“The pension reform bill would affect the growth of the economy, savings and the modernization of the financial sector”: Leonardo Villar

Fedesarrollo, one of the most important economic research centers in the country, revealed the results of a recent study aimed at measuring the effect that the creation of the individually funded system (pension funds) has had on economic development in Colombia.

According to this analysis, the implementation of the private pension system has generated a considerable impact on the growth of the economy, increased savings and boosted the growth of the financial system. In terms of growth, the annual increase ranges from 0.3% to 0.8%; in terms of savings, the annual increase is 1.5% of GDP whereas the financial sector grew by 0.19% of GDP.

The pension reform that gave life to the individually funded system has benefited the economic development of the country, with significant effects that could the even higher if the informal economy and unemployment were lower in Colombia.

Regarding the pension reform project

The director of Fedesarrollo revealed that preliminary estimates show that COP $ 4.1 billion would be redirected from the individually funded system to the public PAYGO system in the government’s proposal in its current form.

This reform has a cost in terms of growth. How much? A reduction of between 6 and 20 basis points of the economy, with a negative impact on savings and financial growth, said Villar.

Nonetheless, the researcher said that the full extent of the proposal is not yet known, so its fiscal impact and other possible side effects cannot be gauged at this point in time. He also said that several aspects related to fiscal savings, the transitional system and special systems still have to be cleared up.

In any event, the country will opt for a structural reform that will establish a socially acceptable pension system that outweighs any side effects it could bring with it.

What international experts say:

Experts such as the Chilean Rodrigo Fuentes, the Mexican Alejandro Villagómez and the Peruvian Pablo Secada agree that the adoption of mandatory savings (the individually funded system) has contributed to the development and growth of the capital market, savings and investment, which have significantly contributed to the growth of the economy.

This discussion opened the second day of work of the 6th Asofondos Congress and the 11th FIAP International Seminar “The Impact of Pension Reforms on Economic Development”.