Social Security reform and pension choice: The case of Colombia

This doctoral dissertation analyzes the Colombian pension system. It consists of three self-contained essays dealing with two topics: an evaluation of the Colombian pension system and the individual choice behavior of its pension insured. Colombia is the only country in the world in which the insured, including new entrants in the labor force, can choose and switch back and forth between a public defined-benefit and a private defined-contribution pension program. A study of Colombia can thus give important information about the way insured individuals make decisions.; Chapter 2 provides an overview of the Colombian pension system and evaluates its performance using four criteria: (1) effectiveness, (2) efficiency, (3) equity, and (4) sustainability, and finds evidence of severe shortcomings in all of these criteria. A current reform proposal from the Colombian government addresses only part of the problem (this chapter is forthcoming in International Social Security Review 56 (1), 2003).; Chapter 3 calculates the internal rates of return of the public program (IRR's) for different types of insured and analyzes how the political risk and these IRR's impact pension program choice. Despite the widespread distrust in the Colombian state combined with the distressed financial situation of the public program, in January 2002 over 50% of all insured had chosen the public over the private program. This puzzle might be explained by considering the high IRR's in the public program, which are especially high for low-income insured and women.; Chapter 4 develops a structural model of pension choice with an explicitly modeled political risk of a pension reform that incorporates the rules of the pension system and allows me to empirically estimate the preference parameters of the insured. Using a unique data set from Colombia (the 1997 National Household Survey About the Quality of Life), I estimate the underlying utility parameters and use those to simulate the impact of a proposed pension reform that would significantly cut the benefits in the public program. I find that surprisingly few of the affiliates of the public program are predicted to switch to the private program because of this reform.