Social security and population ageing in México: analysis of the individual account retirement pension system

 

Mexico’s Social Security Act was amended in late 1995 with a view to the establishing an individual retirement savings scheme. These amendments were promulgated in December 1995 and entered into force on 1 July 1997. Under the new version of the Act, individuals who were already employed when the reforms entered into force may choose to retire under the rules of the old system. Under those rules, rights acquired through a recognition bond or similar entitlement were not counted, since payment of pensions under the old system remains the responsibility of the Federal Government, as are other costs arising from the transition to the new system. Workers in the formal labour market (primarily in the private sector) participate in the social security scheme, and the conditions for civil servants and members of the armed forces have remained unchanged.

Based on eight years of experience with the current system and as a result of the situation created by the system’s own rules, as well as by the conditions of the economy and the labour market, the forecast for a high percentage of workers is rather bleak. This situation is compounded by the limited and, in recent years, shrinking proportion of the economically active population that is covered.

This paper provides a medium-term forecast. It begins by describing the situation of the economically active population (EAP) in terms of the protection it enjoys in retirement and compares recent trends within this population group with the trend among members of the Mexican Social Security Institute (IMSS) and of pension fund management companies (AFOREs).

It describes the features of the system in terms of its contributor and sub-account structure, management commissions currently in effect or proposed for the immediate future, and probable yields on savings. It surveys the insured population and, with a view to analysing the results, selects a subgroup equivalent to 80 per cent of the total number of insured, namely, those who contribute at the five lowest wage levels. It then identifies the various contribution densities —that is, the amount of time spent contributing to social security as a proportion of the total amount of time worked1 — that workers can be expected to achieve during their working lives, distinguishing between the probable situation of men and women, based on the experience of Chile’s pension system.

 

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