At a glance: Pension challenges facing Chile, Mexico

Combining funded and pay-as-you-go pensions, automatic adjustment mechanisms, and a strong safety net for pensioners improves retirement outcomes.

That is a key message from the OECD Pensions Outlook 2018 report.

The Paris-based forum said that, while member nations have made improvements to their systems over the past decade to make them more sustainable, "governments should now focus on ensuring they provide people with an adequate retirement income."

A pension system that includes both pay-as-you-go and funded arrangements is "better able to achieve its various objectives and more resilient to the multiple risks to old-age financial security," it said.

OECD also highlighted the benefits of clear rules, financial incentives, and retirement age flexibility, among other areas.

Factors behind low retirement income include low contribution rates, contribution gaps and low salaries.

"Pension reform remains a continuing challenge as countries need to ensure people get an adequate pension while remaining affordable," said OECD secretary-general Angel Gurría (pictured).

In Latin America, the study looks at Chile and Mexico, which are both members of the OECD. Gross pension replacement rates in Mexico and Chile are the lowest and fourth-lowest of the 36 OECD member nations, respectively.

Chile has a mandatory defined contribution (DC) system in which workers contribute 10% of their gross monthly salary to individual savings pots managed by private pension fund managers, or AFPs as they are known.

Low-income workers receive public pension benefits in the form of a solidarity pillar.

Chile's AFP system, while deemed sustainable, has come under fire for the small pensions many retirees receive. In October, President Sebastián Piñera outlined his pension reform plans. A key proposal is to bring the contribution rate up to 14% - via a 4 percentage point employer contribution. This would bring the level in Chile closer to the OECD average of 19%. The bill also opens the door for increased competition in the sector and strengthens the solidarity pillar.

Authorities have also introduced rules making it mandatory for independent workers to save with an AFP and make social security contributions. However, a bill was submitted in August that phases in contribution requirements, from 10% to 17% of their taxable income.

Mexico, meanwhile, faces its own challenges, the largest being how to raise replacement rates and make them more equitable across existing schemes. The vast majority of Mexican workers in the formal job market participate in one of two mandatory DC schemes, one for all private-sector workers (IMSS) and one that covers most public-sector employees (ISSSTE).

These schemes were established as part of reforms to shift away from the pay-as-you-go model and ease the burden on state coffers.

Today, the employee, the employer and the government contribute. In the private sector worker scheme, the overall contribution rate is 6.5% while for public sector workers the rate is 11.7%, thanks to stronger government support.

The current retirement system covers only four out of every 10 Mexicans, which the head of retirement and pension regulator Consar, Carlos Ramírez, has said "represents the greatest challenge the country has moving forward."

One of the main sources of low coverage is labor market informality, according to the OECD.

Plus, those workers who contributed to the pension system before it was overhauled retain the right, on retirement, to choose whether their benefits are paid under the old model or the DC scheme, with the former resulting in much bigger pensions. This disparity is something that could lead to opposition to the DC scheme, the OECD says.

Indeed, replacement rates once this so-called transition generation finish retiring are going to fall from 80-90% to 25-30%, the Global Aging Institute has said.

Calls have been made to raise contribution levels, boost subsidies for those who are working, promote voluntary pension savings, increase safety-net levels and bring more workers into the system, as part of efforts to boost pensions and reduce the number of people living in poverty upon retirement.

Newly inaugurated President Andrés Manuel López Obrador has pledged to expand, nationwide, a universal pension program for elderly citizens established in Mexico City. Despite raising serious concerns over how he plans to pay for such a program, any proposal to modify the nation's retirement system opens the door to a broader overhaul.

Elsewhere in the region, reform is also seen as necessary in countries including Argentina, Brazil, Colombia, Uruguay and Peru.

Read the OECD report