NCPA - National Center for Policy Analysis

PENSION DEFICIT DISORDER

March 26, 2007

Mexican President Felipe Calderón may be about to pocket a major legislative victory by transforming the pension system covering federal workers, says Mary Anastasia O'Grady (Wall Street Journal).

The catalyst for this reform is the grim outlook for Mexico's Institute of Social Security for Government Employees (Issste), which has become a ticking time bomb:

  • In 2000, Issste's pension deficit was 10 billion pesos ($909 million); this year the government has set aside 42 billion pesos to fill the gap.
  • By 2012 the shortfall is forecast to hit 77 billion pesos; according to the Finance Ministry, Issste's actuarial deficit in pensions is equal to over 50 percent of Mexican gross domestic product.

The centerpiece of Calderón's reform is the establishment of worker-owned, individual accounts, says O'Grady:

  • There are no changes for those already retired; current workers will have the choice of staying with the government's defined-benefit plan and accepting gradual increases in the retirement age, or migrating to the new individual account, defined-contribution system.
  • The plan gives those who migrate to the new system a bond, which represents their vested rights and which will be rolled over into their new individual account.
  • It is close to the Chilean pension reform in that new hires will not have the option of joining the old system; through attrition, all government employees will eventually be owners of their pensions.

One of the important but underplayed provisions of the bill is the change in portability. Under the old system, dissatisfied employees had the incentive to stay at their jobs even if they had an opportunity to do something more suitable in the private sector.  Under the new system, benefits become portable and employees are free to pursue career changes without penalty.

Source: Mary Anastasia O'Grady, "Pension Deficit Disorder," Wall Street Journal, March 26, 2007.

For text:

http://online.wsj.com/article/SB117486297199148376.html 

 

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