Pension Muse

In case you missed the title above, this page is about pensions.

I will talk about pension reform (or lack thereof) in many countries.

The focus is on Latin America - in particular, on Mexico

 April 1, 2007

 Reform of the Mexican Federal Workers Pension (ISSSTE)

Mexico's Legislative body and the Senate passed a set of reforms for the ISSSTE in March of 2007 in double quick time. Within two weeks, the reforms were passed with PRI supporting the intiative that has been stalled for the past five years.

The reform bill will change the pension system for workers employed in the public sector at the Federal level (along with some other state entitites), known as the Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado (ISSSTE - Institute for Social Security and Social Services of State Workers). The initiative had the backing of several parties, including the governing Partido Acción Nacional (PAN) and the Partido Revolucionario Institucional (PRI), even in the face of some union and political protests. The third largest party, PRD - Partido de la Revolucion Democratica, opposed the motion.

The current system is defined benefits only. The implicit debt of the ISSSTE is already 50% of the GDP. Every additional year of no-reform, produces an additional deficit of 1-2% of GDP. In fact, the ISSSTE crisis is far more grave than the IMSS problem ever was.

The dust of the reform bill has not settled yet. There could be more changes. But, as far as the bills passed, the following seem to be the main points.

  • Rationalization. The reform will merge two dozen different types of benefit into four, similar to the Instituto Mexicano de Securidad Social (IMSS): retirement, pre-retirement and old-age; life and disability; work risks; and healthcare.
  • Portability. Workers who switch employment between the private and public sector will remain covered.
  • Increase in contributions. The current pension system entails a contribution of 7% of wages, divided in equal amounts by employer and employee. The reform envisages a gradual increase in contributions up to 12.7% of wages, of which 5.15% would be made up of regular government contributions and 1.5% would consist of social payments, made also by the government. The increase in employees' contributions would rise from 3.5% at present to 6.125% by 2012.
  • Voluntary and matching contributions. The reform will also allow employees to make voluntary contributions, and the government will match each peso of voluntary contributions with 3.25 pesos. [Voluntary contributions will be capped at 2% for employees and therefore 6.5% for the government, with a total maximum of voluntary contributions of 8.5%.]
  • Increase in retirement age. The minimum retirement age for public workers will increase from 50 to 60 years for males and 48 to 58 year for females by 2028 (the actual average retirement age is currently higher than the minimum, at 56 years).
  • Minimum payment. The new system of individual accounts will guarantee a minimum pension equivalent to two times the minimum wage [compared with one minimum wage at present].
  • Transition period. The reform envisages a transition period in which older workers will remain under the current system, new employees will enter into the new system and those currently employed will be able to choose to remain in the current system of defined benefits or migrate to the new system of defined contributions (depending on number of years worked and age). 

The new pension funds will be administered by a public institution called Pensionissste. This will manage the funds for a minimum of three years, after which employees will be able to switch to a private fund of their choice.

Much political football is being played about how this new fund would be managed - who will make decisions - whether some groups will treat it like their own casa chica - as they did with ISSSTE money (whatever little it had).

 Tapen Sinha 


Reforming the Reformed Pension

 Most policymakers were busy getting the pension system out of the reach of the states

That raised the question: What exactly is the objective of a pension reform? If it is just to rid off the NEW pension liability off the government budget, that is one thing (although it does not do anything to the EXISTING liability), if it is poverty alleviation among the old, it is another matter altogether. Steve Kay of Fed-Atlanta gave a talk about the reform of the reform in Mexico City.

(Note: the powerpoint slides are in Spanish).


Tapen Sinha

February 18, 2007

A Surprise from Argentina

On January 24, 2007, Argentina’s Government announced a set of reforms in the current pension regime. A bill would be delivered by the Executive Power to the Congress for discussions in extraordinary sessions. 

A summary of what the new regulation says:

(1) Workers will be able to choose between the public pension system and the private regime for an initial period of 180 days, with subsequent reopenings every five years.

(2) A reduction in commissions charged by private pension fund administrators (AFJP) to a maximum level equal to one percent of worker’s wage.

The new pension system was defined following a meeting between President Nestor Kirchner and the Cabinet Chief, Alberto Fernandez, the head of Argentina’s ANSES, Sergio Massa and the Legal and Technical Secretary of the Presidency, Carlos Zannini.

Alberto Fernandez noted, “The free option between AFJP and the public system, as well as the commission cut, were a priority for the Government and tend to correct questioned aspects of the system, like AFJP costs, which is an origin problem.”

Tapen Sinha

Chilean System Revisited

January 5, 2007

A radical change in the Chilean pension reform is underway. This is surely the biggest change taking place since the introduction of the new system in 1981.

There are three important elements in this new version.

First, it was assumed that the density of contribution (that is, how often does one contribute to the system) would be over 80%. It turns out that for many low income people, this density is low - in some cases, lower than 50%. This simply translate into lower pension benefits for these persons.

Second, there are a whole bunch of people who do not have enough money or no money in the system. Thus, a "solidarity" component is introduced. This means, the system will now have a component where contribution is not necessary for accruing benefits.

Third, the old system was deemed to have lack of competition among the pension funds. The government will try to increase competition.

Chile has been a beacon for many other countries. The new developments will be watched by many.

Tapen Sinha