Mexico: Selected Issues
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This Selected Issues paper assesses the potential financial vulnerabilities of the corporate sector in Mexico. It provides an overview of salient features of the Mexican corporate sector. The paper also presents the formal stress tests that estimate the potential effects of some macroeconomic and financial shocks, such as a sharp depreciation of the exchange rate, a sustained increase in interest rates, a slowdown in demand, and a prolonged international market closure on the corporate sector.

Abstract

This Selected Issues paper assesses the potential financial vulnerabilities of the corporate sector in Mexico. It provides an overview of salient features of the Mexican corporate sector. The paper also presents the formal stress tests that estimate the potential effects of some macroeconomic and financial shocks, such as a sharp depreciation of the exchange rate, a sustained increase in interest rates, a slowdown in demand, and a prolonged international market closure on the corporate sector.

IV. The Financial Soundness of Mexico’s Pension System1

1. In 1997, Mexico implemented a sweeping reform of its ailing public pension system. The reform transformed the pension scheme for private sector workers but did not cover the pension schemes for public servants (Box 1).

2. This chapter analyzes the financial soundness of Mexico’s pension system. Section A provides some methodological background. The structure of the current pension system is briefly described in Section B. Section C summarizes the sources of financial stress for the pension system. The evolution of pension expenditures in the federal budget is presented in Section D. The likely future budgetary pressures from the pension system are analyzed in Section E. Finally, summary conclusions are provided in Section F.

Mexico’s Pension Reform

In December 1995, the Mexican Congress approved legislation that substituted the existing defined benefit pay–as–you–go (PAYGO) system for private sector workers with a fully funded defined contribution system based on privately managed individual accounts.1 The new system also included a minimum pension guarantee for those workers whose savings were insufficient to provide a post–retirement income of at least one minimum wage of the Federal District (indexed to the CPI). In these cases, the government will provide the necessary resources to bridge any gap between the minimum pension and a worker’s actual accumulated savings.

With the reform, the old PAYGO system was abolished and contributions to the Retirement Savings System (SAR92) were transferred to individual savings accounts. Contributions to the new system are compulsory for all private workers since September 1997. Each worker has an individual account that includes three subaccounts: one for mandatory retirement savings, one for contributions to the housing fund INFONAVIT and one for voluntary savings. At retirement, workers may chose between a gradual withdrawal option or purchase an annuity in the insurance market. However, existing participants at the time of the reform (the so–called transition workers) were given the option to chose at retirement between the benefits under the old system or their accumulated balances under the new system.

Since inception, Mexico’s privately managed pension system has experienced rapid growth. By end–2001, the system totaled 26.5 million individual accounts, which represented a coverage of 97.1 percent of the estimated universe. Assets under management by the AFORES increased from 3.0 percent of GDP at end–2000 to 4.3 percent of GDP at end–2001.

1/ The reform divided the social insurance system for private sector workers into old-age insurance, disability and life insurance and insurance for medical expenses of pensioners. The IMSS retained the administration of the latter two, while the administration of the old-age insurance was assumed by private administrators (AFORES). For further details on Mexico’s 1995 pension reform, see Grandolini/Cerda (1998) and Sales/SolisSolís/Villagomez (1999)

A. Assessing the Financial Soundness of a Pension System

3. Public pension systems can be a source of fiscal vulnerability either because of the strain that pension outlays put on public resources and/or because unfunded pension liabilities may create expenditure pressures in the longer–term that raise questions about fiscal sustainability. An assessment of the financial soundness of a country’s pension system is, therefore, an important element of any comprehensive analysis of fiscal risks.

4. The financial soundness of a specific pension system can be analyzed with the help of a number of indicators. These include the implicit pension debt, the financing gap or cash-flow deficit and the actuarial deficit.

5. The implicit pension debt, indicates the stock of benefit promises that a pension system has towards its participants.2 It provides a measure of the liability—in net present value terms—that a government would incur if it were to terminate a pension system and settle all obligations with the system’s participants.

