Retirement Support in Mexico

1
Retirement Support in Mexico

• Presented by Kylie Stannard
• and Danielle Dugan

2
Country Facts

• 1999 estimated population 100,294,036
• Avg. annual rate of natural increase 2.02
• Largest city (Mexico City) nearly 17 million
  (metro area only)
• Literacy rate 87
• Economic Summary
• 1997 GDP 694.3 billion 7,700 per capita
• Inflation rate 15.7
• Unemployment 3.7 urban, considerable
  underemployment

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AFORE--What it is.

• AFORE-(english) Administration of Funds for
  Retirement.
• New, privatized government-mandated retirement
  system.
• Introduced and effective July 1, 1997
• 6.5 of wages paid by employer
• Government contributes additional 5.5 of minimum
  salary for each worker.
• Funds are generated by individuals and from
  investment by the Afore.
• Largely based on Chilean model.

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Previous System (Current)

• IMSS (Mexican Social Security Institute)
• Unfair for low-income workers
• make up for 70-80 of contributions
• Pension payments almost identical for working
  entire life or the minimum of 10 years.
• Benefit based on salary of last 5 years.
• Contrasts Afore system
• workers that contribute longer or at a higher
  level, receive greater benefits.

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Priorities of Afore

• 1. To be actuarially solvent.
• Fully funded plan
• 2. Increase national saving rate.
• Will increase involuntary saving (Chile,
  Singapore)
• 3. Bring more long-term capital to market.
• Will lead to considerable securitization by
  bringing market depth.
• 4. Larger capitalization to stock market.

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Pros

• allows workers to control savings/investments
• promotes incentive to save
• More fairness
• workers who work more(higher level), receive
  greater benefits from those who dont
• Can change Afore
• Competition will keep commissions low

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Cons

• Creates confusion, lack of responsibility.
• Many uneducated do not understand system
• believe they can get away without saving
• Workers overwhelmed
• several different Afores trying to promote
  themselves
• Complicated commission structures.

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Why Afores Works Now

• Growing at 8 a month
• 97 of funds invested in fixed income government
  securities
• Interest rates are at a 4 year high

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The Current Problem with Afores

• Law demands limiting their investing to the
  Mexican debt
• 35 are bonds issued by private pre approved
  companies
• 10 of funds may be invested in foreign-currency
  denominated debt
• 55 is the minimum investment in government
  securities
• Fund managers have been so cautious they are
  investing 97 in government securities

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Why is this a problem?

• Mexican markets tend to nosedive every six years
• In July 2000 one of the two main opposition
  parties could displace the ruling of Partido
  Revolucionario Institutional for the first time
  in 70 years

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The Future of Afores

• Shifting pension assets into domestic equities
  could boost the stock market
• It would also reduce a convenient source of
  funding for countrys 4 to 5 billion deficit
• Domestic Equity wont be permitted until 2001
• 3 years after that investments can be made abroad

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