A significant overhaul of Mexico’s pension system was implemented in May 2024. Under the individual account scheme, the policy revision guaranteed a 100% replacement rate for pensions paid to low-wage workers; however, the establishment of the Welfare Pension Fund, or WPF, would initially bear the additional financial burden. This is not an isolated reform; the nation’s retirement system has lately experienced multiple changes aimed at strengthening and improving the defined contribution plan.
According to the pension system regulator Consar, private fund administrators, or “Afores,” have been in charge of Mexico’s pension system since 1997. As of the end of March 2024, these entities were responsible for managing over 6.1 trillion Mexican pesos.
The new initiative, according to the Mexican Association of Retirement Fund Entities, will not affect individuals’ ability to maintain control over their accounts. Less than two months are remaining before Mexicans cast their ballots in the country’s national elections on June 2.
Prior issues and changes
Up until 1997, the Mexican Institute of Social Security’s (IMSS’s) original pension system was a defined benefit, pay-as-you-go programme. However, due to changes in Mexico’s economy and population, a substantial overhaul took place. It was also the year that defined-contribution plans became official with the creation of Retirement Funds Administrators (Afores), which allowed for the management of individual retirement accounts by the Afores. Public sector workers were then added to the Afore system in 2007 (they also support SITE, another institute).
The 1997 and 2007 reforms have several coverage issues in addition to being ineffective in addressing the unaffordable and growing expenses of pensions. The first change affected those who chose to leave the previous system, increasing the minimum number of years of service required to qualify for a pension from 10 to 24. This is problematic in a nation where workers contribute an average of only 43% of their working lives to social security.
Furthermore, very few workers were expected to get a pension above the minimum guaranteed pension (MGP), which was less than 25% of the average pay for those who did qualify for one. Only a small percentage of the Afore system’s initial generation, who applied for pensions 24 years after the scheme’s inception, were going to get the pension in full; the majority would only get the extremely low MGP.
The Andrés Manuel López Obrador (AMLO) administration implemented two crucial measures in response to these pressing issues. The federal government introduced the Welfare Pension for Senior Citizens (Pensión para el Bienestar de los Adultos Mayores) in 2019, offering a non-contributory pension to all adults 65 years of age and older.
Later, an Afore scheme reform in 2020 improved the MGP, lowered Afore managing fees by 30% to a cap in line with an international reference, raised mandatory contributions that will progressively rise from 6.5% of wages in 2021 to 15% in 2030, and shortened the number of weeks required to qualify for a pension (from 750 in 2021, to rise gradually to 1,000 by 2031).
Synopsis of recent steps
Increasing public expenditure to fortify the social safety net for Mexico’s most disadvantaged populations has been the president’s most well-known and effective policy approach.
AMLO administration has increased the stakes in support of these groups, tripling welfare spending from $8 billion to $24 billion in 2024, from Jóvenes Construyendo El Futuro (Youth Building the Future) to a basic universal pension. AMLO has further increased its commitment, pledging to spend 25% more on social programmes in 2024, or $30 billion, in an election year.
AMLO and his party’s election triumph have benefited greatly from the highest levels of Mexico’s government’s support of these historically excluded groups. Even though Morena officially formed as a political party in 2014, AMLO’s presidential win in 2018 saw the party take the top elected position in Mexico in just four years.
Five years later, Morena is in charge of 22 of Mexico’s 32 state governments. It’s difficult to envision Morena’s explosive rise in success without AMLO’s deft use of social media to encourage voting, particularly among these marginalised communities.
The pension reform was first mentioned by AMLO in 2020, but it wasn’t fully announced until February 2024, along with 20 other reforms that varied in their extent and importance. The Chamber of Deputies Committee on Social Security’s vote on the plan brought pension reform to the fore.
In short, the proposed reform aims to amend Article 123 of the Mexican Constitution to allow workers 65 and older who have paid into the current retirement pension system, which went into effect in 1997, to receive a pension that is equivalent to their most recent monthly salary, but not more than the average monthly salary of an IMSS worker, which is approximately 16,777 Mexican pesos (USD 978).
These pensions are only available to employees in the formal sector, which means that to qualify; an employee must be covered by social security in some capacity. The two options are the Mexican Institute of Social Security (IMSS) and the Institute of Security and Social Services for State Employees (ISSSTE).
The changes implemented in 1997, during the administration of Ernesto Zedillo, and during Felipe Calderón’s following time as president have resulted in a substantial transformation in Mexico’s retirement savings system over the last thirty years. Before 1997, pensioners got a monthly pension equivalent to their average income for the five years before retiring, according to Luisa María Alcalde, Mexico’s Secretary of the Interior.
Fundo de Pensiones del Bienestar (Welfare Pension Fund) is a new public fund that the AMLO administration has proposed to create to finance this new pension programme. The new pension fund’s funding source is the subject of discussion. These monies will come from retirees aged 70 and above whose accounts have been untouched for a minimum of three years, that is, without any withdrawals or deposits.
Administradora de Fondos para el Retiro, or Afore, is currently in charge of these pension funds, which have a total value of almost $40 billion in Mexican pesos, or $2.3 billion. Of these accounts, 4.4% have remained unopened for longer than ten years, according to Alcalde. However, AMLO did point out that safeguards would be in place to ensure that employees or their dependents who later claim the assets stolen can still access them.