6. A pension system’s financing gap or cash–flow deficit is the difference between statutory pension payments and contributions in a given period. It provides a measure (usually on an annual basis) for the financial resources that need to be mobilized to fulfill a pension system’s obligations.

7. The actuarial deficit of a pension system is the net present value of future cash–flow deficits. In contrast to the implicit pension debt, which only measures liabilities towards the current generation of participants, the actuarial deficit includes the contributions and claims of generations that are expected to enter the pension system in the future.

8. The above mentioned indicators are useful tools for the analysis of different aspects of financial soundness of a pension system. For instance, the implicit pension debt provides an indication about the transition cost that could arise from a fundamental reform of the pension system. The financing gap or cash–flow deficit is an indicator of the budgetary pressure that the system will exert in a given year, under the assumption that its parameters remain unchanged. The actuarial deficit is a measure of the sum of these budgetary pressures over a more extended timeframe.

9. The computation of the above mentioned indicators requires actuarial studies, which are based on a number of economic and biometric assumptions. In practice actuarial studies are often unavailable to the public. Still, a more qualitative assessment of the potential financial health of a pension system can be performed with the help of a number of descriptive demographic and economic indicators, which are usually correlated with a pension system’s financial health. For instance, rapidly growing dependency ratios, high salary replacement rates, lax pension eligibility criteria and low contribution rates are almost certain signs of future financial stress.

B. Mexico’s Public Pension System

10. Mexico’s pension system consists of a fully funded defined contribution scheme for private sector workers and a number of institutions that provide mostly defined benefit PAYGO schemes for public sector workers (Figure 1).3

Figure 1
Figure 1

Mexico’s Pension System

Citation: IMF Staff Country Reports 2002, 238; 10.5089/9781451825619.002.A004

11. Private sector workers were covered until 1997 by the Mexican Social Security Institute (IMSS), which operated a defined benefit PAYGO pension scheme.4 The 1997 reform created a new system based on individual retirement accounts, which are managed by private pension administrators (AFORES).

12. Most pension schemes for public sector workers, operate as defined benefit systems that are funded on a PAYGO basis. The workers in the federal administration are covered by the Public Workers’ Social Security Institute (ISSSTE), except for the military who are covered by the Armed Forces Social Security Institute (ISSFAM). ISSSTE’s affiliates are also covered by the SAR92, which is a complementary scheme based on individual savings accounts.5

13. In the parastatal sector, a number of public enterprises—including most importantly the oil company PEMEX and the electricity companies CFE and LyF— have special pension plans for their workers.

14. Finally, at the subnational government level, many public workers are covered by state pension institutes.6 Separate pension schemes also exist for the independent state universities and in some municipalities.

C. Sources of Financial Pressure

15. The financial soundness of a pension system may be compromised by specific design features that lead to a mismatch between the replacement and contribution rates. Most of these features are under the control of policymakers.

16. However, the financial health of a pension system may also suffer from exogenous factors. In this context, one global phenomenon that has put pressure on many pension systems in industrial and developing countries alike is the ongoing demographic transition caused by lower fertility rates and rising longevity.7

17. While Mexico is still a relatively young country—with an average age of its population of around 27 years—its elderly population will increase fivefold between 2000 and 2050 (Table 1). The old age dependency ratio will rise from 7 to 25 during the same period. The latter implies that by 2050 there will be only four people in the active age group (15–64 years) for every Mexican at age 65 or above.

Table 1.

Mexico: Old Age Population Dynamics in Mexico 2000–50

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Source: The World Bank.

65+ years.

65+ years aged as a percentage of 15–64 years aged.

15–64 years aged per each 65+ years old person.

18. These demographic aging has an adverse impact on the financial health of the remaining PAYGO pension schemes, which rely on the contributions of the (shrinking) active population to support the (growing) elderly population. In addition, the financial health of the pension system is compromised by a number of specific characteristics of design of the existing pension schemes which are summarized in Appendix Table I:

  • The pension benefits for public sector workers are not related to a worker’s salary history but rather to a worker’s salary at retirement. Since public sector wages display a high degree of downward rigidity, the salary at retirement is normally the highest salary in the worker’s entire career. This weakens the relationship between contributions and benefits.

