# **<mark>B</mark> OX** **<mark>III-1: T</mark> HE PENSION SYSTEM IN** **<mark>C</mark> OLOMBIA** **<mark>: D</mark> ISTRIBUTIVE IMPACT AND SENSITIVITY ANALYSIS**

In Colombia, there are two pension schemes: **The Public Pension Scheme (RPM) and the Private Pension Scheme (RAIS)** . It is important to underline that both systems differ in their financing, administration of resources, requirements to access the pension, and calculation of benefits. The RPM is managed by Colpensiones. The contributions of the subscribers, together with the National General Budget (PGN) allow funding the payments of current pensioners. The right to a pension through the public regime is acquired once a person has contributed at least 1,300 weeks and reached an age of 57 years for a woman or 62 years if a man. If these requirements are not met, a substitute indemnification is received, which is a system created by law to return to subscribers what they have contributed when, once they reach the age, they do not have the requisite number of weeks and cannot continue to contribute.

The RAIS, for its part, is managed by private pension funds (AFP) and, where subscriber savings go into an individual account. The only requirement for retirement by this means is that savings and their financial yields be sufficient for a pension not under the minimum wage ***** . In the event a person does not reach that level of savings, there are two alternatives: the first is the Minimum Pension Guarantee Fund (FGPM) that helps cover what is needed for the pension of individuals who have contributed at least 1,150 weeks, who are 62 years old if they are men or 57 if they are women and who do not have other income above the minimum wage. The FGPM is financed with a percentage of the contributions made by high-income subscribers. If these requirements are not met, the person receives their savings with their respective financial yields.

An important limitation of the main source of information used in the CEQ exercise (i.e., ENPH) is the inability to identify the type of pension scheme to which each person belongs. Given the low proportion of people in the RAIS, it was considered appropriate to carry out the calculations assuming that all pensioners belong to the RPM. Thus, panel A of Figure 1 shows the percentage of people making contributions to the pension system by income decile and panel B shows the percentage of people of pensionable age (i.e., older than 57 years if female and older than 62 years for men) who receive pension by income decile.

<!-- Start of picture text --> Figure 1. People that made contributions and pensioners among income deciles<br>Panel A: Percentage of the population that makes Panel B: Percentage of the population of pensionable<br>contributions to the pension system by decile age that receives pensions by decile<br>100 100<br>80 80<br>60 60<br>40 40<br>20 20<br>0<br>0<br>1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10<br>Decile Decile<br>Source: World Bank Group staff estimates based on the 2017 ENPH<br>Note: The deciles were put together using market income + per-capita pensions<br>population<br>% pensionable-age<br>% working-age population<br><!-- End of picture text --> As stated above, the Colombian State is obliged to guarantee the payment of pensions to the beneficiaries of the RPM as well as to those belonging to special schemes, such as the Military Forces, the National Police, and the Teachers. During 2017, the National Central Government allocated $ 33.4 trillion Colombian pesos for pension payments. However, not all of the income a person receives as a pension constitutes a government transfer; this, to the extent that they made pension savings for their old age. Therefore, a percentage was applied to the pension 16