The 1997 Pension Reform in Mexico

No AccessPolicy Research Working Papers25 Jun 2013The 1997 Pension Reform in MexicoAuthors/Editors: Gloria Grandolini, Luis CerdaGloria Grandolini, Luis Cerdahttps://doi.org/10.1596/1813-9450-1933SectionsAboutPDF (0.2 MB) ToolsAdd to favoritesDownload CitationsTrack Citations ShareFacebookTwitterLinked In Abstract:June 1998 Under Mexico's reformed pension system, private pension funds could become the single largest financial industry in a decade. Their efficiency and investment returns will profoundly affect the welfare of retirees, the finances of government, the development of capital markets, and the rate of savings. In 1995-96, Mexico shifted to a multipillar approach to old-age security. The objective of the publicly managed first pillar is redistribution; a fully-funded second pillar provides for mandatory individual savings accounts and competitive but exclusive and specialized pension fund management; the third pillar is voluntary savings. This package could provide effective income security and protection against old-age poverty, in a manner compatible with goals of savings and economic growth. It offers Mexico?s first real opportunity to shift to a defined-contribution model and to expand and deepen domestic capital markets by creating a new class of institutional investors-although in the short term its impact on capital markets will be limited by the need to focus on the security of pension fund investments. The reformed system provides for a probably irreversible shift toward private intermediation of most domestic investment funds. Further efforts to improve the pension system should encourage efficiency, confidence, and economies of scale. There are weaknesses in Mexico's pension design-especially the limited scope for workers in the private sector, the continued role of the housing-fund component, and the moral hazard implications of the lifetime-switch option. But Mexico achieved radical reform with its pension system within a difficult political and economic environment. And the timing of reform was appropriate. The age structure in the existing system is very young, so coverage could increase. Also, reform took place after the inflationary 1980s and the recent financial crisis, which eroded the real value of old pensions, the acquired pension rights of the transition generation, and the minimum pension for minimum-wage retirees. If returns on invested contributions are high enough, much of the transition generation will choose the defined-contribution alternative over the old pay-as-you-go system. This will release the government from pension liabilities, except for the minimum pension guarantee for new affiliates. Ensuring the system?s long-term success will require improved financial performance from INFONAVIT, the authorities' political will and technical ability to enforce pension laws and regulations, and the system's flexibility in the face of changing circumstances. This paper-a product of the Finance, Private Sector, and Infrastructure Unit, Latin America and the Caribbean Regional Office-is part of a larger effort to study contractual savings development in Latin America. Gloria Grandolini may be contacted at ggran[email protected] Previous bookNext book FiguresReferencesRecommendedDetailsCited ByA model for the pension system in Mexico: diagnosis and recommendationsJournal of Pension Economics and Finance, Vol.14, No.125 March 2014How Do Management Fees Affect Retirement Wealth Under Mexico's Personal Retirement Accounts System?SSRN Electronic JournalModelling individual benefit in a contributory pension system in a developing economy: Analysis of Nigeria's experiencePensions: An International Journal, Vol.13, No.310 October 2008The Gender Impact of Pension Reform: And Which Policies Shape This ImpactSSRN Electronic JournalPension Reform and Gender Gaps in Latin America: What are the Policy Options?World Development, Vol.29, No.5 View Published: November 1999 Copyright & Permissions Related RegionsLatin America & CaribbeanRelated CountriesMexicoRelated TopicsFinance and Financial Sector Development KeywordsBANKCONTRIBUTIONCONTRIBUTION SYSTEMCONTRIBUTIONSDISABILITYFINANCIAL SITUATIONINDIVIDUAL RETIREMENTINDIVIDUAL RETIREMENT ACCOUNTSINSURANCEINSURANCE COMPANIESLABOR MARKETPENSIONPENSION FUNDPENSION REFORMPENSION REFORMSPENSION SCHEMEPENSION SYSTEMRETIREMENT SAVINGSRETIREMENT SAVINGS ACCOUNTSOCIAL SECURITY PDF DownloadLoading ...