Mexico's current retirement system (SAR) is "woefully inadequate" to confront the challenges of the coming "age wave" as demographics shift sharply to older age brackets in the coming decades, according to Richard Jackson (in photo), founder of the Global Aging Institute.
"[With] the utter inadequacy of Mexico's public pension system once the transition generation in SAR is done retiring, replacement rates are going to fall from 80% to 90% to 25-30%. This will drive a growing demand for voluntary retirement savings," said Jackson in comments on longevity and retirement at Mexican insurer association AMIS's annual convention in Mexico City.
The transition from the older pension system to the AFP-type Afore system in Mexico should begin to advance more forcefully beginning in 2021, as those who began working at the start of the Afore system in 1997 reach retirement age.
Asked about what pension reforms he would support in light of the upcoming elections, Jackson said, "Double the contribution rate to SAR. It shouldn't be 6.5%, it should be 13%, at a minimum. Or alternatively, take the voluntary second tier of SAR – the voluntary retirement savings – and use the lessons of behavioral economics and turn that into an auto-enrollment, opt-out system and channel very significant government subsidies to that."
According to Jackson, "there's a growing interest in voluntary retirement savings in Latin America and in Asia, but I must say Mexico, and [regulator] Consar here, is taking this more seriously than anywhere else I've seen, and that's good. So there's some positive momentum, although Mexico is starting from a very low base on voluntary savings."
The expert also pointed to the troubling disparities between private sector pensions and those of public sector employees.
"In Mexico today, obscenely, and if there are any ISSSTE [public sector] employees in the audience, I'm going to get rocks thrown at me ... in the ISSSTE savings plan you get a three to one government match, whereas private sector workers get nothing."
In truth, the government does contribute a small amount to private sector workers' retirement accounts.
Of the 6.5% total contribution rate for employees in the private sector social security administration system (IMSS), the government contributes 0.225 percentage points, while the employee contributes 1.125 points and the employer contributes the remaining 5.15 points – including for death and disability insurance and a government-linked housing fund.
Public sector employees under PensionISSSTE, however, enjoy a much higher 11.7% contribution rate due to vastly larger government support.
Jackson also stressed the need for Mexican authorities to synchronize the economic development agenda with the agenda to address the graying of Mexico's population, battling economic inequality through education as well as labor and market reforms, and establishing a "a more inclusive, higher quality healthcare system."
He added that Mexico's age demographics are shifting rapidly, adding urgency to the issue, noting that in 1980 there were 10 times as many people under the age of 15 than those over the age of 65. By 2050, data suggests there will be more people over the age of 65 in Mexico than children.
"It also has to be sure to put in place the kinds of mechanisms that will help to control costs as the age wave rolls in," said Jackson, in particular the need to look at the concept of capitation payments for healthcare costs – an incentive-based or prospective payment system that places the provider at risk because the payment amount will be the same irrespective of the resources needed to treat the patient.
"The assumption up to now has been that families are going to take care of this ... that assumption has been a fair one perhaps in the past, [but] it is not a responsible one looking to the future," said Jackson.