Mexico: Proposed reforms to strengthen social security pension system

Employer Action Code: Monitor

A tripartite agreement has been reached among the Ministry of Finance and the two largest groups representing employers and employees (the Business Coordinating Council and the Mexico Workers’ Confederation) on proposals to reform the AFORE (Administradoras de Fondos para el Retiro) defined contribution pension system. Among other things, the reforms would increase employer pension contributions and sharply decrease the minimum period of insured employment required for employees to be eligible for a minimum guaranteed pension, resulting in an estimated increase in the average pension of 42%. The reforms are expected to be presented to Congress for discussion in September 2020.

Key details

Proposed reforms include:

• Gradually increasing the employer retirement contribution from 5.15% to 13.875% of covered pay over eight years (the federal government contribution rate of 0.225% would also be increased for low-paid employees over the same time period, with the ultimate rates ranging from 8.724% for employees earning the minimum wage to 1.798% for those earning up to four times the Unidad de Medida y Actualización, or UMA, unit of measure)
• Immediately decreasing the minimum period of insured employment to qualify for a minimum guaranteed pension from 1,250 weeks (about 24 years) to 750 weeks (14.4 years) to be followed by a gradual, partial reversion to 1,000 weeks (19.2 years) over a period of 10 years
• Changing the calculation of the guaranteed minimum pension for future retirees from 80% of the minimum wage to an amount based on the individual’s age, period of insured employment and salary, resulting in a pension ranging between 70% and 220% of the minimum wage
• Allowing retirement benefits to be taken as a combination of a lifetime annuity and programmed withdrawals of funds (rather than either an annuity or programmed withdrawals)
• Waiving the current six-month waiting period for withdrawals of voluntary savings
• Enabling individuals receiving retirement or survivors’ pensions from individual AFORE accounts to claim the remaining balance of the account 10 years after the pension became payable
• Reducing AFORE commissions on retirement savings to a maximum of 0.7% per year (compared with current rates of around 1.0%)

Employer implications

According to current OECD projections, net retirement income from social security is estimated to replace only 28% of preretirement net earnings for a new entrant to the workforce whose earnings match the national average — one of the lowest rates among OECD states. And that’s only for that portion of the workforce in formal employment, estimated at around 44% of the workforce, for a full career (according to Instituto Nacional de Estadística, Geografía e Informática 2019 data). In other words, as is clear and widely agreed, both the social security pension and the workforce participation rates are too low. The reforms are intended to address both issues by increasing benefits and encouraging more employees to join the formal workforce. The government expects that the reforms would more than double the number of workers eligible for a minimum guaranteed pension; however, most of the additional costs would fall primarily on employers. The changes would require amending the Constitution as well as the Social Security and Retirement Savings Systems Laws, so the obstacles to their becoming law are significant. Companies should monitor the development of the legislation closely.