Domestic service has existed in Colombia since approximately 1525. It is about 500 years of history of this trade in our country, a trade that has always been the primary source of employment for low-income and poorly-educated women. In Colombia, one out of every seven women is engaged in paid domestic service to earn a living. This sector represents 4% of the total labor force in the country, with more than 800,000 domestic workers.
Eighty percent of domestic workers in Colombia are in the informal sector; more than 600,000 women must survive on wages below the minimum wage, with no social security, no social benefits, and no contributions to the pension system. Necessity and lack of opportunities force these women to accept these working conditions, which leads to significant social injustice.
In Colombia, an informal domestic worker works on average 3 or 4 days a week and earns approximately $35,000 pesos for a day’s work. It is generally customary to pay cash when the employee finishes her work. They usually spend this money immediately to cover their daily needs without allocating a percentage of their salary to savings. These cash transactions, coupled with little or no financial education among domestic workers, mean that this population has no formal savings habits.
The lack of education regarding the importance of short- and long-term savings is linked to the domestic service sector’s low contribution to the pension system.
In this context, two factors that negatively impact the finances of domestic workers and, at the same time, seriously affect the national economy stand out: cash transactions and evasion of social security payments.
Cash payments and financial exclusion
Domestic workers in Colombia are unaware of the importance of accessing the banking system to build a financial history that allows them to access credit and other formal savings mechanisms. Cash payments contribute to their exclusion from the banking system, making it almost impossible to buy a home or provide their children with a quality higher education. Without access to credit or savings, these goals become utopian.
This financial exclusion has adverse effects on the lives of informal women workers. At the macroeconomic level, it has negative implications regarding resource traceability and tax collection. Cash transactions are the foundation of the informal economy and the main drain on tax bases.
According to the study “Cash reduction and size of the subway economy in Colombia,” carried out by the Association of Financial Institutions (Anif), in Colombia, the informal economy represents 40% of the GDP, about 294 billion pesos. This means that the country does not receive income from the taxes generated by these monies, and the fiscal gap increases.
Pension system crisis and demographic aging
One of the most severe consequences of the informal economy is that it has become a dangerous threat to the sustainability of the pension system in Colombia. Currently, only 1 out of every 3 Colombians has access to a pension. The root of this crisis is the low contribution to the pension system resulting from everyday work.
Nearly 14 million informal workers are not making the proper pension contributions. Consequently, the fiscal gap of the 38 billion pesos that our pension system has continues to increase. Worse, it is projected that in the future, a large percentage of these 14 million Colombians will not be able to access a pension when their productive stage ends.
The outlook is discouraging. According to the estimates of the Inter-American Development Bank, in about 25 years, the aging of the population in Colombia will be double the current one, there will be more older adults than young people, and fewer and fewer Colombians will be able to retire, thus increasing the poverty indexes in Colombia.
The government is currently taking measures to minimize the impact of informality on the Colombian economy. However, it is imperative to know that this problem affects all Colombians. It is in our hands to help combat the labor informality that harms workers and the nation’s economy.
