system or have their retirement funds managed by one of six private pension companies. The new law affects only social security's guaranteed payments. 

Colombia's budget deficit grew to 6.25 trillion pesos in the first three months of the year from 4.29 trillion pesos a year ago, according to the finance ministry. 
Further changes in the retirement age will be needed to cope with increasing life expectancy, Finance Minister Alberto Carrasquilla told reporters last week. In 2000, 7 percent of Colombians were more than 60 years old, a figure expected to rise to 22 percent by 2050. Women under the new pension law will retire by age 57 and men by age 62. 

Congressman Javier Ramiro Devia, a proponent of the bill in the lower house, said in an interview in Bogota that he's discussing the possibility of forcing a portion of the savings that go into private pension funds to go into the social security system in order to increase its funding.


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