Universal pension could fix Mexico's pension woes

Demographic growth and increased life expectancy in Mexico are making pension solvency the most serious financial problem in the country, said Francisco Aguirre, director of local actuarial consulting firm Valuaciones Actuariales del Norte.

The actuarial executive spoke at health and retirement conference Seminario Retiro y Salud 2018 in Mexico City Tuesday, organized by Mexican actuarial association AMAC. He added to a chorus of private and public sector voices that call for comprehensive pension reform.

"The contingent liability represented by pensions exceeds 140% of gross domestic product; that is to say, it is the most serious financial problem that the country has and although the problem is recognized, it was not part of the structural reforms," said Aguirre according to local media outlet El Economista.

Aguirre explained that the debts building today would take 70 years or more to pay off under the current framework, noting the federal government continues to pay out extensive pension benefits for those that entered the private-sector social security system (IMSS) ahead of 1997, before the current private pension manager (Afore) system went into effect.

The problem is further exacerbated by the late adoption of the Afore system by the public workers social security system (ISSSTE) in 2007, which came at a high cost with significant structural concessions that give public workers higher retirement replacement rates than private sector workers.

He added that social security in the country is in general very poorly distributed, as pension benefits are offered to a minority at the expense of a majority.

Aguirre outlined three classes of Mexican workers from a pension perspective. The first are those who do not have access to social security – some 60% of Mexicans that will not have a pension because they have no Afore with the IMSS or ISSSTE.

The second group, about 30% of the population, is affiliated with the IMSS; this group is divided between pre-1997 workers and those coming after, with those entering the work force after 1997 receiving lower benefits.

The remaining population, between 10 and 12%, consist of public sector employees, many of which are guaranteed pensions after only 30 years of service without making direct contributions from their own salaries and given a 100% replacement rate compared to their last salary level.

"We have about 90% of the population that in old age will have very few resources to survive, while there is 10% that we are offering a lot, but we will not have money to pay," said Aguirre.

Universal pension system

To confront the problem, the AMAC has proposed the creation of a National Pension System that allows a more homogeneous scheme that seeks to provide the same pension benefits.

For this to occur, legislators would need to enact framework legislation that clearly outlines the legal rights and benefits of workers with regards to pensions.

Political momentum may well be in sync with such a proposal, with frontrunner presidential candidate Andrés Manuel López Obrador (AMLO) having openly backed an expanded or universal pension system for all Mexican retirees. AMLO is poised to win the July 1 elections.

Verónica González, representing AMAC's research and guidelines commission, explained at the event that the agency seeks to create a universal pension and a basic pension for both formal and informal workers.

She suggested creating a base universal pension for all workers of 1,500 pesos (US$75) per month, adding that the system would add 0.82% of GDP to annual federal budget requirements – roughly 192bn pesos at current levels.

González noted that today the government allocates about 3% of GDP to pensions, but other countries allocate up to 6% to pension issues, meaning an expansion of this scale would be well within international norms.

The pension would also be funded in part with revenue collected from the national VAT, currently 16%, with the pension system consuming eight percentage points of the total.

In addition to the 1,500 pesos, workers would receive any pension benefits from Afore accounts as well as pension savings from voluntary retirement contributions.

The AMAC plans to hand the universal pension proposal to the winner of Sunday's election.