Mexico moves to overhaul frail pensions system

Mexico’s president announced a sweeping overhaul of the country’s pension system designed to tackle a brewing crisis that the populist leader says will “cancel the possibility of a just, dignified pension for current workers”.

The proposal, which has been widely applauded, aims to boost retirement pay by 40 per cent and ensure that 80 per cent of workers have a guaranteed pension. Analysts said it would boost employer costs and could increase the number of people in the informal employment sector.

Meanwhile, Chile’s senate was preparing for a vote on Wednesday on a big change to its pension system, threatening to hobble state finances already hit hard by the coronavirus crisis.

Both countries are facing public finance crises as they grapple with the pandemic, which has hit Latin America hard and led to costly lockdowns that have put millions of people out of work.

“It’s about radically changing retirement conditions,” Arturo Herrera, Mexico’s finance minister, told a news conference alongside President Andrés Manuel López Obrador, employer and union leaders, and legislators from the ruling Morena party.

He said that at present, an average worker could expect to retire on just 30 per cent of his or her salary. Under the plan, workers’ contributions will remain unchanged, but employers’ contributions will jump to 13.87 per cent of the salary from 5.15 per cent currently.

The Mexican government will chip in the same amount as before — 0.225 per cent — but this will be redirected to benefit the lowest earners. Workers will be able to retire after 750 weeks of contributions, rather than 1,250 currently.

While the proposal is not expected to meet significant opposition in Congress, some analysts said that raising employer contributions risked inflating the country’s already large informal employment sector, in which workers pay no taxes and receive no benefits.

“This just makes being in the formal sector even more expensive,” said Valeria Moy, head of the Mexican Institute for Competitiveness, a think-tank.

According to Inegi, an institute that tracks state statistics, 52 per cent of Mexican workers are informal, a rise of more than 4 per cent since April as Covid has led to mass lay-offs. Mexico’s economy — in recession before the pandemic arrived — is expected to slump more than 10 per cent this year, and it has offered no tax breaks or delayed employee contributions to businesses to help them through the crisis.

The proposal “needs some extra ingredients or employers will just say ‘I’m going into the informal sector’,” said Mariana Campos, budget specialist at México Evalúa, a think-tank.

Later on Wednesday, Chile’s senate was expected to approve a constitutional amendment allowing pensioners to withdraw 10 per cent of their savings. If approved, the amendment would represent a stinging defeat for the centre-right government of President Sebastián Piñera, which urged its representatives in congress not to support the bill.

Pensions reform was one of the key demands of the protests that rocked Chile last year. The pioneering defined contribution system, which has been widely copied around the world, now provides meagre payouts, with most pensioners receiving less than the minimum wage.

Allowing pensioners to withdraw their savings could create a hole in what had been a pillar of the Chilean economic success story.

Andrés Solimano, an economist and former World Bank country director in Santiago, said withdrawing funds would be “the first great fissure in the pensions system”.

“It is a consequence of the late and limited cash transfers by the Chilean state to counter the Covid-19 crisis,” he said. “People need the money to feed themselves and pay bills, and the funds — in theory — belong to the people.”

Fernando Larraín, director-general of the pension administrators’ association, said that the reform “goes in the opposite direction” required to improve pensions.

The pensions bill passed the lower house earlier this month, fuelling investor fears that populism is taking root in the country ahead of a historic constitutional reform process starting later this year.

If approved by the senate, the bill would then be sent back for final approval to the lower house of congress. It could still be vetoed by the constitutional court or the president, although analysts doubt Mr Piñera would risk any move that could trigger further protests. A poll this month showed 83 per cent of Chileans supported the amendment.

Critics fear withdrawals of as much as $20bn from Chile’s private pension funds, which manage about $200bn, could scare off private investment that Chile depends on for a solid economic recovery next year. Its economy is projected to contract by 6-7 per cent in 2020.