INCREASE THE MAXIMUM LIMIT FOR CONTRIBUTION PURPOSES TO THE SOCIAL SECURITY SYSTEM: IT WILL GO FROM 25 TO 45 CURRENT LEGAL MONTHLY MINIMUM WAGE.

Last November 28th, the President of the Republic, through his Ministry of Labor, published the Decree 2322 of 2022, by means of which he regulated the maximum limit of the contribution base of the General System of Integral Social Security, going from twenty-five (25) to forty-five (45) current legal monthly minimum wages. 

The above decision is transcendental not only because of the modification applied to the regulation that was in force since 2003, but also because of its genesis, since it was the result of an Enforcement Action initiated by a citizen against the Ministry of Finance and Public Credit, the Ministry of Labor and the Pension and Parafiscal Management Unit.

This enforcement action was filed by a citizen who claimed to the mentioned institutions the compliance with the article 5 of Law 797 of 2003, which deals with the pension contribution base of public and private workers who receive a monthly income higher than 25 salaries, a situation that -according to the plaintiff- had been pending regulation for more than 15 years.

Specifically, the article on which compliance by the executive was claimed established that:

"The limit of the contribution base shall be twenty-five (25) legal monthly minimum wages in force for public and private sector workers. When more than twenty-five (25) legal monthly minimum wages in force are earned monthly, the contribution base shall be regulated by the national government and may be up to 45 legal monthly minimum wages to guarantee pensions up to twenty-five (25) legal minimum wages."

In the first instance, the Administrative Court of Cundinamarca agreed with the plaintiff, leaving aside the arguments presented by the Ministry of Finance and Public Credit and the Ministry of Labor, which, in principle argued that: i) the verbal conjugation used by the Legislator " may", implies the power or faculty to execute an action and is contrary to the conjugation "shall", which does denote obligatory nature. They also insisted that ii) the National Government had already regulated the subject, through Decree 1359 of 1993 which established the special regime for legislators, Decrees 1293 of 1994 and 916 of 2002 which contemplated the benefits for senators and representatives to the Chamber covered by the transition regime and Decree 104 of 1994 which determined the amount of the pension for magistrates of the Supreme Courts.

However, the Council of State, as the highest authority of the Contentious Administrative Jurisdiction, resolving the challenge filed by the Ministry of Labor, finally argued that the rule contained in Law 797 of 2003 brings with it a legal mandate of the National Government to regulate the contribution base. Regarding such legal mandate, the Council of State indicates that more than 17 years have passed without any Government having made any pronouncement on the matter. 

However, what is optional is to define the maximum limit of the contribution base, which may reach up to 45 legal monthly minimum wage, a maximum limit that must be based on and be the result of an analysis by the Ministry of Labor, taking objective data (financial, actuarial, statistical, legal, among others) and, above all, holistically analyzing the Colombian pension context. 

In short, the Council of State, through its ruling of September 23nd of 2021, ordered the Ministry of Labor and the National Government, within six months following the notification of the decision, to implement the regulation referred to in paragraph 4 of Article 18 of Law 100 of 1993, as amended by Article 5 of Law 797 of 2003.

Hence, the President of the Republic through his Ministry of Labor, 14 months later, proceeded to publish Decree 2322 of November 28, 2022, in which, following the order given by the Council of State, added paragraph 2 to Article 2.2.2.3.1.7 of Decree 1833 of 2016, in the following terms:
 
"Paragraph 2. The limit of the contribution base of the general comprehensive social security system shall be a maximum of forty-five (45) legal monthly minimum wages in force, provided that: i) the real growth of the Colombian economy is higher than 4% during at least the last three fiscal years, and ii) the fiscal expenditure on pensions is lower than 2 percentage points of the GDP."

From the above it is important to extract that, although it is true that an increase in the base contribution income was introduced to contribute over a maximum of 45 legal monthly minimum wage, it must also be emphasized that this provision lacks an exact date of 8application in which it will generate real effects in its obligatory nature, due to the two (2) conditions that were established: 

I.    When the real growth of the Colombian economy be higher than four percent (4%) during at least the last three fiscal years. 
II.    When the fiscal expenditure on pensions be lower than two (2) percentage points of the Gross Domestic Product (GDP).

These requirements set forth in the regulation leave in a state of uncertainty the moment in which it will be possible to start paying contributions above 25 legal monthly minimum wage, if it is considered that the same Decree, in its considerations, states that in accordance with the calculations of the General Directorate of Economic Regulation of Social Security of the Ministry of Finance and Public Credit:

I.    Between the year 2000 and the year 2022 the real growth of the Colombian economy has been 3.6%.

II.    The Fiscal Spending on pensions for the year 2021 was 3.6% of the GDP. 

In other words, there is no certainty when the real growth of the Colombian economy will increase more than 0.4% percentage points, considering that achieving an increase of 3.6% took the nation more than 20 years and additionally if this increase must be maintained for at least three (3) fiscal periods. 

Likewise, reducing Fiscal Spending on pensions of the Gross Domestic Product (GDP) by more than 1.7% is not a situation that can be consolidated quickly and easily over the time, since the delicate financial situation that the pension system in Colombia is currently going through cannot be ignored.

Now, leaving aside the conditions established in the regulation and bringing up the fact of increasing the contribution base up to 45 legal monthly minimum wage, we found that this will have an important impact for the following groups:

(i)    Self-employed workers, who will have to contribute more to the social security system and, consequently, will obtain a decrease in their net monthly income. 

(ii)    ii) For dependent workers, the impact will be reflected in the increase of the economic cost for the employer, who is the party that assumes the highest value in the contribution (8% to health, 8% to pension and the respective percentage to labor risks).

(iii)    And finally for the State, because currently there is a deficit in the General Social Security Pension System due to the recognition of pensions higher than 10. In this regard, it is important to point out that today there is a small group of people who receive a pension allowance close to 25 current legal monthly minimum wage; but this generates a significant impact on the State's finances due to the subsidy it must cover to guarantee the amount of these pensions. 

In this way, if the base contribution income increases up to 45 legal monthly minimum wage -as established in the regulation- in the short term, it will imply that the State will receive more economic income from its members, but in the long term, it will result in an exponential increase of high pensions for people whose contributions during their working life are not enough to cover their pension for life and, consequently, the State subsidy will have to be even higher to guarantee them, to the point that it could lead to the bankruptcy of the Colombian pension system.

In summary, although the order issued by the Council of State could be considered to be fulfilled with the issuance of Decree 2322 of 2022, the fact that this Decree is not clear as to the actual date on which contributors to the General Social Security System may start to contribute above 25 legal monthly minimum wages, due to the severe conditions required for such purpose, without ignoring the delicate effects that the financing of pensions equivalent to 25 legal minimum wages will have for society as well as for the State and its economy, cannot be disregarded.