Colombia's pension and labour reforms
In March 2023, President Petro presented his pension and labour reforms. An in-depth look at the background to them, what they propose and their possible fate in Congress.
Following the failure of the political reform, and with the healthcare reform in dire straits, President Gustavo Petro's hopes for passing major structural reforms this year—of the kinds he promised during his 2022 campaign—now hinge on his pension and labour reform proposals.
Just like the healthcare reform was intended to be, the pension and labour reforms would bring major changes to Colombia's post-1990s social security system and labour laws.
Both reforms are spearheaded by Petro's minister of labour, Gloria Inés Ramírez. Ramírez, the first Communist cabinet minister in Colombian history, is a former trade union leader and senator (2006-2014). Compared to health minister Carolina Corcho, whose stubbornness and unwillingness to compromise and listen to differing voices contributed in part to the crisis her healthcare reform now finds itself in, Ramírez has shown that she's able to listen and compromise all while holding on to her ideological beliefs. Before presenting the labour and pension reforms, she had over 150 meetings with employers, business associations, unions and government officials to negotiate the reforms. The pension and labour reforms show that, in part, she listened to concerns and modified the reforms accordingly, but without compromising on the broader objectives and general outlines.
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Pension reform
The pension reform was presented to Congress on March 22.
There’s widespread consensus, from left to right, that a structural pension reform is necessary and long overdue — but it’s never been done. The current pension system, a creation of Law 100 of 1993, is complicated and has several major problems. It is made up of two parallel, competing systems (plus special systems, including ones being phased-out): a public defined-benefit social insurance system (Colpensiones) known as Régimen de Prima Media (RPM) and private, defined-contribution individual accounts, known as Régimen de Ahorro Individual con Solidaridad (RAIS), run by private pension fund administrators (AFP), based on the 1980s Chilean model. People must choose between the systems and may switch every five years up to 10 years before retirement. The payroll contributions are the same for both system (16% of covered earnings), but the qualifying conditions are different although both systems guarantee a minimum pension (the minimum wage) to those who don’t meet qualifying conditions. Most working-age contributors are affiliated with the AFPs (73%) but most pensioners are in Colpensiones (84%).
Both systems have many problems. Pension coverage is very low (~27% of seniors receive a pension, another 25% or so receive the Colombia Mayor subsidy) and only 30–35% of the economically active population contributes for a pension because of high labour informality (58%) and low wages (around 45% earn less than the minimum wage). Many pensioners do not meet the qualifying conditions, and only receive an old-age settlement (in the public system) or a return of their account balance with interest (in the AFPs). To help fix the problems with the system a subsidized voluntary individual account program (BEPS) for non-contributors earning less than the minimum wage and a meagre means-tested pension subsidy for the very poor (Colombia Mayor) were created.
The RPM pays a much higher replacement rate (73% on average) than the RAIS (39% on average for those with higher salaries). As a result, Colpensiones is costly and has a big deficit since 2004, which costs the state about 3.5% of GDP in public spending annually. Moreover, the public system has regressive implicit subsidies, with taxpayers heavily subsidizing ‘mega-pensions’ paid out to a lucky few.
The retirement age in Colombia — 57 for women, 62 for men — is quite low and some experts have recommended increasing to retirement age. In January, finance minister José Antonio Ocampo, who in internal cabinet discussions supported raising the retirement age, publicly said that the government hadn’t ruled out increasing the retirement age. He was quickly pulled back in line by Petro, who tweeted that he would rather resign than increase the retirement age.
Petro’s reform would unify the current system into a pillars system. There would be four pillars in the new system.
A basic, non-contributory pillar would guarantee a basic minimum income of 223,000 pesos (the extreme poverty line, thereafter indexed to inflation) for poor and vulnerable seniors over 65 (about 2.5 million people) who cannot qualify for a pension.
A semi-contributory pillar would provide a pension for those who contributed (between 150 and 1,000 weeks) to the system but do not qualify for a pension at the age of 65. They would receive an annuity based on the value of their contributions, adjusted for inflation. Those who qualify for the non-contributory pillar would also receive the basic minimum income, while those who do not qualify would receive an annuity adjusted for inflation plus a 3% annual return. This pillar would include the existing BEPS system.
