Shannon K. O'Neil

Latin America's Moment

O'Neil analyzes developments in Latin America and U.S. relations in the region.

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Mexico's Social Security reform

by Shannon K. O'Neil
April 2, 2007

Mexico finally passed a reform of its public sector workers’ social security system, the ISSSTE system. This system covers 3 million people, or roughly 10% of the insured population in Mexico.

Calderon, unlike Fox or even Zedillo before him, was able to cobble together a coalition of support with for the initiative, including many members of the PRI as well as the deputies of the New Alliance party, headed by former PRI heavy weight and powerful leader of the teacher’s union Elba Ester Gordillo. Gordillo was a key figure in the success of this reform as teachers comprise half of ISSSTE’s clientele.

The successful reform represents nothing new in terms of design. All the main elements of the new system – including the creation of individual worker savings accounts, of a publicly managed pension fund manager (named the PENSIONISSSTE), and the payment of recognition bonds for previous contributions to the ISSSTE system were elaborated years ago by the Finance Ministry. What the current success (versus previous failures) shows is Calderon’s political acumen negotiating with Congress as well as the close working relationship he has with many in the PRI. This bodes well for future reforms, in particular the Reform of the State that is now on the table.

In the short term, the ISSSTE reform will not significantly affect Mexico’s finances. If anything, it makes apparent the medium to long-term state obligations to public workers. All those currently in the ISSSTE system will be given generous bonds for previous contributions, guaranteeing high retirement pensions under the new individual system. But in the long term, this reform will link future benefits to the amount of individual savings and accumulation. This change will encourage future public employees to work longer in order to accumulate the funds necessary for an adequate pension. The current average 54 year old retirement age will undoubtedly increase, even without the new minimum ages also incorporated into the law. Now, with this reform finally behind the government, perhaps the Mexican government can address the real retirement problem—which is the half of Mexico’s population remaining outside of any social security system.

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