Mexico outlines social security reform

Mexico outlines social security reform

Economy & Policy Regulation Politics Coronavirus Mexico

The Mexican government has presented a pension reforms program to increase retirement benefits for the average worker by 40% due in part to higher employer contributions, Finance Minister Arturo Herrera said on Wednesday.

"This is not a minor matter. It is about radically changing retirement conditions for workers," Herrera said at a press conference.

Under the proposed reforms, workers will increase contributions to their retirement savings to 15% of their salaries from 6.5% in eight years, while employers will increase contributions to 13.9% from 5.15%, Herrera said.

"In a period of eight years, employers will increase what they contribute to workers' retirements by 2.7 times," he said.

The government will only contribute to retirement savings on a sliding for workers who make less than four times the minimum wage, going from 8.72% for workers who make minimum wage to 1.8% for those who make four times the minimum wage.

The government already spends more than MXN1 trillion ($44.7 billion) on pensions each year with MXN700 billion for civil servants through ISSSTE and MXN300 billion through the social security institute IMSS, according to Herrera.

The reforms also include lowering the minimum number of years of formal employment to 15 from 25, but the minimum retirement age remains 60 years old.

Carlos Salazar, head of the business chamber Consejo Coordinador Empresarial (CCE), spoke in support of the reforms at the press conference, saying the lobbying group's 12 member organizations have heeded a call from President Andrés Manuel López Obrador "Yo improve the social conditions of most of the population."

Senator Carlos Aceves from the centrist Institutional Revolutionary Party (PRI) and Deputy Mario Delgado from Morena, the same party as the president, also voiced their approval for the reforms.

Alberto Ramos, head of economic research for Latin America at Goldman Sachs, said increasing household savings and strengthening the social security system in Mexico are "laudable objectives," but he added that the heaviest burden falls on the corporate sector.

"Rising labor costs could generate cost-push pressures on inflation down the road and higher formal employment costs could potentially push an even larger share of the labor force into the informal sector (which would undermine the main objective of the reform of increasing social protection upon retirement)," Ramos said in a note to clients on Wednesday.

On bright side, at least according to Ramos, the reforms do not include the creation of a state-run pension plan, or Afore, as some Morena members had proposed in the past.