The main contributory pillar, for employed workers and the self-employed, would include both the current RPM and RAIS systems. Everyone earning up to three times the minimum wage would make compulsory contributions to the RPM (Colpensiones). Anyone with additional earnings above three times the minimum wage (up to 25 times the minimum wage) would contribute to ‘complementary’ individual accounts. The pension received would be the sum of the values of both components, as long as the individuals meets the qualifying conditions for the RPM.
An early old age pension would be granted to those over the age of 65 with between 1,000 and 1,300 weeks of contributions. The amount would be proportional to the number of weeks contributed, deducting the value equivalent to the missing weeks of contributions.
A fourth voluntary savings pillar would allow additional voluntary retirement savings.
About 85% of employed workers in Colombia earn 3 minimum wages or less and would only contribute to Colpensiones. This would seriously weaken the private pension fund administrators, who’d lose about 80% of their current contributions, which is what Petro wants: he has repeatedly attacked the “two bankers” who make money from the pensions ‘business’. However, private pension funds are major players on Colombian capital markets and are the second-biggest holders of Colombian government bonds, so finance minister Ocampo worried about the economic impact of the reform. He was able to include the creation of a public ‘savings fund’ in the reform. This public savings fund, which would receive a share of contributions (about 20%), will invest in capital markets and be used to face future demographic impacts. The creation of this savings fund would (partially) mitigate the economic impact of the reform. The text of the reform is quite short on details of the fund and its management, and analysts want to make sure that the money that’d come in would be saved and that it wouldn’t turn into another fund for government spending.
The reform does not make any changes to the retirement age, the length of required contributions, contribution rates (besides increasing additional contributions paid by wealthier workers to the pension solidarity fund) or the replacement rate formula.
Calculations by the Universidad Javeriana’s fiscal observatory show that the reform would favour people currently in the RAIS earning over 1.5 minimum wages, as they’d earn a bigger pension. Those earning between 1.5 and 3 minimum wages currently in the RPM would not be affected, while those earning more than 3 minimum wages currently in the RPM would be hurt by the reform, receiving a smaller pension.
It does not make any major changes to old-age family pensions, disability pensions, survivor pensions or the funeral grant, although disability and survivors’ pensions would now be exclusively paid by Colpensiones.
Mothers would be able to reduce by 50 weeks for each child the weeks required to get a pension (up to a maximum of 3 children, or 1,150 weeks rather than 1,300 weeks). Fathers and mothers of children with disabilities would be able to retire at any age if they meet the contribution length requirements.
The reform proposal would require pensioners receiving pensions over 10 minimum wages to make a 2% contribution to the pension solidarity fund (3% contribution for those with pensions over 20 minimum wages), that would be used to help pay for the basic non-contributory pillar (the current rates are 1% and 2% respectively). Last year’s tax reform had initially proposed to tax pensions over 10 million pesos — a measure that would have impacted only 16,700 pensioners (but among them nearly all retired senior politicians, judges etc…) — but self-serving congressional opposition to this forced Petro to backtrack.
The reform spells out, in not much detail, a transition process under which those with over 1,000 weeks of contributions would remain fully covered under the provisions of Law 100. Everyone else would switch to the new system, that would take effect in 2025. Various actuarial systems would take into accounts contributions to whichever of the two current systems. The AFPs would continue to administer their assets and individual accounts until members claim their pension, at which point the value of contributions (and financial returns) made up to 3 minimum wages would be transferred to Colpensiones.
Petro’s proposal is not particularly radical. Most experts and politicians across the political spectrum, as well as the OECD and World Bank, have proposed a pillars system as well, and the pillars system is similar to pension systems in parts of Europe and the 2008 Chilean pension reform. For example, the liberal think tank Fedesarrollo proposed a very similar pillars system.
The final pension reform proposal also shows that, unlike Carolina Corcho, labour minister Gloria Inés Ramírez was able to negotiate the reform in cabinet and listen to the comments of other ministers, most notably Ocampo. The proposal is more ‘moderate’ than Petro’s campaign proposal or the first trial balloons sent out by the government last year. The contribution floor to private pension funds was lowered from 4 to 3 minimum wages. Given average salaries, three minimum wages is still a high floor (Ocampo pushed for 2.5 minimum wages, Ramírez negotiated to 3) — AFPs say that they’d need a floor at 1.5 or 2 minimum wages to have a safe future, Fedesarrollo’s recent proposal suggested it be at 1.5 or 2 minimum wages and the Javeriana’s fiscal observatory proposes it be 2 or fixed at a set amount in pesos. The amount of the basic pension in the non-contributory pillar was reduced from Petro’s initial announcement of 500,000 pesos (about half the minimum wage) to 223,000 pesos, after concerns over the huge fiscal impact of a 500,000 pesos universal pension. Fedesarrollo’s proposal also set the amount of this basic pension subsidy at the extreme poverty threshold.
