Pensions are an issue that worries all countries. According to the International Labor Office, around 90 percent of the world’s economically active population is not covered by pension programs that provide them with a sufficient income upon retirement.
In the case of the countries of the Organization for Economic Cooperation and Development (OECD), especially in North America, Western Europe, Japan and Australia, the coverage of pension schemes is almost universal and the programs are well administered; however, financing problems will arise as the number of elderly increases.
In many cases, people gather few resources for their retirement, so the pensions they obtain are not enough to cover their needs. Photo: Pixabay.
In Mexico, the Consar distinguishes as the main objective of the pension system to provide economic security to the pensioner and provide an income for the rest of his life. There are also other social objectives such as: alleviating the economic conditions of the elderly, expanding the coverage of the pension system as much as possible, balancing the conditions of the generations, promoting a fair distribution of public resources for pensions and promoting gender equality.
It is not possible to speak of the existence of an optimal pension system, according to the situation of each country, but some principles can increase its efficiency.
The Consar points out these main sources of pensions in Mexico:
The old Defined Benefit schemes in which the generation that traded since before the IMSS, ISSSTE, Pemex and CFE reforms has participated. The Retirement Savings System (SAR). Support from non-contributory programs (« 65 y más » and state programs).
Furthermore, it recognizes that there is no confluence of these mechanisms, so there may be duplications and inefficiency. These are the ten points that a good pension system must meet in a country.
1. Pensioners protected with basic levels
In many cases, people gather few resources for their retirement, so the pensions they obtain are not enough to cover their needs. This makes it necessary for the pension system to have a mechanism that provides protection to the most vulnerable elderly. These resources depend on public finances and are extracted from taxes, ideally they cover the minimum levels of well-being.
2. System coverage
The pension system should cover the largest number of people. Like many countries, Mexico’s pension system is linked to the labor market. What reduces the coverage of the pension scheme is the informality of labor relations. To compensate for this situation, participation in the schemes should be encouraged and one way in which these incentives are applied in Mexico is with the Modality 40 scheme, which allows workers to increase, through voluntary contributions, the amount of the base contribution salary.
3. Equality between generations
Regarding pensions, equality or equity between generations is a challenge and pension systems should grant the same benefits to all pensioners, regardless of the generation to which they belong. Any possibility of transferring the pyramid savings scheme to the pension system must be avoided; In other words, the young people who make their contributions must be guaranteed the receipt of their pension.
4. Financial support of the system
As the population pyramid is inverted, there are fewer and fewer active workers compared to the number of retired workers, now there are 3 or 4 active workers for one pensioner, which implies a significant increase in government contributions to cover the expense.
5. Sufficient pension amount
The main thing for the pension funds to be sufficient is that the accumulated amounts guarantee that sufficiency. However, the aspect that has the greatest impact on this is the amount of savings that enters the account, the fund or the system.
6. Progressivity and solidarity in pensions
In most countries, governments subsidize pensions. Ideally, the subsidies should go to lower-income workers. Achieving this is very complex since those who receive or received the highest income are the ones who contribute the most, which is why they turn out to be the beneficiaries of the subsidies.
7. Appropriate decision making regarding pensions
When retirement approaches, people do not necessarily make good decisions regarding the age at which they retire, saving, their investments, their pension fund. These issues, as if they were very complex, are postponed or ignored. For this reason, pension systems have developed mechanisms that induce the participation of pensioners to make these decisions.
8. Low cost in managing pensions
The workers who make their contributions to the pension system do so for 40 or 45 years, this makes them increasingly aware of the costs of managing these resources.
The State must intervene to find a balance between what the worker contributes and the costs involved in managing the pension fund. It is difficult to reduce commissions.
9. Lack of adequate incentives in the pension system
It could be assumed that the pension system has incentives for workers to participate in each phase of the process: contributions, savings, choosing the date of retirement and retirement, that happens.
There should also be mechanisms that achieve a balanced return with lower risks, and report on the performance of resources. For this, public policies, regulation and economic policy must be linked and kept aligned to the achievement of a common objective.
10. Connection between the pillars of the pension system
There must be provisions to mitigate the risks that arise. This can be achieved with an integrated pension system.
Consar points out that a recommendation from the World Bank and the OECD is that there be mixed pension schemes, in which the public and private sectors participate. An example is that the objective of alleviating poverty in old age corresponds to the public sector and the balance in consumption to the private sector.
Consar affirms that Mexico’s pension scheme has positive features: it has a platform to save through the SAR, with a population that has saved a significant amount in the Afore and a stable environment.
But if these positive aspects are contrasted with the ideal pension scheme, Mexico has areas of opportunity and changes must be made so that in the future, demographic and pension challenges are adequately faced.
More information in our Retirement Section.