Mexico’s Aging Population and Pension Sustainability
Mexico is expected to experience a rapid demographic shift towards an aging population in the coming decades, presenting significant challenges for pension sustainability, according to Édgar Díaz Garcilazo, the executive board member of Afore PensionISSSTE.
Díaz Garcilazo warns that if workers do not contribute continuously or start saving in later stages of their lives, their resources may become insufficient to cover extended retirement periods. The current proportion of adults aged 60 and over, at 17 million (13% of the total population), is projected to rise to 15% by 2030 and 34% by 2070. Simultaneously, the Población Económicamente Activa (PEA) is expected to decrease substantially.
Adapting Pension Policy
To tackle these demographic changes, Díaz Garcilazo emphasizes that pension policies must anticipate the demographic shift by encouraging early and consistent contributions. He advocates for flexible, personalized schemes that cater to more diverse and less linear career paths than in the past.
Recent Reforms and Their Impact
During the previous six-year term, significant reforms were implemented to strengthen the Sistema de Ahorro para el Retiro (SAR) and benefit workers. These reforms included reducing the number of contribution weeks, increasing mandatory contributions, and lowering commissions. As a result, over 75,000 workers have obtained pensions with replacement rates exceeding 70% since January 2021.
However, Díaz Garcilazo acknowledges that challenges persist. The reforms effectively addressed the contribution structure, but the system needs to advance in promoting formal employment to broaden coverage and ensure more individuals accumulate the necessary weeks for retirement.
Key Areas for Improvement
When asked about other challenges facing the SAR and Afores, Díaz Garcilazo highlighted the need to improve account ownership. Only 42% of the population claims to have an individual account, with certain groups lagging behind, such as women and independent workers.
He also stressed the importance of enhancing knowledge and trust in Afores, promoting voluntary savings, and maintaining competitive yet sustainable returns. Furthermore, Díaz Garcilazo emphasized the necessity of strengthening portability and digitalizing processes, particularly those requiring physical worker presence or postal addresses.
Infrastructure Investment Opportunities
As the sole public Afore, Díaz Garcilazo explained that infrastructure investment is highly attractive, provided it’s done with technical criteria, transparency, and a long-term vision.
As of September, 10.5% of their total portfolio was invested in infrastructure, amounting to 55.8 billion pesos in alternative instruments like CKDs and Fibras.
Favorable conditions for private investment are being created through simplified procedures, tax incentives, and public-private partnerships aimed at accelerating project execution under the Plan México.
Afore PensionISSSTE Overview
Afore PensionISSSTE manages 2.5 million retirement savings accounts, with 531,019 billion pesos in assets, ranking it seventh and sixth in its respective categories according to the National Commission of the Retirement Savings System.
Although established for state workers contributing to ISSSTE, any worker (regardless of government employment) can open an account with PensionISSSTE.
Key Questions and Answers
- What are the main challenges facing Mexico’s pension system? Mexico is experiencing a rapid demographic shift towards an aging population, which poses significant challenges for pension sustainability. Early and continuous contributions are crucial to ensure sufficient resources for extended retirement periods.
- What recent reforms have been implemented to address these challenges? Reforms have strengthened the Sistema de Ahorro para el Retiro (SAR) by reducing contribution weeks, increasing mandatory contributions, and lowering commissions. These changes have benefited over 75,000 workers with pensions exceeding 70% replacement rates.
- What other areas need improvement in Mexico’s pension system? Key areas for improvement include enhancing account ownership, promoting voluntary savings and trust in Afores, maintaining competitive returns, and strengthening portability and digitalization of processes.
- Why is infrastructure investment attractive for Afore PensionISSSTE? As the sole public Afore, infrastructure investment is highly attractive when done with technical criteria, transparency, and a long-term vision. This investment strategy has 10.5% of their total portfolio allocated to infrastructure, amounting to 55.8 billion pesos.
