Trade group sounds alarm on Mexican pension system

Friday, October 14, 2016

Mexico is facing a deepening web of problems related to its social security system, as a new pension framework and low individual contributions factor into a shocking scenario for younger workers when they begin to receive retirement benefits, according to the country's association of finance executives (IMEF).

Speaking at an international forum on pensions in Mexico City, IMEF member Francisco Gutierrez-Zamora noted that, among the OECD member nations, Mexico has the lowest percentage of its population under social security coverage, at only 33.1%.

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"In the Netherlands, 100% of the population has social security, and in Chile, which is similar to Mexico, there is 40.4% coverage," local papers El Economista and Vanguardia reported him as saying. "We have a genuine problem with pensions in the country that we need to start resolving urgently."

Mexico's pension framework was based on the Chilean AFP system, which is the target of widespread protests in that country and is facing dramatic changes to boost contributions, and Mexican officials are calling for major legislation to change its own system in the near future.

The executive pointed to the situation in Chile, where new pensioners are receiving only 50% of their final paycheck in benefits, adding that Mexico's problems are even worse but have yet to really hit home.

Firstly, there are two systems in place, one under the 1973 social security law and the other that began in July 1997 - the Afore plan that mimicked Chile's AFP system.

Mexico is also set for a major milestone in its retirement system in 2021, as some 10mn users under the Afore pension system begin to retire and draw benefits. Gutierrez-Zamora sees the full impact becoming clear to all by 2030 as pensioners begin to pull money from their individual accounts.

"Pensions will be very low for those who pay into the new[er] law," he said. "In 2030, when they begin to retire, they're going to realize that the conditions have changed."

"Their father took home a pension of 50,000 pesos, but the son doesn't even get 20,000 pesos."

The lack of formality only deepens the problem, he added, noting that six of 10 Mexican workers operate outside the formal system.

"We have to pay them from the taxes we have, even though it is a minimal guaranteed pension," he said, noting this will draw upon those resources collected from workers who did actually pay into the system.

He added that Mexico must begin to take the issue of pensions seriously. It should be regularly reviewed and not ignored "until it is about to explode."

"These aren't policies that sell, but the changes need to be made."

He pointed to recommendations from retirement agency Consar, including increasing the retirement age, improving yields on savings and encouraging voluntary contributions.

"It's all about an individual account, but to achieve this, there needs to be the implementation of public policies that support them, such as the pari passu scheme, where for every peso saved by the worker, the government matches that with a similar amount."

Gutierrez-Zamora argued that as long as fiscal incentives do not go far enough to boost social security, companies and employees would not save voluntarily.

"In a country where formal employment is a burden, informality is more attractive," he said.