Mexico: Reforms to the Mandatory Account Individual Account Program

Submitted by mmarquez on Thu, 02/25/2021 - 10:34

Social Security Association (25.02.2021) On January 1, Mexico's government implemented reforms to the country's mandatory individual account pension program that include increasing employer contributions, adjusting government contributions, reducing the minimum contributions required for an old-age pension, boosting the guaranteed minimum pension, and capping administrative fees. The government finalized the changes on December 16, 2020, after reaching a reform agreement with Mexico's largest private-sector employer and trade union associations in July 2020. The reforms are intended to increase participation in the individual account program—particularly among lower income workers—by improving the adequacy of old-age pensions provided by the program. The government estimates that the reforms will increase future pensions by an average of 40 percent. (The pension increase could be as high as 103 percent for lifelong minimum-wage workers.)

The key provisions of the reform law—effective January 1 unless otherwise noted—include: Increasing employer contributions: Starting in 2023, employer contributions for the individual account old-age pension will increase for all employees earning more than the minimum wage. (The legal daily minimum wage is currently 141.70 pesos [US$6.98]; 213.39 pesos [US$10.52] in certain northern border areas.) This will be facilitated by replacing the current fixed employer contribution rate with one that increases with an employee's average daily earnings based on 8 salary bands. From 2023 to 2030, the contribution rates for the highest 7 salary bands will gradually increase from the current rate of 5.15 percent of daily covered payroll until they range from 6.202 percent to 13.875 percent. The contribution rate for the lowest salary band (the legal monthly minimum wage) will remain at the current rate. (The employee contribution rate will remain unchanged at 1.125 percent of daily covered earnings.) Adjusting government contributions: Starting in 2023, the government's contributions for the individual account old-age pension will be targeted more at lower income workers. Currently, the government contributes 0.225 percent of daily covered earnings for all workers plus a fixed daily amount of up to 6.09312 pesos (US$0.30) for workers with average daily earnings up to 15 Units of Measure and Adjustment (Unidad de Medida y Actualización, or UMA; the daily UMA is currently equal to 89.62 pesos [US$4.42]). Under the new rules, the 0.225-percent contribution will be eliminated, the maximum fixed daily amount will increase to 10.75 pesos (US$0.53), and only workers with earnings up to 4 UMAs will receive the subsidy. In addition, the government will pay a fixed daily amount of up to 2.45 pesos (US$0.12) for workers with earnings from 4.01 UMAs to 7.09 UMAs for 2023 only. Reducing required minimum contributions: The minimum weeks of contributions needed to qualify for an old-age pension decreased from 1,250 to 750. Starting in 2022, the minimum weeks of contributions will increase by 25 weeks a year until reaching 1,000 weeks in 2031. Boosting the guaranteed minimum pension: The guaranteed minimum pension increased from 3,289 pesos (US$162.12) a month to an average of 4,345 pesos (US$214.17) a month. The actual amount paid under the new rules ranges from 2,622 pesos (US$129.24) a month to 8,241 pesos (US$406.21) a month, depending on the insured person's age at retirement, contribution record, and average covered lifetime earnings. The guaranteed minimum pension amounts will be adjusted each February based on changes in Mexico's national consumer price index. Capping administrative fees: Starting in 2022, the fees charged by pension fund management companies (Administradoras de Fondos para el Retiro) for administering the individual account program cannot exceed a limit based on the average administrative fees for defined contribution pension programs in Chile, Colombia, and the United States. Once it is set, this new administrative fee cap can never increase, even if the peer-country average later rises. The National Commission for the Retirement Savings System (Comisión Nacional del Sistema de Ahorro para el Retiro) is required to review the fee cap annually and make downward adjustments as needed.

Mexico's old-age pension system consists of the mandatory individual account program, a legacy social insurance program, and a universal program. Both the individual account and social insurance programs cover private-sector employees and cooperative members, but the social insurance program was closed to new enrollees on July 1, 1997, when the individual account program was introduced. (Individuals who were covered by the social insurance program before this date can choose to receive a social insurance old-age pension at retirement.) The normal retirement age for the individual account and social insurance programs is 65. (Early retirement is possible under the individual account program.) The universal program covers all residents of Mexico and can be claimed at age 65 (for indigenous persons) or age 68 (for other covered individuals).

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