Faced with the pension transitions that the states will undergo in the following years, the Inter-American Development Bank (IDB) proposed to the Ministry of Finance and Public Credit (SHCP) the creation of a bond that allows its financing.
According to an IDB analysis, carrying out future reforms to the 41 state pension systems will generate significant financing challenges for each of them in the following decades, which will require fiscal adjustments and financing alternatives.
“Financing alternatives” will demand innovative financial schemes that allow creating the necessary incentives for a good management of pension liabilities, “said the IDB.
Therefore, one of the alternatives that the IDB evaluated is the issuance of zero coupon bonds, similar to Brady bonds, which are a financial instrument issued by emerging countries to restructure their debt with foreign commercial banks.
(The bonds) would help state governments finance their transition, maintaining the transparency of pension liabilities and obtaining financing with attractive costs, ”the IDB project pointed out.
The document mentions that the profile of the instrument to finance transitions was delivered on October 31 to the Ministry of Finance, but the agency in charge of Rogelio Ramírez de la O replied that “it has no plans to issue this type of bonds.”
It should be noted that the IDB’s suggestion comes after, in January, the SHCP itself asked the multilateral body for a Non-Responsible Technical Cooperation to support the National Commission of the Retirement Savings System (Consar) in determining the maximum limit of the commissions charged by the Afores.
In total, the cooperation is for 150,000 dollars and its objective is to support the Mexican authorities to improve the functioning of various financial and institutional mechanisms of the pension systems in Mexico, including the commission scheme within the defined contribution system, analysis of alternatives for financing state public schemes, as well as alternatives to improve the interoperability of the existing state systems in the country ”, explained the international financial organization.
Reform did not include measures for the states
The IDB project document highlights that last year, in Mexico a pension reform was approved, which lowered the threshold of workers’ contribution weeks, in addition to increasing retirement contributions and expanding the minimum benefits obtained by Workers.
The contribution weeks were reduced from 1,250 to 750 weeks, while from 2023 the contribution of workers will go from 6.5 to 15%, in addition to increasing the minimum guaranteed pension.
However, the IDB noted that the reform did not include measures for the pension systems of subnational governments to be consolidated with the national system, even though most of them face a complex financial situation.
“In the case of state pension systems, the federal government has increased its funding and it is very likely that it will continue to do so in the years to come. This distribution of resources will require clear and consistent information that allows dimensioning the size of pension liabilities in this area. The heterogeneity of the systems and the financial conditions they face require differentiated support in each case ”, it can be read in the document.
Challenges
In general, the IDB analysis agrees with several studies that have been carried out in other institutions and organizations, which indicate that the population that entered the labor market as of 1997 will have difficulties accessing a decent pension.
“The Mexican pension system faces very important challenges given the rapid demographic aging, the characteristics of the Mexican labor market and the deficiencies of the institutional design of the pension systems that coexist today. Mexico is immersed in a demographic transition characterized by accelerated aging, “said the IDB.
In this sense, he calculated that the percentage of the population over 65 years of age will go from 10 to 20% of the total between 2030 and 2050, which generates the urgency of having the necessary resources to face the demand for pensions in the future.
“The main shortcomings that would prevent more people from having a pension at the time of retirement would fundamentally be a high threshold of the requirements to obtain a pension, such as insufficient savings to be able to finance a pension. Likewise, the lack of coordination of the mechanisms to complement pensions between existing systems ”.
Reference-www.eleconomista.com.mx