Pension Schemes and the Outlook for Social Security

Abstract

At the beginning of the twenty-first century, Mexico is currently at a stage of intermediate development, and is experiencing profound social, economic, political and demographic transformations. The changes in its population structure reveal a rapidly aging population together with financial insufficiency and actuarial deficits in the social security systems. One challenge yet to be met are the vast requirements of retirement pensions. The social security system consists of various institutions covering various groups of workers: salaried workers from private companies, the public sector and decentralized firms. Over half the economically active population is completely excluded: these include farm workers and the informal sector with the least resources. A mere 24% of the population over 60 draws some sort of retirement pension, most of which are quite inadequate. Social security institutes have experienced deficiencies due to the country's economic and social problems. Various projections envisage sharp imbalances in two main areas; between active and retired workers and between the cost of maintaining retirees and the income obtained from salaries. These perspectives mean that modifications must be considered. The main change has occurred in the IMSS, which covers salaried workers in the private sector. It has shifted from a system of defined benefits to a system of defined contributions. This system will be unable to achieve an adequate percentage of salary replacement and most future pensions will be set at the minimum guaranteed level. This guaranteed level is paid for by public finances, which, together with the costs of transition, entail a vast burden for both those enrolled in the social security system and non-enrollees. In terms of economic activation, given the current internal savings of the social security system, the country's economy will be unable to convert these funds into productive investment. The problem warrants political, economic and social attention, together with long-term vision.