  • The pension schemes for the public sector also exhibit relatively high replacement levels up to full replacement of the contributed salary base. This contrasts with relatively modest replacement levels in the pension system for private sector workers.

  • Generous replacement levels are coupled with relatively lax age and service requirements in the pension schemes for the public sector. Many public sector workers are entitled to a full pension after only 30 years of active service, irrespective of age. Private sector workers, by contrast, need to reach a minimum age of 65 (63 for women) to have access to a pension.

  • In contrast to the expensive benefit levels, worker’s contributions to the public sector pension schemes are low by international standards or non–existent. Therefore, the bulk of the cost of the pension benefits falls upon the employer (i.e., the government).

19. A number of descriptive quantitative indicators for Mexico’s pension system are presented in Appendix Table II. The table shows that the mandatory AFORE system for private sector workers has by far the largest active population with 11.9 million contributors, followed by ISSSTE with about 2.4 million contributors8. The transition generation from the old IMSS system accounts for the largest share of the passive population, totaling almost 1.9 million pensioners at end–2001.

20. Overall, the indicators presented in Appendix Table II confirm the potential for financial stress in most pension schemes. Most notably:

  • Except for the AFORE system, which is a fully funded pension scheme, reserves for future pension obligations are either insufficient or inexistent.

  • The dependency ratio in a number of pension schemes is already very low, particularly in the case of PEMEX where there are less than two active contributors per pensioner.

  • The average retirement age for public sector workers is well below 60 years. This leads to a high life expectancy at the moment of retirement and, thus, high costs as pensioners receive their benefits over a prolonged time horizon. In addition, most public sector pension schemes have also survivor benefits that are quite generous by international standards.

D. Budget Expenditure on Pensions

21. Expenditures on pensions in the federal budget include statutory contributions to the pension system that derive from the government’s role as an employer, transfers to finance existing cash–flow deficits in a number of public pension schemes, and the costs of the 1997 pension reform.

22. Table 2 shows expenditures on pensions in the federal budget between 1995 and 2002.9 These exhibit a continuous increase from 1.3 percent of GDP in 1995 to 2.0 percent of GDP in 2002. As expected, the upward trend in expenditure accelerated markedly after 1997 due to the costs of the reform of the IMSS (see below). Since 1997, pension outlays rose almost 50 percent in real terms (7.1 percent on average per year).

Table 2.

Mexico: Budgetary Pension Expenditure 1995–2002

(In percent of GDP)

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Source: Secretariat of Finance and Public Credit.

Preliminary.

Budget as approved by congress.

Employer contribution to ISSFAM.

One–time compensation for affiliates to ISSFAM who retire before reaching minimum pension requirements.

Cost of pensions for affiliates of ISSFAM.

One time compensations to railorad and sugar industry workers.

Includes pensions of IMSS workers (RJP).

E. The Financial Soundness of Mexico’s Pension System

23. The evolution of budgetary expenditure is only a partial indicator of financial pressures from the pension system, since defined benefit systems which are financed on a PAYGO basis may be accumulating sizeable future liabilities even if present cash–flow deficits are low or non–existent. Therefore, the assessment of the financial health of the pension system needs to be complemented by actuarial studies to determine its long–term sustainability.

Mexican Social Security Institute (IMSS)

24. Since the 1997 reform, the federal budget covers all liabilities associated with the transformation of the pension system for private sector workers. In addition, the IMSS has pension liabilities towards its own workers, which have to be financed from the budget.10

Costs arising from the 1997 pension reform

25. The 1997 reform created both transition and permanent costs for the government. The government assumed the obligation to pay the implicit pension debt that the previous PAYGO system held with existing participants (also called the transition generation).11 The full cost of existing pensions is now financed by the government since all contributions from active workers were transferred into the new private retirement accounts. In addition, workers in the transition generation were given the option to chose at retirement between the benefits under the old system or those provided under the new system. This option created a contingent liability, since it commits the government to supplement a transition worker’s accumulated retirement savings in order to finance the benefits under the old system.12

26. In addition, the AFORE system created new costs that will have to be financed on a permanent basis from the budget. These costs include the so–called “social quota,” which is a flat bi–monthly contribution made by the government to each retirement account13 and the cost of the minimum pension guarantee that was extended to workers whose accumulated balances in the individual savings accounts are not sufficient to buy an annuity of at least one minimum wage.

