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ECONOMY| 27.04.2021

Why do Mexicans receive the smallest pensions in Latin America? 

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One of the greatest challenges facing societies over the next few decades will be the future of pensions. In particular, Mexican society’s concern for social protection is becoming ever greater. And it’s no wonder, since Mexican men and women have the lowest replacement rates (a person’s pension entitlement as a percentage of their pre-retirement earnings) in Latin America. The opinion of experts on this matter is categorical: Given the gravity of the situation, the level of consumer knowledge about savings and retirement products is insufficient.

Due to the gradual increase in life expectancy, the span of years for which we can expect to enjoy our retirement is growing ever longer. This is undoubtedly good news, though it will engender a need for greater savings in order to support the increasing cost of pensions. In this regard, a global debate is underway on how pension systems can be reformulated to make them more sustainable in the long-term. And Mexico is at the heart of this discussion in Latin America, as both Mexican men and women have the lowest replacement rates in the region.

Governments therefore need to open up a space for dialog on the implementation of measures to increase the viability of pension systems. These are some of the conclusions drawn from the Pension systems from a global perspective report, presented by MAPFRE Economics and edited by Fundación MAPFRE. This study, which features an in-depth analysis of the pension systems of 11 countries, states that “it is imperative that pension systems be reformed as soon as possible so that they will be provided with sustainability and stability in the long-term (and, consequently, greater equity).”

 

Mexicans have difficulty maintaining their standard of living after retirement

At the end of their working life, a Mexican worker who makes the minimum contributions will receive a pension that is equivalent to around 30 percent of their final salary, a figure far below the recommended amount. Experts predict that the share of Mexico’s Gross Domestic Product (GDP) devoted to public pensions will rise from 3 percent currently to 6 percent by 2030.

Mexico is one of the OECD countries in which the lowest percentage of workers’ salaries go toward retirement savings, according to CONSAR (Comisión Nacional del Sistema de Ahorro para el Retiro — the Mexican Pension Fund Supervisory Authority). For Mexican citizens, this means that their pensions will not be enough to maintain the standard of living they had before retirement unless their savings are supplemented by other measures.

Mexican women have it the worst

Mexican women will receive just 29 percent of their final salary, according to a report from Fundación MAPFRE. If we look at other Latin American countries, the most dramatic gender difference is found in Chile, where the gap is 15 percentage points. In Chile, men have a 46.3 percent replacement rate at retirement, while for women it is just 31 percent.

In Argentina, the country with the highest replacement rate, the difference between men and women is 8 percentage points. On retirement, men in Argentina will receive a pension equivalent to 89.6 percent of their final salary, while women will receive 81 percent.

 

In the spotlight: contributions

Many experts point to the need to increase the contribution rate in Mexico as soon as possible, since it is the lowest in the region at just 6.5 percent of the worker’s salary. In Argentina, by contrast, workers contribute 27 percent of their salary.

José María Romero Lora, CEO of MAPFRE in Mexico and LATAM North, explains that one of the major public policy challenges is how to include the more than 50 percent of Mexicans who work in the informal labor market, and who therefore face not a low replacement rate but a non-existent one.

Adding the aging Mexican population to the equation, Romero Lora believes that it would be necessary to increase the retirement age to 70, as well as increasing workers’ mandatory contributions. In the same vein, the contribution rate would have to rise, from 6.5 percent of an individual’s salary at present, to 16 percent — which is the average among the member countries of the Organization for Economic Cooperation and Development (OECD).

 

A global debate 

In recent decades, we have been observing a demographic pattern of increased life expectancy and reduced birth rates in societies around the world. This trend is reflected in the population pyramids of societies across the entire planet, which increasingly illustrate aging populations.

This phenomenon is reflected in many aspects of social and economic organization. Unfortunately, one of the areas most impacted by this is pension systems. “Longevity, together with the materialization of other economic and financial risks, has had a significant effect on pension spending, and there is an evident need to continue adjusting these systems to make them sustainable in the long-term and, in so doing, preserve one of the most important pillars of social organization today,” outlines the Pension Systems report by MAPFRE Economics.

Among the measures recommended by the report are:

  • Incentives for voluntary savings, and greater transparency toward workers regarding the calculation of their pension entitlement
  • Tax incentives for businesses
  • Regulation and establishment of bodies to support transparency in resource payment and administration
  • Incorporation of technology and of organizations that facilitate voluntary contributions and advice