The government’s proposal would fix some of the big and most urgent problems with Colombia’s pension system: expand coverage, reduce old age poverty (the government estimates a 13.2% reduction in poverty and 5.3% reduction in extreme poverty among people over 65), integrate and coordinate the different systems, reduce (but not eliminate) the highly regressive subsidies paid out to wealthy pensioners and improve the short and medium-term fiscal sustainability of Colpensiones. Simply put, the state would have an influx of new revenues from pension contributions to Colpensiones that’d reduce the strain on the central budget (for a while).
However, it doesn’t do much to increase contributions to the system (besides a new possibility for weekly contributions intended at part-time workers and domestic workers) and doesn’t address long-term issues. Colombia isn’t yet facing demographic pressures like Europe, but has an aging population. The reform doesn’t include unpopular measures that some experts have suggested like raising the retirement age and reducing the replacement rate.
Asofondos, the association of private pension funds, argues that the reform is unsustainable in the long-term, and claims that in the medium to long-term it will be necessary to increase the retirement age, raise taxes, increase contributions or reduce pensions. They say that pension savings (in AFPs), which currently represents 30% of GDP, will fall to 14% of GDP by 2052, putting young people's future pensions at risk. Asofondos also claims that while the reform would provide a major infusion of funds for Colpensiones in the short term and reduce its deficit in the next five years, its deficit would start growing again with an aging population and fewer working-age contributors. While Asofondos is obviously defending their interests, they're not entirely wrong. The Javeriana's analysis also raises questions about the post-reform's system sustainability and argues that, with an aging population, it is important that the system relies more on savings and less and less on distribution.
Labour reform
Colombia’s labour market has several longstanding issues. Unemployment has been consistently high, running at around 9–11% for years (except for the pandemic), with unemployment significantly higher among women. The labour force participation rate is low, around 63–64%, with a big gender gap (76% for men, 51% for women). As previously noted, wages are low — many earn less than the minimum wage, but Colombia’s minimum wage at 90% of the median wage and 62% of the mean wage of full-time formal employees is high in comparison with OECD countries. Informality is very high (58%), and most informal workers have no access to social security benefits. Colombian workers work longer hours than just about anyone else in the OECD besides Mexico and Costa Rica.
The OECD’s 2022 Economic Survey on Colombia noted that “informality is perpetuated by high non-wage costs that finance formal-sector benefits” and that the “high minimum wage has likely left many workers in informal jobs, self-employment and unemployment.” The OECD’s 2022 Review of Labour Market and Social Policies also noted that “persistent misuse of other types of civil law contracts remains problematic in Colombia.”
Labour minister Gloria Inés Ramírez and Petro presented the labour reform on March 16. Petro wanted to replay the flashy ceremony he had for the healthcare reform in February, and organized a public mobilization for his base and another public event on the Plaza de Armas in front of the Casa de Nariño. However, in classic Petro style, the president was held up in Medellín and arrived hours late — starting to speak at 9 pm — and few people bothered sticking around for that long.
The labour reform’s main objective is to guarantee employment stability. It would make indefinite term contracts the general rule and impose strict limits on the use of fixed-term contracts, union service contracts and labour outsourcing. Fixed-term contracts would only be exceptionally permitted where a ‘temporary need’ or specific task is identified by the employer and would no longer be indefinitely renewable (limited to 2 years). The reform also seeks to limit outsourcing and subcontracting to cut costs, notably by extending the rights and guarantees of direct employees to outsourced workers, banning companies from using staffing agencies to meet permanent needs and setting limits to the use of service provision contracts (contratos de prestación de servicios).
Certain categories of people would benefit from ‘reinforced employment stability’ against dismissal— people with disabilities, pregnant women and mothers of newborns up to 6 months and pre-retirees (those three years or less away from retirement) . Employers would require just cause and prior authorization from labour inspectors before dismissing them.