27. Estimations of the total reform costs (transition plus permanent costs) require the formulation of assumptions since some of its components cannot be predicted with certainty.14 Table 3 presents a number of estimates that have been made on the basis of different sets of assumptions.

Table 3.

Mexico: Estimated Cost of the 1997 Pension Reform

(In percent of GDP)

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Assumes GDP growth of 3.5 percent, average real wage growth of somewhat less than 2 percent, and a real return on pension savings of 3.5 percent. The simulation excludes resources from the INFONAVIT account.

Assumes GDP growth of 3 percent, real wage growth of 0.8 percent, and a real return on pension savings of 3.5 percent. The simulation excludes resources from the INFONAVIT account.

Include the cost of pensions for existing pensioners at the time of reform plus the cost of additional pensions under the old system from transition workers who made use of their switch option.

Includes the transition cost plus the cost of the social quota and the minimum pension guarantee.

Projection period: 2001 to 2101 as stated in IMSS (2002)

Projection period: 1997 to 2024, using a 3.5 percent real interest rate

Projection period: 1997 to 2047, using a 5 percent real interest rate

Maximum cost during the projection period.

28. As Table 3 shows, the total costs of the reform are expected to rise over the next several decades from the current level of about 0.7 percent of GDP a year and could reach close to 3 percent of GDP a year by 2030. The estimates differ quite significantly, especially in the longer term, reflecting uncertainty about costs associated with the switch option for the transition generation and the minimum pension guarantee in the new system.

29. Overall, the projected cost increase reflects the incidence of the transition generation that is expected to retire under the benefits of the old system. The cost of pensions for those who were already retired at the time of the reform is expected to decline relatively quickly. At end–2001, the total cost of pensions under the old system was Mex$30.4 billion (0.5 percent of GDP). The cost of the social quota is expected to stabilize at about the current level of 0.2 percent of GDP, while the costs associated with the minimum pension guarantee will not materialize until the new generations of contributors become eligible for retirement (in about 20 years).

Liabilities from the collective labor contract

30. Despite the 1997 reform, the IMSS has kept a role in the social security system as a provider of health care services and life and disability insurance.15 While the federal government has assumed the costs associated with the pension reform, the IMSS maintains an unfunded pension liability vis–à–vis its own employees, which derives from the institution’s own pension plan (RJP) that is part of the collective labor contract.16

31. The RJP already suffers from a very low dependency ratio with 102,000 pensioners being supported by only 371,000 contributors. The plan offers very generous retirement conditions (100 percent replacement of the integrated salary with only 28 years of service) and collects only a 3 percent contribution from its members. In addition, due to the specific pattern of hiring in the past, the number of pensioners is projected to increase by 134,000 people (131 percent) over the next ten years.17

32. According to the financial statements of IMSS, the RJP registered a cash–flow deficit of Mex$15.4 billion (0.25 percent of GDP) in 2001, including Mex$8.5 billion in reserves for future pension liabilities.18 The implicit debt of the RJP was estimated at 5 percent of GDP.19 This amount is substantial, especially given the relatively small number of participants in the RJP.

