Will Pending Reforms Improve Mexico's Pension System?
Mexico’s government and the country’s private sector have ironed out the details of a pension reform that is expected to take effect early next year, the Finance Ministry said July 22. Under the plan, the average worker’s pension will rise 40 percent, said Finance Minister Arturo Herrera. Is the new plan likely to be approved in Mexico’s Congress? Where is the increased payout coming from? How will the proposal affect workers and the country’s current pension funds, known as the Afores? What are the proposal’s main benefits and drawbacks?
Tapen Sinha, professor of risk management at the Instituto Tecnológico Autónomo de México and professor at the University of Nottingham Business School: “Right now, with Morena ruling the roost, it would be an easy exercise for the current government to pass the new plan. Nobody in the government has talked about the extra costs. The employers will be required to increase their contribution from 5.151 percent to 13.875 percent in eight years. That will add to the cost of doing business for the private formal sector. They will react by reducing employment in the formal sector by hiring people either through ‘honorarios’ or by hiring more in the informal sector. The result will be a reduction of formal full-term employment in the private sector. There will also be additional costs by reducing the vesting period from 25 to 15 years. The cost for the ‘top up’ to 13.875 percent for people with less than four times the Measurement and Evaluation Unit, or UMA, inflation indexing benchmark, will be borne by the government. Given the employment conditions today, I estimate that cost will amount to between…”Read More
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