Budget expert warns Mexico could face fiscal crisis due to mounting pension spending

Mexico’s government looks to be headed towards a fiscal crisis if it does not quickly address pension reform, according to Alejandra Macías, head of research at Mexican budget think tank CIEP.

“The forecasts are not optimistic If changes are not made now in the pension system,” said Macías, speaking at an online presentation from CIEP on Monday. “In fact, spending on distributed [pay-as-you-go] and individual account [Afore] pensions is expected to reach 7% of GDP by 2030."

Macías added that already roughly one-fifth of public spending goes towards the pension system, noting that the largest burden for the federal government comes from generous pensions at the higher end of the spectrum under the old pay-as-you-go scheme.

Mexico continues to make payments to the pre-1997 pay-as-you-go pension system in addition to individual accounts under the private pension manager (Afore) system, with the 2019 budget for pension and retirement benefits set at 985bn pesos (US$51.3bn).

"The cost of the most expensive pensions must be contained, 20% of the budget that goes to the distribution scheme is assigned to 3% of the pensioners, very few people have high pensions,” noted Macías.

Social supports coming with the administration of President Andrés Manuel López Obrador (AMLO) look to exacerbate the problem with this year’s roll out of a nationwide senior citizen pension system projected to add 123bn pesos in spending this year, climbing to 193bn pesos by 2024, according to research reported in local daily El Universal and statistics agency (Inegi) data.

The growth in spending is tied to the growing number of Mexicans at or above 68 years of age, the threshold for the subsistence pension, expected to increase from 8.1mn people in 2019 to 10.9mn by 2024.

The 68-and-over program represents a new pressure on public finances, said Macías, as cited in El Universal.

“If you increase the budget for a social program like [the 68 and over program], you have to cut back somewhere else, and if you do not do this, then you will have to place more debt to continue making pension payments,” she noted.