Economics: Main issues of the Pension Reform proposal
The stated purpose for the social security reform package the López Obrador administration announced on July 22 with the support of the country’s business and social sectors is to raise disability or retirement pensions. They propose doing this by increasing the contributions paid into the system, expanding the options available to private retirement fund administrators (Afores) for investing funds from individual retirement savings accounts, lowering the commissions they charge, and raising the minimum guaranteed pension.
These are the same items that all countries that have transitioned from a defined benefit to a defined contribution pension system have tried to periodically tweak. Soon after the existing defined contribution arrangement first began to take effect it became obvious that the system would demand major adjustments to increase the replacement rate as contributions were clearly going to prove to be insufficient not only for the workers who began paying into the Afore-based system of 1997, but even for those who had been paying into the previous defined-benefit system.
One of the main obstacles to such reform efforts has involved fights over who should cover the cost difference: workers, employers, the government or some combination of the three. The Mexican government’s answer is basically that employers should pick up almost all of the tab, with the contribution rate to be slightly more than doubled over the eight years following a planned 2023 launch of the plan.
Few details have been released, but the basic problem remains that while employers may pay the difference up front, they will have to pass it along to consumers in the form of higher prices; to their workers through layoffs or wage cuts, increased productivity or tapping into alternative labor-power sourcing schemes; or to the government by getting it to make the increased social security payroll tax deductible.
To state the obvious, the new plan’s viability would require much higher and sustainable economic growth, as well as macro-financial stability and stronger public finances, something that AMLO and his 4T seem unlikely to deliver.
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