Economics: Surprise details in the government's pension reform

MEXICO - Report 19 Oct 2020 by Mauricio Gonzalez and Francisco González

Something troubling happened between the time the business community and President López Obrador announced a plan to reform the public pension system and the reform bill the administration delivered late last month.

The praiseworthy purpose of the reform as agreed in July is to increase the number of people eligible for social security pensions and increase the minimum payment for which they are eligible. To that end, the plan calls for increasing the contributions to be paid into the system by employers, lowering the number of weekly payroll tax payments needed to qualify, raising the minimum guaranteed pension, and providing the private retirement fund administrators (Afores) that have been managing individual retirement savings accounts since 1997 a broader range of investment options, in order to increase returns on investment. And as we pointed out at the time, the reform’s viability would be dependent on the details of the government’s strategies for covering the costs of higher pensions and potentially for minimizing the added costs’ impact on the economy and public finance.

While the government’s bill does little to allay concerns as to its broader economic impact, or even the implications of the heightened labor costs companies and the public sector will have to absorb, it did include a surprising cap on the commissions Afores can charge. Should the plan be adopted in its present form it could accelerate a process of market concentration that has allowed only four Afores to account for an 80% share of the funds managed.

This aspect could destabilize the administration’s efforts to line up the necessary support to pass its reform, thereby raising the risk of a version that would fail to deliver the main benefits contemplated in the July version. And the added pressures it implies for the state of public finance in Mexico could climb even more than currently assumed should we witness weaker economic growth or outright stagnation in the coming years, which would imply lower levels of earned income and people experiencing briefer periods of formal employment.

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