A model for the pension system in Mexico: diagnosis and recommendations

Available from: 
October 2013
Paper author(s): 
Consuelo del Carmen Hoyo (BBVA Research)
David Tuesta (BBVA Research)
Javier Alonso (BBVA Research)
Topic: 
Fiscal Policy - Public and Welfare Economics
Year: 
2013


The reform of the pension system of the Mexican Social Security Institute (IMSS) in 1997 limited the growing fiscal cost of the previous pay-as-you-go scheme. Fifteen years on from its creation, the Retirement Savings System (SAR) has had favorable macroeconomic effects for Mexico, as it has significantly increased financial saving and encouraged the development of local financial markets and the creation of new asset classes in which Afores invest pension savings. However, the employment and pension coverage provided by the IMSS pension system has not had developed as hoped, due to the high rate of informality in the labor market. In addition, the replacement rates forecast for workers who obtain an old-age pension from the defined contribution scheme will be low, due to problems exogenous to the pension system, such as low contribution rates to individual retirement accounts, far below international standards, and low contribution densities due to the intermittent entry and exit of workers in the formal labor market. With the help of the Pension Prediction Actuarial Model (MAPP2), developed specifically for the IMSS pension system, and based on the information provided by the National Commission for Retirement Savings (CONSAR) and Afore Bancomer, as well as INEGI socioeconomic surveys micro-data, this document presents results and projections through 2050, for the levels of employment and pension coverage, as well as the replacement rates of old-age pensions that contributors to the IMSS will receive in a baseline scenario, i.e. under the current parameters of the system. We also present a set of proposals that aim to improve the weak points of the SAR, increase the projected replacement rates and lower the fiscal cost of reform. With respect to the problem of pension coverage, the existence of a non-contributory pension targeted at the population that does not have social security, such as the "Pensión para Adultos Mayores” (Pension for the Elderly) scheme, can provide a basic retirement income for all the elderly. However, the Federal Government will have to pay particular attention to ensure that this measure is financially sustainable and does not put public finances at risk, as well as implementing pre-financing measures to reduce the associated fiscal cost.

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Research section: 
Lacea 2013 annual meeting
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