SOCIAL SECURITY and FINANCIAL. Comments to the announcement to amend the Pension System / Plan July 27, 2020

On July 22, 2020, the Federal Government announced the sending to the Mexican Congress an amendment to the regime of the Social Security Law of 1997 in order to improve the Pension System / Plan and under which currently Retirement Fund Administrators (RFA) operate.

Comments

The three main modifications that we estimate will be highlighted in the amendment are:

• Increase the tripartite contributions (employer, employee, and government) to the savings for the workers retirement which is currently 6.5% to gradually arise until 15% in a period of 8 years. In the case of the employer the contribution would increase to 13.87% (currently it is 5.15%).
• They would be reduced temporarily from 1,250 weeks to 750 weeks of contribution to retire and obtain a guaranteed minimum pension at 60 years old, increasing the number of weeks until reaching a minimum of 1,000 weeks in 10 years. When decreasing to 750 weeks of contribution the minimum guaranteed pension would be increased, which is currently approximately MXN $3,289.00 to go to MXN $4,345.00 approximately.
• The RFA must gradually reduce their commissions for the administration of savings for the workers retirement. The RFA regime would be modified to diversify the risks and allow them to participate in investment projects (i.e. infrastructure).

We observed that although reducing the necessary weeks of contribution would extend the access of such benefit to more workers, it could also imply the possibility that they obtain a low pension, in addition to discouraging voluntary savings which in itself is little.

Furthermore, increasing the contributions would obviously raise the savings for retirement in less time, however, we consider that there would be significant consequences in the labor market, since with this increase the jobs would eventually become more expensive, formal employment would be affected with lower wage increases, or less jobs would be created and, consequently, it would have a negative impact on economic growth of Mexico.

We estimate that an amendment to the current Pension System / Plan would imply a considerable burden for the Mexican Government, since it should invariably foresee an a proper programming and financial planning that prevents the public finances from being placed in a situation that they cannot bear in the short and in the long term, because an amendment of such magnitude would have an immediate effect on workers who are about to retire, as well as those who will retire in subsequent years.

If you have any questions regarding the foregoing, please do not hesitate to contact us.

Mexico City, July 27, 2020