Public Workers’ Social Security Institute (ISSSTE)

33. The population affiliated with ISSSTE is aging rapidly due to general demographics but also because of the specific personnel policies of the federal public sector20. ISSSTE’s dependency ratio has increased from 1:40 in 1980 to 1:5 in 2001 and is expected to reach 1:2 by 2020. As in most of the other public sector pension schemes, the financial impact of the rising demographic pressure is compounded by the generosity of ISSSTE’s pension benefits. With a contribution of only 7 percent of base salary (3.5 percent from the worker), the ISSSTE scheme offers its affiliates a 100 percent replacement rate of their base salary after 30 years of service (28 years for women).21 The generosity of the pension system leads to a fairly low average retirement age of 56 years (down from 62 years in 1980) and a high life expectancy at retirement (22 years). The result is a large disequilibrium between contributions and benefits, with the difference being charged to the budget since the federal government is committed by law to cover any shortfall of resources for ISSSTE’s pension obligations.22

Since ISSSTE was not able to accumulate significant reserves in the past, the above mentioned pressures have already led to—small—cash–flow deficits. In 2001, this deficit amounted to Mex$l 1.1 billion (0.2 percent of GDP) or more than half of ISSSTE’s total pension expenditure.

Simulations performed by ISSSTE indicate that without reforms, the annual cash–flow deficit could increase to about 1.2 percent of GDP over the next 30 years and then stabilize at around that level for the following 50 years. ISSSTE’s implicit pension debt is estimated by the authorities at close to 50 percent of GDP, and its actuarial deficit at 58 percent of GDP.23 These liabilities are very high, both in absolute terms but also considering the relatively small affiliated population, indicating an urgency for addressing the underlying imbalances of the system in the near term.

Armed Forces Social Security Institute (ISSFAM)

34. Relatively limited information is available about the pensions provided through the ISSFAM. The number of participants is estimated at around 300,000 (which is the approximate size of the armed forces). The number of pensioners is estimated at somewhat more than 42,000.24 According to the Law of ISSFAM (Art. 21), the cost of pensions for the retired and their survivors and lump–sum compensations for those who retire before reaching the required minimum service (20 years) is entirely borne by the federal government. In 2001, the cost of these benefits amounted to some Mex$3.3 billion (0.05 percent of GDP). Actuarial studies of the liabilities of the armed forces pension benefits are not publicly available.

Public enterprises

35. A number of public enterprises maintain their own pension plans. Within the budgetary public sector, the most important are those of PEMEX, CFE and LyF. Since most of these plans are fairly generous and require no contributions by the affiliated workers, they already represent a significant burden on the federal budget. Public enterprises only register part of the actuarial net cost of pension liabilities in their financial statements.25 This practice has led to the accumulation of significant unfunded pension liabilities in most of the plans.

National Mexican Petroleum Company (PEMEX)

36. Mexico’s budget registered cash outlays by PEMEX for pensions of Mex$4.2 billion (0.1 percent of GDP). However, according to the audited financial statement of PEMEX, the net actuarial cost of the pension system in 2001 would have totaled Mex$33.4 billion (0.6 percent of GDP). The pension plan of PEMEX is particularly onerous because of very high average wages, large statutory benefits for pensioners, low eligibility requirements and zero contributions from the workers towards the plan’s costs. As of end–2001, the implicit debt of the pension plan was estimated at 3 percent of GDP.26

Electricity sector

37. Little detail is publicly available about the main characteristics of the pension plans of the electricity companies CFE and LyF. Cash outlays in the budget for CFE’s pension plan totaled Mex$3.4 billion (0.05 percent of GDP) in 2001. Cash outlays in the budget for pensions by LyF were Mex$4.2 billion (0.1 percent of GDP). The detailed audited financial statements of CFE indicate that the company’s implicit pension debt was estimated at 1.4 percent of GDP as of end–2001.27 Information about the actuarial situation of LyF is not publicly available.

Sub–national governments

38. The federal government does not explicitly guarantee the pension liabilities of subnational governments. However, uncovered pension liabilities at the subnational levels could lead over time to rising pressures on the federal government to increase transfers to subnational governments or even to directly assume part of these liabilities.