The government will also utilise the money it saves by collecting debts, selling off government real estate, and reducing spending to support the Fondo de Pensiones del Bienestar. Two-thirds of the members in both chambers of Congress must vote in favour of this measure.
According to the Mexican opposition, it is against Article 14 of the Constitution to transfer funds immediately into a new fideicomiso (trust) without first obtaining judicial clearance. With ten or so banks acting as the main fund administrators, AMLO, however, argues that the current pension system is a monopoly.
AMLO even went so far as to compare the proposed change to theft and claim that these financial corporations are so strong that they dominate the media in Mexico and are spearheading campaigns to oppose the reform’s adoption. The president claims that the reason for these remarks is that the change will hurt the banks, not the pension beneficiaries.
By adding the so-called Solidary Supplement (complemento solidario) to the MGP, the government will guarantee this advantage. Employees contribute to individual retirement accounts run by Afores, together with payments from the government, companies, and other parties under Mexico’s pension scheme. This sum of savings is what their monthly pension will come from when they retire. As soon as the worker’s savings are insufficient, the government subsidises their pension so that they obtain the MGP if the balance is insufficient to attain the MGP. As a result of the 2024 reform, the pension will now match the final contributed pay thanks to the addition of the Solidary Supplement to the MGP.
Thus, the Solidary Supplement establishes a new fiscal obligation that will be specifically funded by the WPF, with an initial capital of 64 billion Mexican pesos (about $3.8 billion). The National Fund for Tourism Promotion’s real estate income and the money from the National Agricultural Development Fund’s liquidation are just two of the many sources from which the fund will draw.
One matter that caused controversy in the media is that, in situations where the accounts have been dormant for a year, the WPF will additionally obtain monies maintained by the Afores that have not been claimed by the workers or their beneficiaries ten years after they were entitled to them.
In such a case, the respective institutions would dispose of the accounts under the previous provisions of the new laws of IMSS, ISSSTE, and the Institute of the National Housing Fund for Workers provided that these institutions established a reserve to return the funds to the workers or their beneficiaries if they later claimed them.
Under the new legislation, those unclaimed accounts will go to the WPF, which the Ministry of Finance will establish as a public trust fund at Mexico’s Central Bank (Banco de México). It is nevertheless necessary to set aside funds to guarantee that employees or their beneficiaries can get reimbursements when they need them.
The new law also unequivocally states that workers’ property rights over their assets are imprescriptible, and the reform only affects the institution in charge of managing those rights for those who fit the specified requirements (the resources that will be transferred to the WPF are expected to constitute less than 0.5% of the total assets under the Afores’ management).
Stated differently, the WPF will now be in charge of managing unclaimed money that was previously under the control of social security organisations, and it will still be their responsibility to keep a reserve to cover any future claims. Since the pre-reform system had a reserve, it never failed to return any claimed cash; there is no reason to think that under WPF, this would not be the case.
Knowing the advantages
According to projections, the number of people receiving the Solidary Support Aid will increase from 8,529 in 2024 to almost 2.7 million by 2050. On average, each senior will receive 4,592 Mexican pesos (about $275) every month in supplemental subsidies. To guarantee sustainability, the reform incorporates an actuarial evaluation of the financing sources every eight years, allowing for modifications if the anticipated amounts prove to be inadequate.
This latest change is a component of the federal government’s ambitious pension policy, which demonstrates a clear commitment to providing superior retirement benefits. The nation has developed a unique mixed model that complements the changes made in 2019 and 2020 with the most recent ones made in 2024. This model creates a more robust and inclusive environment because it includes a universal non-contributory pillar, which is crucial for a labour market that is characterised by high levels of informality, or low contribution density rates.
In addition, it has lowered the number of years of payments needed to be eligible for a pension, which benefits the initial worker generations under the Afore system who would not have been able to get benefits at all otherwise.
Furthermore, if a worker’s pay is below average, the reform passed in May 2024 guarantees that the first generation of workers to acquire pension status under the individual-account, defined-contribution system will get pensions with a 100% replacement rate. This policy might be the missing motivation for more workers to pursue formalisation in a country like Mexico, where half of the population still works under informal systems.
The WPF offers a stable financial stream for the reform’s finance for at least the ensuing ten years. Nonetheless, the law’s requirement for an actuarial evaluation and a final replenishment from new sources following eight years of operation is a smart one. It will then be possible to make any necessary adjustments at that point.
The new mixed pension model in Mexico marks a substantial breakthrough in the country’s labour circumstances by combining the finest features of both contributory and non-contributory schemes. More importantly, though, it not only protects but enhances the Afore system. This is significant because, in addition to having the best and most worker-centred retirement fund management system, Afores plays a significant role in the Mexican economy, accounting for 20% of the nation’s GDP in domestic savings at the moment. Previous estimates for this amount before the new model put it at 35% by 2040; however, the projection for that year is now as high as 56% of GDP. Undoubtedly, this is positive news for Mexico’s economy, the banking system, and the workers themselves.