Mexico Pension Plan

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Mexico reformed its pension system in 1997, transforming it from a pay as you go (PAYG), defined benefit (DB) scheme to a fully funded, private and mandatory defined contribution (DC) scheme. The reform was modeled after the pension reforms in Chile in the early 1980s, and was a result of recommendations from the World Bank.

A pension is a fund into which a sum of money is added during an employee's employment years, and from which payments are drawn to support the person's retirement from work in the form of periodic payments. A pension may be a "defined benefit plan" where a fixed sum is paid regularly to a person, or a "defined contribution plan" under which a fixed sum is invested and then becomes available at retirement age. Pensions should not be confused with severance pay; the former is usually paid in regular installments for life after retirement, while the latter is typically paid as a fixed amount after involuntary termination of employment prior to retirement.

The World Bank is an international financial institution that provides loans to countries of the world for capital projects. It comprises two institutions: the International Bank for Reconstruction and Development (IBRD), and the International Development Association (IDA). The World Bank is a component of the World Bank Group.

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Structure

Participants in the Mexican system choose from a variety of private pension fund managers called Administradores de Fondos para el Retiro (AFOREs). AFOREs are responsible for managing individual accounts and investing savings in the pension funds called Sociedades de Inversion Especializadas para el Retiro (SIEFOREs). SIEFOREs are separate legal entities with their own Board of Directors, and segregated assets from AFOREs.

Pension system prior to 1995 reforms

In 1943 the Mexican government ratified legislation designed to provide its workers with social insurance administered by the Mexican Social Security Institute(IMSS) which included pensions, sickness insurance, and worker's compensation. From the 1950s through the 70s, the mobilization of laborers, with their political establishment affiliations, worked to improve the social insurance program along with expanding its level of coverage. [1] Prior to the reform law, contributions to the pension system were managed and disbursed by the IMSS through a pay-as-you-go, defined benefit program. Measuring the number of years an individual contributed to the system while also calculating the number of funds accumulated by tripartite worker-employer-state contributions serve to determine the levels of pension granted with a minimum requirement of five hundred weeks of contributions for qualification. [2]

Mexican Social Security Institute Public institution of social security

The Mexican Social Security Institute is a governmental organization that assists public health, pensions and social security in Mexico operating under Secretaría de Salud.

A defined benefit pension plan is a type of pension plan in which an employer/sponsor promises a specified pension payment, lump-sum on retirement that is predetermined by a formula based on the employee's earnings history, tenure of service and age, rather than depending directly on individual investment returns. Traditionally, many governmental and public entities, as well as a large number of corporations, provided defined benefit plans, sometimes as a means of compensating workers in lieu of increased pay.

During the Salinas administration,1984-1994, financial issues linked to the social insurance program and concerns for competition protection induced policymakers to consider a complete overhaul and privatization of the pension system. [3] However, opposition from labor organizations and the need to maintain their support for the free trade agreement(NAFTA) with the United States and Canada forced Salinas to implement only partial privatization reforms. [4] Nevertheless, with the added private pillar to the existing public pension system, the foundation for the eventual privatization of the entire arrangement was definitively put in place.

Carlos Salinas de Gortari President of Mexico (1988–1994)

Carlos Salinas de Gortari is a Mexican economist and politician affiliated with the Institutional Revolutionary Party (PRI) who served as President of Mexico from 1988 to 1994. He is widely regarded as the most influential politician in Mexico over the last 30 years. Earlier in his career he worked in the Budget Secretariat eventually becoming Secretary. He was the PRI presidential candidate in 1988, and was declared elected on 6 July 1988 after a controversial electoral process and accusations of electoral fraud.

Since 1989, the guaranteed minimum pension earned with the satisfaction of requirements had been indexed to the minimum wage, but it failed to reflect the growth of real average wages that occurred during the 1990s. It was quite common for workers to contribute to the IMSS with earnings between one and three times the minimum wage and subsequently only to receive the bare minimum pension. [1] As a result of this stark dissociation between contribution levels and earned benefits, workers often avoided paying IMSS salary deductions either by working unofficially or joining the informal sector. In addition, employers frequently refused to declare their actual number of employees in an effort to reduce contributions to the IMSS. [2] In light of such structural issues along with fears of running a deficit and high inflation rates, the Zedillo administration,1994-2000, was ultimately compelled to initiate further reform.

Ernesto Zedillo President of Mexico (1994–2000)

Ernesto Zedillo Ponce de León, is a Mexican economist and politician. He was President of Mexico from 1 December 1994 to 30 November 2000, as the last of the uninterrupted 71-year line of Mexican presidents from the Institutional Revolutionary Party (PRI).

Reformation of the pension system

For the Zedillo administration, the severe devaluation of the peso and the subsequent 1995 economic crisis served to expose the potential risks associated with capital account openness emboldening policymakers to search for new methods that encourage domestic savings. Like many other Latin American countries that emulated the Chilean model, Mexico also decided to take a similar approach in their attempts to privatize the pension system under the IMSS. [4] With the prescription of the World Bank, the Zedillo administration sought legislation that not only privatized the IMSS pensions but also IMSS healthcare, however opposition from labor and teacher unions halted the privatization of the latter. [5]

The Mexican peso crisis was a currency crisis sparked by the Mexican government's sudden devaluation of the peso against the U.S. dollar in December 1994, which became one of the first international financial crises ignited by capital flight.