39. In 1998, the federal government coordinated a broad assessment of the financial health of the pension institutes of the Mexican states.28 The study, which was based on common actuarial standards and covered 29 out of a total of 34 state pension schemes revealed a dire financial situation. None of the covered systems was actuarially viable. The study estimated that by 2002, 16 out of the 29 pension schemes would produce cash–flow deficits that required transfer payments from the state budgets. The aggregate actuarial deficit of the covered pension schemes was estimated at 30 percent of GDP and the implicit pension debt at 10 percent of GDP.29

40. As in the other public pension schemes, the rapidly rising financial disequilibria in the state pension institutes result from contribution levels that are insufficient to finance extremely generous pension benefits in the context of rising demographic pressure. A few indicators highlight this situation. For instance, the number of active contributors per pensioner in these systems was expected to fall from 9.8 in early 1998 to 4.7 by 2010 and 2.15 by 2025. Also, the state systems provided an aggregate replacement rate of 116 percent. Overall, only three out of the 29 pension schemes analyzed in the study had minimum age requirements, while minimum service requirements ranged between 25–30 years.

F. Conclusions

41. Mexico’s public pension system faces problems of financial viability and is accumulating public sector liabilities. Financial pressures from the pension system are bound to rise in the medium–term, albeit gradually.

42. Budgetary outlays on pensions have already been increasing at an annual real rate of 7 percent in recent years. If this trend is maintained, pension expenditures in the budget could rise further from 2.0 percent of GDP in 2002 to 2.3 percent of GDP by 2007. However, the rate of increase in pension outlays could be even higher in the longer term since most public sector pension schemes will confront their most dramatic demographic pressures over the next 10–20 years.

43. While the number of contributors to the pension schemes for public sector workers is much lower than those of IMSS at the time of the 1997 reform, their benefits are significantly more generous. Therefore, the combined liabilities of the remaining public sector pension schemes are substantial and the transition costs for reforming them will be significant. This is confirmed in Table 4, which provides a summary of the unfunded liabilities of the public pension schemes. While these deficits cannot be added to obtain the aggregate liability of the entire pension system since the calculations are not based on common actuarial assumptions, they still provide a clear indication that the order of magnitude of the unfunded liabilities in the pension system is a cause of concern.

Table 4.

Mexico: Estimated unfunded liabilities in Mexico’s Pension System

(In percent of GDP)

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Sources: Secretariat of Finance and Public Credit (SHCP); Mexican Social Security Institute (IMSS); Public Worker’s Social Security Institute (ISSSTE); National Petroleum Company (PEMEX); and CFE.

44. More importantly, since most pension schemes continue to accumulate liabilities under their current operation there is urgency in addressing the underlying disequilibria. This is especially true in the case of ISSSTE, which harbors the most important unfunded liabilities but also extends to the pension schemes of the public enterprise sector.

45. The government is aware of the fiscal risks associated with the financial situation of the public pension schemes. The structural reform agenda laid out in the National Development Plan for 2001–06 prominently includes fundamental reform of the pension system as a strategic goal of the government. The authorities’ recently issued medium–term financial program (PRONAFIDE) recognized the need to proceed with the reform of the pension system, notwithstanding the transition costs that such reforms could generate.30

46. The authorities are taking steps to prepare for policy action. These include the elaboration of actuarial and administrative diagnostics reports on the financial health of ISSSTE and the RJP of IMSS.31 This work should be extended in due course to cover all other public pension schemes.

47. In addition to fundamental pension reform, the authorities can influence a number of policy variables which affect the costs of the 1997 pension reform. For instance, the fiscal costs associated to the new system’s minimum pension guarantee and the cost of the switch option for transition workers will depend on the return that is being achieved by the individual savings accounts and the FOVISSSTE housing accounts. Policy actions to increase the real return of these accounts could therefore help reduce fiscal costs.32

48. Limited information is available on a number of public pension schemes and the aggregation of information on pension liabilities is difficult since most studies use different actuarial assumptions. Further improvements in this area would therefore be welcome as part of the authorities efforts to increase fiscal transparency.

49. Both the transition costs of the 1997 pension reform and the financial disequilibria in the pension systems for public sector workers will generate significant budgetary pressures in the not so distant future. In this context, the introduction of a medium–term budgetary framework, as recommended by the staff in the fiscal transparency module of the Report on the Observance of Standards and Codes (ROSC), would be a useful tool for a forward looking accommodation of these expenditures in line with sustainable fiscal policy.

References

  • CFE, 2002, “Audited financial statements for 2001 and 2000.

