The Challenge of Low Pension Contribution Rates in Mexico
In Mexico, approximately two out of every ten individuals with formal employment transition to informal work, unemployment, or leave the Economically Active Population (EAP) annually, resulting in a loss of pension contributions. This issue is highlighted by the study “Mexico, How Are We Doing with Retirement Savings?” which reveals that the Mexican population spends minimal time contributing to pension funds relative to their working hours.
Understanding Pension Contribution Density
Pension contribution density refers to the proportion of time a worker contributes to their pension in relation to their total working hours. In Mexico, the average contribution density for workers enrolled in the Instituto Mexicano del Seguro Social (IMSS) is 66.5%. This low density can be attributed to the fluctuation between formal and informal employment, as well as periods of stagnation or economic contraction.
Consequences of Informal Employment on Retirement Savings
Currently, 54.4% of workers in Mexico are engaged in informal employment, limiting their access to social security and retirement savings. This issue disproportionately affects women (54.9% vs. 53.9%) and results in only 42.2% of the population having a pension account, with a gender gap persisting at 51.4% of men versus 34.2% of women. The overall labor participation rate stands at 59.9%, with a significant disparity between men (75.3%) and women (46.4%).
Challenges Faced by Informal Workers in Retirement Savings
Informal workers face additional hurdles in saving for retirement, including the decision to save and trust in the financial system. These challenges include underestimating future importance, overcoming loss aversion, assuming retirement responsibility, and avoiding complex financial decisions.
Seven Keys to Boost Retirement Savings and Financial Inclusion
- Promote digital tools: User-friendly mobile applications and platforms.
- Automatic inclusion: Link processes like INE to the opening of digital pension accounts with incentives and financial education.
- Clear tax benefits: Communicate the advantages of formal pension schemes over informal ones (like tandas).
- Innovative financial education: Gamification, simulators, and behavioral counseling.
- Formalize informal savings: Integrate community schemes into the formal financial system via digital channels.
- Institutional trust: Improve communication, showcase results, and combat misinformation.
- Simplified processes: Intuitive, inclusive, and accessible procedures.
Structural Issues and Low Retirement Savings in Mexico
Low pension savings rates in Mexico are linked to structural labor market challenges. To increase the percentage of the population with retirement savings accounts, it is crucial to:
- Enhance women’s labor participation: Implement an Integral Care System, flexible contribution schemes, and digital products.
- Raise the formal employment rate: Develop policies that promote productivity, education, and combat informal labor.
