Pensions Lopez Obrador39s final crusade to win voters

Pensions, López Obrador's final crusade to win voters

Pensions will be on the ballot around 2024. In the last stretch of his term, President Andrés Manuel López Obrador has gradually given hints about one of the last economic reforms that he will submit to Congress: an amendment to increase the government's contribution to pensions in Mexico, in order to increase the percentage with which an employee retires at the age of 65 and which, according to current law, is approximately 40% of his final salary. The change proposed by López Obrador is not minor, it represents a déjà vu of the pension system before 1997, when workers who were 65 years old could retire with 100% of their salary. Knowing a little more about the initiative raises the same question for locals and foreigners alike: How will the government get the resources to fund billions of dollars in pensions?

In 1997, under the mandate of PRI President Ernesto Zedillo, Mexico implemented a reform of the workers' pension system, moving from a defined-benefit system to a defined-contribution system based on individual capitalization accounts, which involves management's private collection of assets Pension fund manager (Afores). To be eligible for a retirement pension from the IMSS, employees assigned under the 1997 law must meet two requirements: demonstrate at least 1,250 weeks of contributions or be at least 65 years old.

Currently, pension fund managers (Afores) manage savings worth 5.9 trillion pesos, equivalent to 19.1% of GDP. Of this stock, 50%, or about 3 trillion pesos, is invested in government securities – including Cetes, Development Bonds, Development Bonds, M-Bonds, Udibonos – while the rest is distributed in other financial instruments. , infrastructure, among other semi-governmental organizations.

According to current law, the state contribution to pension provision is now 0.225% of the employee's contribution salary. The employee adds 1.125% and this year's employer contribution is equal to 7.150% of base salary. Due to the recent reform in this area, signed in 2020, it was agreed that the employer contribution will be gradually increased year by year until it reaches 13.87% of the basic salary in 2030.

In order to avoid major turbulence in the markets, the Mexican President has already made it clear this Monday in his morning conference that the reform does not aim to increase the employer contribution, but, on the contrary, to increase the percentage of the government contribution. However, the exact number is unknown less than a week before the initiative is presented in Congress. “We are already working on a financial race to see how long it will take to ensure that the worker retires with his last salary and not that his pension is reduced by half,” explained the President on Monday.

López Obrador during his morning press conference on January 9th.López Obrador during his morning press conference on January 9th. Isaac Esquivel (EFE)

Despite these new references to the initiative, the proposal still does not clarify the questions surrounding it: Where should the government get the resources to finance greater state participation in pensions? Does the next government have to implement tax reform? How will the deficit increase if this reform is adopted?

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

Tenorio recognizes that under current legislation, an employee can seek a maximum payout of 40% of their final salary, a percentage that will increase to 50% in 2030 if employer contributions increase. However, the specialist from Tec de Monterrey explains that employers will have to increase their contribution to 40% if the goal is to reach 100% of the salary and that the government will also have to increase its contribution to 22%, which is the crucial question raises question: Where does the government get the resources to increase its participation?

“It is unworkable, the government can only sustain this project by increasing taxes, or there is, among other things, the version that the only place where it can get the money to guarantee 100 percent payment is through its debts in the Afores.”, a change that would require amending the constitution,” says Tenorio. According to their calculations, if this proposal were accepted, the government's deficit would rise from 5% to 12%.

This year, the government will allocate nearly 2 trillion pesos – 22% of the federal budget – for pension spending, in addition to disbursing more than 465,000 million pesos necessary to cover social pensions for adults over 2 years old, which will be received every two months. 65 years.

Given this scenario, the specialist reiterates that this proposal will be rejected by the opposition and will not move forward. In the election narrative, however, it will be a popular initiative that will win voters by 2024. “I don’t see any possibility for the initiative.” “But then it helps the ruling party’s candidate (Claudia Sheinbaum) to announce that the opposition doesn’t want the pension to be increased,” he says.

Banco Base's analysis director, Gabriela Siller, warns that López Obrador's reform would lead to higher public spending, which would have to be financed by more debt or by spending cuts in other areas, such as health or education. “The possibility of a persistently high budget deficit would increase the likelihood of a credit rating downgrade of Mexico's sovereign debt and threaten the country's macroeconomic stability. For workers, pension reform would bring a short-term benefit, but if the government interferes in investment decisions, the return on workers' savings would be jeopardized,” he concludes.

In 2020, the population aged 65 years or older was 9.7 million people, accounting for 7.7% of the total population. Projections from the National Population Council (Conapo) indicate that by 2050 there will be an expected 24.8 million elderly people aged 65 years or older, 16.5% of the total population.

Currently, no country pays 100% to its pensioners. According to the pension overview prepared by the Organization for Economic Co-operation and Development (OECD), workers in Belgium would retire in 2023 with the equivalent of 83.8% of their salary; in Luxembourg the proportion is 72%, in the United Kingdom it is 67% and in Spain it is around 65%.

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