On May 1, a major new reform was introduced to Mexico’s pension system, which included the guarantee of a 100 percent replacement rate for pensions of below-the-mean-wage workers in the individual account scheme, with an additional fiscal cost to be initially financed by the creation of the Welfare Pension Fund, WPF (Fondo de Pensiones para el Bienestar). This reform is not an isolated event – the country’s retirement system has very recently undergone several transformations to correct aspects of the defined-contribution scheme while strengthening it.
Previous problems and reforms
The original Mexican pension system of the Mexican Institute of Social Security (IMSS) operated under a defined benefit, pay-as-you-go scheme until 1997, when, prompted by Mexico’s economic and demographic shifts, a significant transformation occurred. That year, Retirement Funds Administrators (Afores) were established, marking the shift to a defined-contribution scheme, with retirement savings through individual accounts managed by the Afores. Subsequently, public sector employees were integrated into the Afore system in 2007 (they contribute to another institute, ISSSTE).
The 1997 and 2007 reforms, although helpful in coping with the rising and unsustainable fiscal costs of pensions, presented several drawbacks in terms of coverage. First, for those who did not remain in the old system, minimum contributory years to gain the right to a pension were raised from 10 to 24, a problem in a country where workers contribute on average only 43 percent of their active life to social security. Additionally, the minimum guaranteed pension (MGP) for those who did qualify for a pension was less than 25 percent of their average wage and very few workers were expected to get a pension above it. When the first generation of the Afore system filed for a pension in 2021, 24 years after the implementation of the scheme, only a few of them were going to actually receive it and they would mostly get the very low MGP.
Facing these immediate problems, the administration of President Andrés Manuel López Obrador introduced two critical reforms. In 2019, the Welfare Pension for Senior Citizens (Pensión para el Bienestar de los Adultos Mayores) was established, providing a non-contributory pension funded by the federal government to all individuals aged 65 and over. Later, a reform to the Afore scheme in 2020 increased mandatory contributions that will gradually rise from 6.5 percent of wages in 2021 to 15 percent in 2030, reduced Afore managing fees by 30 percent to a cap aligned to an international reference, enhanced the MGP, and decreased the number of weeks needed to qualify for a pension (from 750 in 2021, to rise gradually to 1,000 by 2031).
An overview of the new measures
The new pension reform approved this year was also supported by President López Obrador. It intends to further strengthen the system by increasing the pension to equal the last contributory wage to all workers earning a salary lower than the current IMSS average of 16,777 Mexican pesos a month (around $1,000 at the current exchange rate), provided they are subject to the Afore system and are at least 65 years old. If the worker takes an earlier retirement the pension remains unchanged. Additionally, they must fulfill the years of contribution requirement for a pension.
This recent reform is part of an ambitious pension programme of the current federal government administration
The government will ensure this benefit through the so-called Solidary Supplement (complemento solidario), which will be added to the MGP. In Mexico’s pension system, workers save their contributions as well as their employers’ and the government’s into individual retirement accounts managed by Afores. Upon retirement, their monthly pension comes from this saved amount. If the balance is not enough to reach the MGP, the government subsidises their pension as soon as the worker’s savings are insufficient, so that they receive the MGP. Now, with the 2024 reform, the Solidary Supplement will be added to the MGP so that the pension is equal to the last contributory wage.
The Solidary Supplement therefore creates a new fiscal obligation to be financed, precisely, by the WPF, which is set to start with an initial capital of 64bn Mexican pesos (around $3.8bn). The fund will draw on a variety of sources, like proceeds from the liquidation of the National Agricultural Development Fund and real estate revenues generated by the National Fund for Tourism Promotion, among others. One issue that sparked debate in the media is that the WPF will also receive funds managed by the Afores that have not been claimed by the workers or their beneficiaries 10 years after they had the right to them, in cases where those accounts have been inactive for a year.
The new laws of IMSS, ISSSTE and the Institute of the National Housing Fund for Workers previously stated that accounts in such a situation would be disposed of by their corresponding institutions, provided they created a reserve to return the funds to workers or their beneficiaries in case they eventually claimed them. Under the new legislation, those unclaimed accounts will go to the WPF, which will be established by the Ministry of Finance as a public trust fund at Mexico’s Central Bank (Banco de México). The obligation remains to create a reserve to ensure that refunds can be made to workers or their beneficiaries whenever claimed.
Fact check: unravelling speculation
More than a few media outlets and commentators sparked a heated debate at the time of the legislative process by asserting that the new measure implied an unlawful expropriation of workers’ savings by the government. This assertion proved to be false, as the new law clearly establishes that property rights of the workers over the assets are imprescriptible and the reform merely represents a shift in the institution managing them for those who meet the mentioned criteria (it is estimated that the resources to be transferred to the WPF add to less than 0.5 percent of the total managed by the Afores). In other words, unclaimed funds previously managed by social security institutions will now be managed by the WPF, with the same obligation of maintaining a reserve to pay any claims that may arise. In fact, the pre-reform system never failed to return any claimed funds, due to the reserve created; there is no reason to believe that with WPF this would be otherwise.
The benefits of the reform
The number of beneficiaries receiving the Solidary Support Aid is projected to grow from 8,529 individuals in 2024 to approximately 2.7 million by 2050. The amount of the supplementary subsidy each pensioner receives is expected to average 4,592 Mexican pesos per month (around $275). To ensure sustainability, the reform includes a provision for an actuarial review of the funding sources every eight years, enabling adjustments in case the projected figures fall short.
Key takeaways from the pension reform
This recent reform is part of an ambitious pension programme of the current federal government administration, which has showed a stark determination in going the extra mile in retirement benefits.
Complementing the 2019 and 2020 changes with the latest in 2024, the country has created a unique mixed model, which brings about a more inclusive and robust environment: it now has a universal non-contributory pillar which is very important for a labour market characterised by high informality – that is, low density rates of contributions. At the same time, it has reduced the years of contributions required to gain access to a pension, favouring the first generations of workers under the Afore system, who would otherwise fail to even reach a pension.
The country has created a unique mixed model, which brings about a more inclusive and robust environment
Additionally, the reform passed in May 2024 assures that those first generations of workers reaching a pension in the individual-account, defined-contribution system, receive pensions with a 100 percent replacement rate if their wage is below average. In a country like Mexico, where half the population still works under informal schemes, this measure may very well be a missing incentive for more workers to seek formalisation.
Regarding the funding of the reform, the WPF provides a sustainable financial source for at least the next decade. It is a good provision of the law however, to mandate an actuarial assessment and an eventual replenishing through additional sources after eight years of operation. This will allow for adjustments to be made in case they are necessary at that time.
By taking the best elements of both non-contributory and contributory schemes, the new Mexican mixed pension model represents a significant advancement in the labour conditions of the country and, very importantly, it not only preserves but actually strengthens the Afore system. This is very relevant, as besides being an optimal and worker-aligned management system for retirement funds, Afores have an important role in the Mexican economy, currently representing domestic savings equivalent to 20 percent of the country’s GDP. Before the new model, this number was estimated to rise to 35 percent by 2040, but now the estimate is as high as 56 percent of the GDP of that year. This is no doubt good news not only to the workers but also to the financial environment and economic stability of Mexico.
