How is our pension system doing, it is already 25 years old

Our pension system has been around for a quarter of a century and it is still seeking to square the circle. It stands out for its enormous financial muscle: It manages resources for 4 trillion 972,000 million pesos, equivalent to almost 20 points of GDP. Its strength is felt in the government debt markets and in private debt issues. Those 20 points are one of the keys to our macroeconomic and financial stability. Ernesto Zedillo did not have them when he faced the Tequila crisis, in 94-95.

The pension system is undoubtedly strong, but it shows its weaknesses when we ask about its impact on decent retirement pensions: the replacement rate is barely 42%, this means that a worker who worked for more than two decades in the formal economy, would have a monthly pension equivalent to 42% of their average salary, assuming they have not made early withdrawals.

Some things will change with the reform that was made in 2020. Perhaps the most important thing is that the employer contribution to workers’ pensions will increase. This will occur at a rate of one percentage point each year, from 2023 to 2030. This will raise the cost for employers, but will increase the percentage of workers’ wages that go to retirement from 6.5% to 15 percent. If the actuaries who cooked up the reform are right, the replacement rate could be higher than 70%, for those workers who have worked and contributed for twenty-odd years.

This will not happen soon. It will take several years for this change to show up in retiree accounts. In the near future, we will see several workers “graduate” with a very low pension, because 42% is the maximum possible. To have this replacement rate, it is required to have worked 1,250 weeks in the formal sector and that the worker has contributed with his full salary in that period. The vast majority of older adults will need the universal pension granted by the Government to complete their spending. For many it will not be enough, not even like that. We will see, perhaps, protests by older adults, as part of our future normality.

How does the system see itself? This week AMAFORE held its annual event. He had a list of top-level conferences, with the Nobel Prize in Economics, Paul Krugman; the journalist Anne Applebaum, an expert on Russia and the political scientist Francis Fukuyama. The president of AMAFORE, Bernardo González makes an optimistic balance and asks for more flexibility to place the investments of the system. He has a point, because 50% of the resources are invested in government securities; 6.8% in national equities and 11.8% in shares of foreign companies. The president of CONSAR, Iván Pliego, underlines how inequitable the system is when we see the differences between men and women. He argues in favor of the drastic and forced reduction that was made to the commissions. He believes that the Afores can be more efficient and lower sales costs, for example.

How does Mexico’s pension system look like compared to other countries? At the AMAFORE convention, they insisted on how good the Mexican system looks, compared to other cases in the region, especially after the 2020 reform. To put things in perspective, it is worth knowing an external perspective and taking a look Beware the Mercer CFA Institute Global Pension Index. Mexico has a rating of 56.1 and appears as the fourth place in Latin America, above Argentina and Brazil, but below Uruguay, Chile and Colombia. In the world, among 44 countries, we occupy position 29. On the positive side, it should be noted that Mexico showed the greatest improvement in the rating in the 2022 report, largely thanks to the reforms.

The index rates adequacy, sustainability and completeness. How much I will get, is what is evaluated in adequacy. Will it be able to continue to deliver or comply? It is under the microscope in sustainability and can I trust it? It is the key question in integrity. For Mexico, the best score is in adequacy, 63.1, and the worst in integrity, 43.6. This refers to regulation and governance; communication to beneficiaries and operating costs. Whose turn is it to do it? How much time are given to achieve significant progress?

lmgonzalez@eleconomista.com.mx