Regulator sees 'silent pension tsunami' headed for Mexico

Mexican senators and officials met on Wednesday to discuss the need for comprehensive pension reform, with the head of the country's pension regulator (Consar) saying changing demographics and the aging population “are transformations that comprise a silent pension tsunami that is increasingly visible on the horizon.”

During a meeting of the senate’s social security committee, Consar chief Abraham Vela Dib said Mexico is a country plagued by inequalities, where 53mn people live in poverty, 10mn of them in extreme poverty, while 30mn people are forced to make a living in the informal sector, depriving them of social security benefits.

The nation's statistics agency reported the level of labor market informality to be 56.6% in March, and while any adult may open their own account at the country's pension fund managers (Afores), almost all Afore accounts belong to formal sector employees.

Furthermore, Mexico is seeing the impact of a steady decline in population growth. A woman had an average of 6.45 children in 1950, while in 2000 the number was 2.65 children, and by 2050 a woman is expected to have two children.

Meanwhile, life expectancy has increased from almost 50 in the 1950s to 75 years or more by 20018 - and is projected to reach 79.4 by 2050.

Citing direction from President Andrés Manuel López Obrador (AMLO), Vela Dib called on lawmakers to propose solutions and establish routes of action to reform the fractured pension system.

Vela Dib added that – adopting a central focus on social justice and the interest of workers – the government needs to establish a consolidated, inclusive pension scheme with wide coverage that is capable of providing decent benefits to retirees with adequate replacement rates.

The head of the social security committee, senator Gricelda Valencia de la Mora, stated as pension reform goals a reduction in the fees that Afores charge, an increase in their investment yields - and higher contributions rates with the tripartite system in place (with funds from the government, the employer and the employee).

Valencia de la Mora also decried the fragmented overall system, which contains more than a thousand different pension systems at the federal, state, municipal, private and public levels, adding, “We inherited a broken system.”

POTENTIAL REFORMS

A recent report conducted by federal auditing agency (ASF) showed that workers contributing under the Afore system can expect to receive monthly benefits equivalent to 24.3% of their pre-retirement salary, which would mean Mexico’s replacement rate is among the lowest in the OECD.

The report included an actuarial analysis showing the replacement rate would improve 5.8 percentage points to 30.1% with the following modifications: an increase of 1% in the Afores' real-term investment yields; a 10% decrease in the average fees charged by the Afores; a two-year increase in the retirement age to 67; and an increase in contributions by workers, whether voluntary or mandatory.

At a conference in Mexico City held last year by Mexican insurer association (AMIS), Richard Jackson, founder of the Global Aging Institute, was asked about what pension reforms he would recommend.

His answer was: “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.”