Though the proposed legislation was adopted in 1995, its full implementation was delayed until 1997. Consequently, the entire public pension system provided by the IMSS was privatized under a new mandatory framework that transformed the previous pay-as-you-go arrangement to a model fostering individual retirement accounts. [1] Such accounts are ultimately managed and administered by private trust funds(AFP[Administradora de Fondos de Pensiones], Afore[Administradora de Fondos de Retiro], AFPJ[Administradora de Fondos de Pensiones y Jubilaciones], etc.) which in turn are supervised and regulated by the state. [2] Like the Chilean model, the Mexican reform increased the required minimum number of weeks of contributions to 1,250 while eliminating cross-generation subsidies and significantly reducing the level of redistribution between income groups. [1]

In 2004, the Fox administration, 2000-2006, implemented further reform as the financial health of the IMSS continued to serve as a significant concern. Through government reports and IMSS internal documents, it was discovered that the generous pension scheme enjoyed by the institute's own employees was largely the facilitator of the weak financial performance in question. [3] Prior to the 2004 reform, IMSS employees were treated with greater leniency as they were allowed to retire earlier thus completing fewer years of contribution yet they received levels of benefits well above those granted to retiring workers in other economic sectors. Following the reform, IMSS workers were forced to receive their benefits through the privatized pension system rather than through their labor contract, [2] however, overall, the reform failed to make any significant positive impact. Instead, it had a more symbolic effect as it engendered the future retrenchment of the welfare state and the dissolution of union opposition to future reforms. [3]

Economic shortcomings and gender disparities

For proponents of the pension reform, privatization was regarded as necessary in resolving the financial issues surrounding Mexico's social security system in two main ways. The first, privatization limits the pension system's vulnerability to changing demographics, and secondly, it insulates the system from political interference. However, for some critics, such claims are unconvincing. In their view, the state lost a substantial portion of its social security revenue through the cost of transition in the short to medium term, and that other types of reforms, like increasing taxes or eliminating special benefits to privileged groups, would have been more cost efficient. [4] Critics have also asserted that it is unclear whether or not mandated pension saving is conducive to an increase in national saving or that it simply elicits a change in private and public proportions of saving. From a skeptical perspective, the privatization of the pension system merely serves to expose the Mexican state's direct intervention to create new markets favoring special interest groups, particularly financial corporations. [6]

Other critics have argued that the privatization of the pension system will only exacerbate levels of gender inequality and stratification. Under Mexico's pension system of defined-contributions, differences in work habits between male and female workers can lead to disparities in both the accumulation stage (working period) and the withdrawal stage (retirement). [7] In the first, pension savings are indicative of gender differences in earnings and labor-market participation (e.g., women tend to have shorter employment histories and change jobs more frequently). Because the pension reform increased the required minimum number of years of contributions, for women, this tends to be less de-commodifying than the previous pension plan due to the fact that the average women often fails to satisfy this requirement. In Latin America, it is quite common and even expected for women to stay at home and act as a familial caretakers- thus remaining dependent on their husbands. As a result of their short working hours, women are frequently unable to purchase a minimum pension with whatever earnings and interest they accumulate in their individual pension accounts. In the second stage, women's higher life expectancies entail that the period in which benefits are received is subsequently longer. Because Mexico, along with other Latin American countries, utilizes gender-specific mortality tables, the pension systems of individual accounts do not pool the risks of longevity between the sexes. With limited pension funds, longer retirements, and a reformed pension system considerably sensitive to wage levels, the level of stratification between the sexes may only worsen. [1]

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Welfare state Government promoting its peoples welfare

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References

  1. 1 2 3 4 5 Dion, Michelle (2006). "Women's welfare and social security privatization in Mexico". Social Politics. 13 (3): 400–426.
  2. 1 2 3 4 Marier, Patrik, and Jean F. Mayer (2007). "Welfare retrenchment as social justice: pension reform in Mexico". Journal of Social Policy. 36 (4): 585–604.
  3. 1 2 3 Dion, Michelle (2009). "Globalization, Democracy, and Mexican Welfare". Comparative Politics. 42 (1): 63–82.
  4. 1 2 3 Madrid, Raul (2002). "The Politics and Economics of Pension Privatization in Latin America". Latin American Research Review. 37 (2): 159–182.
  5. ↑ Laurell, Asa Cristina (2015). "Three Decades of Neoliberalism in Mexico: The Destruction of Society". International Journal of Health Services. 45 (2): 246–264.
  6. ↑ Laurell, Asa Cristina (2000). "Structural Adjustment and the Globalization of Social Policy in Latin America". International Sociology. 15 (2): 306–325.
  7. ↑ Arza, Camila (2012). "Pension reforms and gender equality in Latin America". UNRISD Gender and Development Programme Paper.
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