The reform would also increase compensation paid out in cases of unfair dismissal (to a minimum of 45 days of salary for all workers with less than one year of service, increased by 45 days of salary for each additional year worked), place the burden of proof on the employer when an employee alleges arbitrary or discriminatory dismissals and explicitly spells out the procedure to follow to apply sanctions or just cause dismissals (with basic principles such as workers’ dignity, presumption of innocence, proportionality etc.).
One of the most notable parts of the reform are changes to night shifts and overtime pay, overturning key changes made in Álvaro Uribe’s 2002 labour reform. Promising to create 160,000 jobs a year, Uribe’s labour reform reduced labour costs for employers and made it easier to hire contract workers or have people work irregular hours (nights, weekends). This reform largely failed to achieve its goals. For example, a study by the Bank of the Republic found that it had only a marginal effect on employment but led to longer working hours.
Petro’s labour reform would redefine night shift hours as 6pm to 6am (since 2017 it is from 9pm to 6am, and was from 10pm to 6am from 2002 to 2017), as it was prior to 2002. Nighttime work entails extra pay (recargo nocturno) of 35% of the salary, so it will be more costly for employers to employ night shift workers. In addition, extra pay for work on Sundays and holidays would increase to 100% of the salary (from 75%), as it was prior to 2002.
The reform would slightly modify the legal definition of the workweek, setting the maximum hours of work to 8 hours per day and 42 hours per week. A 2021 law already reduced the maximum duration of the workweek from 48 hours to 42 hours, but removed the 8 hours/day limit. The law would allow daily working hours to vary, from a minimum of 4 hours to a maximum of 9 hours.
The labour reform would ‘restore’ full labour rights to apprenticeship contracts, again overturning changes made in the 2002 labour reform (which reduced labour rights for apprentices). These rights include minimum wage, social security affiliation, holidays, benefits, unionization, collective bargaining and employment protections.
Another big change in the labour reform would be the regulation of work on digital platforms, although this would only apply to delivery services (like Colombian company Rappi) and not rideshare like Uber (which is unregulated and in a legal gray zone). Digital platform workers would have contracts and benefit from all rights and guarantees in the labour code, and be enrolled in social security. Companies would also need to inform their workers of any employee monitoring software.
The labour reform would also create a special contract for agricultural workers, require contracts for paid domestic workers and professional athletes, guarantee all labour rights to immigrants and includes provisions protecting workers affected by automation (i.e. reconversion or relocation, employers would require the ministry’s authorization for collective dismissals). Employers would also be required to increase salaries annually based on inflation, for all employees earning up to 2 minimum wages.
An innovative aspect of this labour reform are measures to foster gender equality and reduce inequalities in the workplace. Employees with family or childcare responsibilities would be allowed to organize flexible workdays or workstyles with their employers. Employers would be required to accommodate medical appointments (including women with menstrual pains). Paternity leave would be increased from two weeks to 12 weeks, gradually, by 2025.
The second part of the labour reform includes changes to promote trade union organization and strengthen collective bargaining. Trade union density in Colombia is very low (9.5%), largely concentrated in the public sector and most unions have fewer than 100 members, limiting their negotiating power. Colombia often ranks as one of the most dangerous countries in the world for trade unionists, with over 3,200 union members murdered between 1973 and 2020. The reform would establish a number of minimum guarantees for unions as well as a list of punishable anti-union conducts.
One of the goals of the reform is to reduce the ‘atomization’ of unions, reducing the number of unions and strengthening larger unions, particularly industrial unions.
The reform would extend collective bargaining to levels beyond the company, including branches, sectors of activity and business groups. The reform also enshrines the bargaining unit, which would force trade unions to coordinate a single list of demands, avoiding the multiplicity of collective agreements. Following OECD recommendations, the reform would ban collective pacts (with non-unionised workers where unions represent less than a third of the workforce) and union service contracts.
Finally, the reform would broaden the right to strike. The blanket ban on strikes in public services would be replaced with requirements to provide minimum services in essential public services, in line with article 56 of the Constitution.
The labour reform follows Petro’s objectives but is a fairly moderate reform. The final version presented to Congress was more moderate than the draft text from a few weeks before, with the government modifying some points after negotiations with unions and businesses without changing the essence of its reform.