  • Chand, Sheetal; and Albert Jaeger, 1996, “Aging Populations and Public Pension Schemes,” IMF Occasional Paper No. 147

  • CONSAR, 2002, “Informe de Actividades 2001.

  • Grandolini, Gloria; and Luis Cerda, 1998, “The 1997 Pension Reform in Mexico,The World Bank Policy Research Working Paper No. 1933

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  • IMSS, 2002, “Informe al Ejecutivo Federal y al congreso de la Unión sobre la Situación y los Riesgos Financieros del Instituto Mexicano de Seguridad Social,document available at www.imss.gob.mx.

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  • ISSFAM, 2002, “Metas y objetivos 2002,document available at www.issfam.gob.mx.

  • ISSSTE, 2002, “Situación actual y perspectivas.

  • Ley del Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado, 1983, modificada el 1 de junio 2001.

  • Ley del Instituto de Seguridad Social para las Fuerzas Armadas Mexicanas, 1976, modificada el 23 de enero 1998.

  • PEMEX, 2002, “Audited financial statements for 2001 and 2000.

  • Sales, Carlos; Solís, Fernando; and Alejandro Villagómez 1998, “Pension System Reform: the Mexican Case,” in Feldstein, Martin (ed.), “Privatizing Social Security,” (The University of Chicago Press).

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  • Solís, Fernando, 2001, “Los Sistemas de Pensiones de México: la agenda pendiente,XXX, ITAM.

  • Secretaría de Hacienda y Crédito Público, 1999, “Segundo Taller sobre Sistemas de Pensiones Estatales,Documentacion distribuida a participantes.

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  • Secretaría de Hacienda y Crédito Público, 2002, “Programa Nacional de Financiamiento al Desarrollo, 2002–06.

APPENDIX I

Mexico: Main Characteristics of Pension Plans in Mexico

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Source: Secretariat of Finance and Public Credit (SHCP).

The federal government is required to cover any cash deficits (Art. 177).

28 years for women.

Members with more than five but less than twenty years of service receive a lump-sum compensation of 6–32 months of their integrated salary.

Includes a 5 percent contribution to INFONAVIT housing fund.

The disability and life insurance requires additional contributions of 0.625 percent from the worker, 1.75 percent from the employer and 0.125 percent from the government.

An additional contribution of 3 percent was levied for disability and life insurance, which was distributed as follows: 0.75 percent from the worker, 2.1 percent from the employer and 0.15 percent from the government.

No requirement for work related disability.

APPENDIX II

Mexico: Selected Pension Indicators of Public Pension Plans

(As of end–2001)

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Source: Secretariat of Finance and Public Credit.

Pensioners as a percentage of active contributors.

Average pension as a percentage of average insured wage.

1

Prepared by Andreas Bauer (FAD).

2

These include pensioners and active contributors who have claims on the pension system.

3

Most of these institutions provide a broad range of social security services to their affiliates, including pensions, health care, work accidents and life insurance and others. This document focuses exclusively on their function as providers of pensions.

4

Pension systems can be classified according to several criteria, including their management (public or private), their way of calculating benefits (defined benefit or defined contribution), and their financing method (funded or PAYGO).

5

The SAR92 was created in 1992 as a complement to the existing PAYGO systems. The SAR92 is a fully funded mandatory defined contribution system that provides individual retirement accounts for every worker affiliated with ISSSTE (prior to the reform, it also covered workers affiliated with the EVISS). Each retirement account consists of two sub–accounts; one for retirement savings and another for savings in a housing fund (FOVISSSTE). Contributions to each of the sub–accounts are 2% and 5% of a workers base salary respectively. The contributions are entirely borne by the employer (i.e. the government). Upon retirement, the accumulated balances from both sub–accounts are disbursed as lump–sum payments. For a more detailed assessment of the SAR92 see Grandolini/Cerda (1998).

6

A number of subnational government institutions have their workers directly covered by ISSSTE on the basis of specific agreements.

7

See Chand/Jaeger (1996) on the effects of aging populations for pension systems in industrial countries.

