Everything, everywhere, all at once
Pension reform was one of President Gustavo Petro’s key campaign issues. He emphasized increasing coverage of the old-age protection system, and diverting to Colpensiones, the public pay-as-you-go system administrator, the bulk of current contributions to mandatory private pension funds. Implementing both measures would be game-changing, for the private pension fund business, institutional investment in Colombia and public finances.
Petro aims to finance a substantial increase in coverage to the elderly destitute. He has stated his intention to expand the Colombia Mayor program from 1.5 million people receiving around COP 80,000 per month, to 3 million receiving COP 500,000 per month, a more than tenfold increase in cost (from 0.1% to 1.3% of GDP per year). We calculate that gross mandatory contributions staying in private pension funds would fall from 2% of GDP to 0.2%. On the other hand, the annual outflow of resources going today to the PAYG system amounts to 0.9% of GDP. Those transfers would fall to zero. So, Petro’s proposal could be characterized as follows: multiply subsidies to the elderly poor by a factor larger than 10, generate an immediate net fiscal cost of 0.3% per year, and then leave for future administrations a 30% of GDP fiscal gap in net present value. Where will these resources come from? Nobody knows.
The tax reform currently under congressional consideration would come on top of a substantial increase in tax collection achieved in 2021 and 2022, and the expected raise in 2023. Why does this government need yet another tax reform? Will it be able to spend the new revenue, and spend it well? We doubt it. This government would get monies that households and firms know how to spend, and give it to bureaucrats who hardly know the budgeting and expenditure procedures, and may have poor skills for effective government expenditure.
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