The labour reform will raise ideological issues. It will oppose those on the left, who want to improve workers' rights and conditions and strengthen unions and collective bargaining, and those on the right, who want more labour flexibility. The right argues that Petro and Ramírez's vision of labour relations is archaic, ignoring changes to the labour market and working styles in the 21st century. The left will argue that years of neoliberal labour market policies, like Uribe's 2002 reform, have worsened working conditions, increased precarity and created very few jobs.
Unsurprisingly, the labour reform was welcomed by the main unions, including the Central Unitaria de Trabajadores (CUT), the largest union federation, and the Confederación General de Trabajadores (CGT) among others. On the other hand, business groups have been very critical of the reform. The employers’ association ANDI’s president Bruce MacMaster said that it would be a “death certificate” for entrepreneurs and SMEs, saying that changes to outsourcing and fixed-term contracts would end up killing SMEs. He also complains that the reform places more costs on formal employers while doing little to reduce labour informality, ignoring the two “contradictory parallel universes” in Colombia’s labour market. MacMaster claims that the reform would raise costs on businesses by up to 2–4% of GDP and could increase unemployment by 1.5% or 400,000 people. FENALCO, the trade and merchants’ federation, said that the reform leaves out “two out of three in the labour force” (the unemployed and informal workers) and drew attention to the increased labour costs for merchants hiring new personnel (a 30–35% increase). The ACOPI, the association of MSMEs, is particularly concerned over changes to night work and extra pay for Sunday/holiday work.
Digital platforms like Rappi that’d be regulated by the labour reform have also criticized the reform’s provisions. While saying that they want to be regulated, Rappi argues the labour reform would badly hurt the viability of their business model, like labour flexibility. Rappi says that their rappitenderos (delivery drivers) can earn 11,000 pesos an hour and, on average, 800,000 pesos a week if they work 20 hours — far more than they’d earn if they got just the minimum wage. Simón Borrero, the CEO of Rappi, told Semana that they’d need to charge 18,000 pesos per delivery because of the reform. Of course, Rappi is infamous for its harsh working conditions…
José Daniel López, the former CR congressman who is now president of Alianza In, the association of digital apps, echoes these concerns: he argues that the reform would cause “worse precariousness” and calculates that 80,000 app workers could lose their jobs. He’s particularly critical of the reform ‘forcing’ contracts and ‘labour subordination’ on app workers.
App workers themselves are also skeptical of the reform, fearing for their incomes and loss of ‘independence’. Some rappitenderos protested against the reform in Bogotá on March 28. Unhelpfully, Petro tweeted that they were “marching on the orders of the boss against the reform that is going to dignify their work” and compared it to when slaveholders told their slaves they’d starve if they were freed.
In the political world, Inspector General Margarita Cabello, after a meeting with the main business lobbies, said that it seemed more like a list of union demands than a labour reform. Labour minister Gloria Inés Ramírez said that Cabello’s comments reflected a “lack of knowledge of national and international legislation” because the labour reform responds to recommendations of the ILO and the Constitutional Court. From his Sunday column in El Tiempo, former vice president Germán Vargas Lleras lashed out against a reform which he claims will benefit the privileged “interests of less than 5% of workers” (i.e. unionized workers) and would deepen informality and lead to hundreds of thousands of job losses.
In Congress, there are signs that the labour reform will face difficulties. The Conservative Party, on March 22, “distanced itself” from the reform which it said would make the labour market more rigid and less competitive. The Partido de la U, while praising some positive aspects of the reform, said it was concerned about some aspects that could affect SMEs. The Conservatives called on the government and other parties to open a space for “dialogue and concertation” to reach a balanced text. The Conservatives and the Partido de la U, perhaps to be joined by the Liberals, are likely to join forces again to present a counter-proposal to the government to reach a compromise.
The pension and labour reforms are now Gustavo Petro’s best hopes to pass the kind of major structural reforms to Colombia’s social security and labour relations systems that he promised in his 2022 campaign. On the pension reform, there is broad consensus on the need for reform and fairly wide support for a pillars system of the kind that Petro is proposing, although there will be negotiations and compromise around the details—most notably the threshold for contributions to the private funds versus the public system. On the labour reform, the government may find it more difficult to impose its left-wing vision in Congress where the left lacks a majority on its own. It will need to negotiate with the traditional parties, and likely be forced to abandon some of its demands.