8

The number of afiliates to the AFORE system is much higher (26 million), but only 45 percent of them were actively paying contributions at end–December 2001.

9

The Fiscal Transparency ROSC Module (SM/02/277) provides a detailed description of the coverage of the federal budget.

10

The workers of IMSS are excluded from participating in ISSSTE, which is the general pension scheme for federal government workers.

11

The transition generation includes those workers who were contributing to the old system at the time of the reform but had not yet retired.

12

The decision of a worker to opt between the benefits under the old or new system will depend upon the amount of accumulated retirement savings and the real wage level. The liabilities for the government will be lower the longer a worker’s contribution period, the higher the real return of the pension savings and the lower the real wage growth.

13

The social quota was set equal to 5.5 percent of the minimum wage in July 1997 indexed to the CPI.

14

For example, the fiscal cost arising from the minimum pension guarantee will depend on the return that is being achieved by individual savings accounts.

15

The most recent actuarial study shows that the disability and life insurance is financially viable in the long term. However, the health insurance for pensioners exhibits an actuarial deficit of 8.5 percent of GDP over the next 50 years under the assumption of an unchanged contribution rate and a rather optimistic evolution of costs in the health sector. See IMSS (2002) for details.

16

The workers of IMSS are excluded from participating in ISSSTE, which is the general pension scheme for federal government workers.

17

IMSS registered two waves of massive new hiring during the times of abundant oil windfalls in the late 1970s and the late 1980s.

18

However, these reserves only covered about ¼ of the provisions that would have been required on the basis of the RJP’s actuarial assessment.

19

The actuarial study was based on a real interest rate of 3.5 percent, a projection horizon of 100 years and zero real wage growth. The actuarial valuation of the plan established a net present value of pension obligations of 5.2 percent of GDP, of which only 0.3 percent of GDP are backed by constituted reserves. See IMSS (2002) for details.

20

While public sector employment grew very fast during the 1970s and 1980s, it has declined since the 1990s due to the need for fiscal adjustment. Currently, the average age of ISSSTE’s contributing population is 41 years.

21

The base salary represents on average about 75 percent of the affiliated worker’s total salary. However, the effective replacement ratio is higher since the workers affiliated with ISSTE receive their contributions to the SAR92 upon retirement as a lump–sum payment.

22

For example, the contributions in present value terms of a worker who earns a constant minimum wage over his working career only equal about 1/3 of the present value of expected pension benefits (based on a 5 percent discount rate).

23

The estimates are based on a real interest rate of 3.5 percent and a 75 year (100 year) time horizon for the implicit pension debt (actuarial deficit).

24

A publicly available document detailing the ISSFAM’s administrative objectives puts the number of retired personnel at about 42,000. However, this number does not include survivor pensions.

25

The public sector financial information norm NIF–08 BIS states that labor obligations are to be registered in line with the guidelines of the Mexican Institute of Public Accountants (Bulletin D–3 “Labor obligations”) but can only be recorded up to the point of zero profit. Most public enterprises also prepare financial statements on the basis of Generally Accepted Accounting Standards (GAAP). These statements do record labor obligations in line with standard practice.

26

The actuarial valuation of the plan established a net present value of pension obligations–assuming zero real wage growth–of 3.1 percent of GDP, of which only 0.1 percent of GDP are backed by constituted reserves. See PEMEX (2002) for details.

27

Based on a real interest rate assumption of 5 percent and assuming a real wage increase rate of 2.5 percent. See CFE (2002) for details.

28

In addition to the state pension institutes, pension schemes reportedly exist at autonomous universities and some municipalities. The latter two were not covered in the assessment and little information is available on their financial health.

29

Using a 3.5 percent real interest rate and a projection period of 100 years.

30

See Secretaría de Hacienda y Crédito Público (2002), pp. 45–46.

32

For example, the return of the housing fund INFONAVIT has been close to zero in the recent past. Also, the investment of pension funds is currently limited to fixed income instruments. Increasing the efficiency of INFONAVIT and broadening pension fund access to financial instruments could help increase the return of retirement savings.

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