Pensions, López Obrador's last crusade to win voters

Pensions have entered the electoral field towards 2024. In the last stretch of his mandate, President Andrés Manuel López Obrador has gradually given clues about one of the last economic reforms that he will send to Congress: a change to increase the contribution that the Government contributes to retirements in Mexico, in order to increase the percentage with which a worker retires at 65 years of age and which, with the current law, is around 40% of his last salary. The change proposed by López Obrador is not minor, it represents a deja vu of the pension system prior to 1997, when workers who turned 65 could retire with 100% of their salary. Knowing a little more about the initiative, the question that looms among locals and strangers is the same: how will the Government obtain the resources to fund billions of pesos in pensions?

In 1997, under the mandate of PRI President Ernesto Zedillo, Mexico carried out a reform in the workers' pension system, moving from a defined benefit scheme to a defined contribution scheme based on individual capitalization accounts, which includes the management private collection of balances through the Retirement Fund Administrators (Afores). To be entitled to an old-age pension from the IMSS, workers assigned to the '97 law must meet two requirements: have a minimum of 1,250 weeks of contributions or be at least 65 years old.

Currently, the Retirement Fund Administrators (Afores) manage 5.9 trillion pesos in savings, which represent 19.1% of GDP. Of this stock, 50%, that is, about 3 trillion pesos, are invested in government securities—cetes, development bonds, development bonds, M Bonds, Udibonos, among others—while the rest is distributed in other financial instruments. , infrastructure, parastatals, among others.

Under current legislation, the State's contribution to retirement savings is today 0.225% of the worker's contribution salary. The worker adds 1.125% and this year's employer contribution corresponds to 7.150% of the base salary. Due to the latest reform on the matter, signed in 2020, it was agreed that the employer contribution will gradually increase year after year until it reaches 13.87% of the base salary in 2030.

To avoid greater turbulence in the markets, the president of Mexico has already specified this Monday in his morning conference that the reform does not intend to increase the employer contribution, on the contrary, the percentage contributed by the Government will be increased. However, less than a week before the initiative is presented in Congress, the exact figure is unknown. “We are already working on a financial run to see how long it takes to resolve that the worker retires with his final salary and not that his pension be reduced by half,” the president declared this Monday.

Despite this new clue about the initiative, the proposal still does not clear up the questions surrounding it: where will the Government obtain the resources to fund greater government participation in pensions? Will the next Government have to undertake a tax reform? How will the deficit increase if this reform is approved?

Raymundo Tenorio, professor emeritus at Tec de Monterrey, explains that the 1997 reform occurred because previous governments had taken pension resources to build infrastructure, bridges, theaters, but not to reinvest them and generate resources for more pensions. Starting in the late 1990s, with the regulatory change, private administrators began to manage workers' savings and the Government can no longer take this money, because they are private funds.

Tenorio recognizes that under current legislation, a worker can aspire to a maximum withdrawal equivalent to 40% of their last salary, a percentage that will rise to 50% in 2030, to the extent that employer contributions grow. However, the Tec de Monterrey specialist states that if the aim is to reach 100% of the salary, employers would have to increase their contribution to 40% and the Government should also increase its contribution to 22%, which raises the question. most crucial question: where will the Government get the resources to increase its participation?

“It is unfeasible, the Government cannot sustain this project other than by raising taxes or among other things there is the version that the only place where it can get the money to guarantee that 100% payment is by canceling that debt it has with the Afores, a change for which the Constitution would have to be modified,” says Tenorio. According to his calculations, if this proposal is approved, the Government's deficit would go from 5% to 12%.

This year the Government will allocate almost 2 trillion pesos—22% of the federal budget—for spending on pensions, in addition to the disbursement of more than 465,000 million pesos that will be required to cover the Welfare Pensions that adults over the age of 2 receive every two months. 65 years.

Given this panorama, the specialist reaffirms that this proposal will crash with the opposition and will not advance, however, in the electoral narrative it will be a popular initiative that will win voters, towards 2024. “I do not see any possibility of the initiative passing. , but then that helps the ruling party's candidate (Claudia Sheinbaum) to proclaim that the opposition does not want the pension to be raised,” he says.

The Director of Analysis at Banco Base, Gabriela Siller, warns that if the reform is endorsed in the terms launched by López Obrador, it will imply greater public spending that would have to be financed with more debt or by reducing spending in other areas, such as health. or education. “The possibility of a persistently high fiscal deficit would increase the probability of a credit rating cut on Mexico's sovereign debt and put the country's macroeconomic stability at risk. For workers, the pension reform would imply a benefit in the short term, but if the Government becomes involved in investment decisions, the return on workers' savings would be put at risk,” she concludes.

In 2020, the population aged 65 or over amounted to 9.7 million people, 7.7% of the total population and projections from the National Population Council (Conapo) indicate that by 2050 there are expected to be 24. 8 million elderly people aged 65 or over, 16.5% of the total population.

Currently, no country pays 100% to its retirees. The Pensions Overview prepared by the Organization for Economic Cooperation and Development (OECD) reported that in 2023 workers in Belgium would retire with the equivalent of 83.8% of their salary; in Luxembourg, with 72%, in the United Kingdom with 67% and in Spain the percentage is around 65%.

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