The challenges of the pension system in Mexico

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LEXIA Insights & Solutions

At LEXIA, we know that lack of information about pension funds and AFORES in Mexico plays a key factor in the absence of foresight for that moment when we either have to or want to stop working.

We hope that this article will be useful to you in getting a better understanding of this issue.   

Let's keep talking. 

The challenges of the pension system in Mexico 

In Mexico, pension plans have always been a challenge to the economy.  

In LEXIA, we have worked exhaustively on this subject and, therefore, understand that we are dealing with a multifactorial issue, one which is affected not only by the social aspect, but also by changes that happen in the job market , which undergoes constant growth and experiences changes in terms of physical structure and personnel.   

Changes in the pension system are urgently needed and the entry of the current government represents an opportunity to do so. 

 Let's see why. 

The first thing is to understand that, in Mexico, there is neither a solid pension scheme nor a perception of the need for one. 

This is due, in the first place, to the fact the habit of saving money is not deeply rooted in the Mexican consciousness and also because the Retirement Fund Administrators, or AFORES, have not been able to approach workers in an effective manner.     

When we add all these elements together, we are faced with the fact that the majority of Mexicans are not clear about what they are going to live on when they stop working. 

Today, this challenge is magnified, since life expectancy in Mexico has grown, so that every day there is a greater number of older adults who need to maintain their quality of life. 

In our country, the percentage of mandatory savings is low and, for workers who have payroll, making voluntary contributions to increase the amount of their AFORE is not perceived as a viable option.  

This reluctance to save money is due to the fact that it is not a scheme where short-term benefits are seen and many workers live, literally, on a day to day basis. Also there is a large number of people who work in a freelance or informal scheme, without having a systematic savings method 

In this country, the mandatory savings percentage is low and, for hired workers on a payroll, making voluntary contributions to increase the amount of their AFORE is not perceived as a viable option. 

The implementation of a variety of benefits in companies is due to the need that they have to save money through deduction, using instruments such as grocery vouchers, gas vouchers, car credits, etc..   

 Also, career plans are established, such as advancement incentives for employees and increases in salary, strategies where the distant future is not considered. 

AFORE, therefore, is seen as an employee choice and not as an obligation of the company. 

Workers also have a negative perception of pension schemes, as they present continuous and unpredictable changes, such as the one that occurred with the AFORES and the cancellation of work on the new CDMX airport. 

Today, with the so-called "fourth transformation" and taking into account the campaign promises of President Andrés Manuel López Obrador, in which he spoke of a "dignified retirement" for all Mexicans, the needs and expectations on the issue of pensions are more visible than ever. 

Under the austerity law scheme proposed by the president, the pension and retirement funds of a large number of current public officials will be affected because, by executive order, they must be incorporated into the public social security system.   

The actual extent of these changes is not yet known. But for now, the measure to eliminate life insurance and major medical expenses for public officials has hit the insurance sector and agencies like the ISSSTE, which must now receive bureaucrats without private insurance. 

The Individualized Separation Insurance (SSI) enjoyed by officials is another of the products eliminated in the new Federal Republican Austerity Act. It was awarded to almost all of the officers by MetLife. With its removal, the insurer could have effects of up to $51 billion pesos in its reserves, in addition to officials lose this savings instrument. 

All these changes are the ones that have expectations for both the population and the companies in the sector, and the original question, "What will Mexican workers live on after retiring?  

It is in this context of urgency that the president of the National Commission of the Retirement Savings System (CONSAR), Carlos Ramírez Fuentes, reiterates the need and importance of carrying out reforms to the pension system in Mexico. 

This call opened the debate on the real need for workers to have an AFORE, as well as the need to increase the percentage of mandatory savings, and to raise the retirement age in Mexico from 65 to 68. 

Carrying out all these modifications would increase the amount of savings funds and ensure financial peace of mind for retired workers, at least those on a company's payroll. 

The last federal administrations have been reluctant to carry out these changes and have been postponing them.  

With the government in office, the currency is in the air and we will have to be aware of the repercussions in the coming months. 

Lexia Insights & Solutions

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Érika Domínguez

Érika Domínguez is Sr. Project Manager at LEXIA Insights & Solutions. Érika has a degree in Sociology from the UNAM and in Psychology from the UAM, and a Master's degree in Social Psychology.

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