NCPA - National Center for Policy Analysis

Privatized Social Security Popular in Mexico

June 11, 1999

Two years ago Mexico did away with its nearly bankrupt social security system and replaced it with investment accounts similar to 401(k) plans in the United States. Observers say the private pensions are popular and have spread the benefits of financial investment to millions. And that new pension management companies should eventually pay better pensions than today's retirees resceive under the old pay-as-you-go system -- where 90 percent receive a pension equivalent to the minimum wage of about $75 a month.

  • Today in Mexico, more than a dozen pension management companies called Afores manage the retirement savings of 14 million people, already worth some $7.5 billion.
  • The Afores, owned by financial groups and insurance companies, could be managing nearly $140 billion by 2015, says Salomon Smith Barney.
  • In 1998, investments earned an average real return of more than 6 percent after commissions.
  • As a result, savings in Mexico have risen from 16 percent of gross domestic product to about 20 percent.

Workers deposit 11.5 percent of their salaries in their Afore accounts, and the government and employers deposit an additional 2 percent.

While investments are now restricted to Mexican securities, experts say benefits under the private system will eventually be greter, particularly if the government liberalizes investment rules. Moreover, voluntary contributions to special accounts that exist alongside the mandatory ones are up more than 40 percent this year.

Seven Latin American countries have privatized their public pension systems since Chile pioneered the process in 1981.

Source: Brendan M. Case, "Financial Revolution," Dallas Morning News, June 6, 1999.

 

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