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Privatizing Social Security in Latin America
January 1999
Reform In Mexico
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"Launched in February of 1997, the new Mexican system is already the largest in Latin America."
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Launched in February of 1997, the new Mexican pension system is already the largest in Latin America, thanks to the size of the country, the large-scale transition plan and the reach of the new program. All of the country's private-sector employees are required to contribute to the private capitalization program, and by the end of 1997 Mexico's 17 Afores (the Mexican name for the private pension fund managers) had enrolled more than 10.5 million workers.21
The new system stipulates that when a worker reaches retirement age the amount accumulated in his or her individual retirement account will be calculated, as will the amount the worker would have been due from the Mexican Social Security Institute (IMSS), the agency in charge of the old social security system. If the latter amount is larger, the funds in the private account will pass to the IMSS, which will pay the pension. If the individual retirement account is larger, pension benefits will be paid out of it.
In all likelihood, in the first few years of operation the funds from the private accounts will not exceed IMSS benefits. But this will change as the private system accumulates funds over young employees' working lives.
In the private system, workers select the Afore they wish and can change their choice once a year. They pay a total premium of 9 percent, of which 6.5 percent goes to old-age benefits.
Like the Chilean system, Mexico's old-age benefits are payable as either life annuities or scheduled withdrawals. The government provides a minimum pension for the neediest workers, equal to the minimum wage, and collects payments into all funds through its centralized taxing authority (the only way in which the Mexican system mimics the Argentine model).
One unique aspect of the Mexican system is that disability and survivors benefits remain under management of the IMSS. The IMSS charges a premium of 2.5 percent of workers' pay for the service, a high rate that helps to finance the overall transition to the reformed social security system. Another unique aspect of Mexico's system is that no one of the Afores can hold a market share of more than 17 percent.
Reform in El Salvador
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"Before the reform in Uruguay, more than one-third of all government spending was for pensions." |
El Salvador's National Assembly approved a complete reform of that nation's social security system in late 1996. Based on Chile's model, the reforms created a wholly private system. Private fund management companies were created to oversee the funds of workers who choose to shift to the new system. The government's participation is limited to providing a minimum pension for the most impoverished and creating an oversight agency for the private funds.
El Salvador's policymakers, like Chile's, were clear in their design of the new system: once the new program is fully implemented, the old, state-run system will not accept new workers.