Background on the ISSSTE and Afore Systems
The Coordinadora Nacional de Trabajadores de la Educación (CNTE) is demanding the removal of the 2007 reform to the Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado (ISSSTE) law. However, Jorge Cano, Coordinator of the Public Spending Program at Mexico Evalúa, argues that this demand is financially unsustainable.
Understanding ISSSTE and Afore
Before the 2007 reform, ISSSTE pensions were based on a defined-benefit model, where retirement pay was guaranteed by the state through taxes from contributors. With the reform, those who started contributing to ISSSTE after 2007 gained access to Administradoras de Fondos para el Retiro (Afores), which manage individual retirement funds.
Fiscal Implications of CNTE’s Demand
Cano explains that reverting to the old system would put significant financial strain on public finances. He highlights that, as of 2024, pension expenditures for ISSSTE contributors before 2007 and IMSS contributors before 1997 amounted to 4.3% of the Gross Domestic Product (GDP). Including assisted pensions, the total expenditure reached 5.7% of GDP.
To put this into perspective, Cano notes that these pension costs are more than double the budget allocated to education (around 3% of GDP) and healthcare (approximately 2.7% of GDP). Moreover, pension spending is nearly equivalent to the total Value Added Tax (IVA) revenue.
Social and Fiscal Impacts
Cano emphasizes that the government would face substantial financial pressure to guarantee pension payments again. This would inevitably lead to budget cuts in other crucial areas like healthcare, education, or security. Such a shift would have significant social implications, as pension cost increases have historically stalled or reduced other important expenditures.
Alternative Solutions
Cano suggests two potential solutions: either substantially increase taxes or accept the current contributory pension system’s slower growth rate since the Afore transition.
Pension Age and Macroeconomic Conditions
Cano also points out that freezing the retirement age at 58 for ISSSTE contributors would strain public finances, as it implies paying pensions for more years. Given Mexico’s average life expectancy of 76 years, this would result in extended pension payments.
Furthermore, this change would exacerbate inequality, as state employees’ pensions would surpass those of others, including informal sector workers who only have access to the Bienestar pension.
Expert Opinions on Future Pension Costs
Francisco Miguel Aguirre Villarreal, an actuary and expert in pension systems, projects that ISSSTE pension spending will reach 401,730 million pesos in 2025, increasing to 431,340 million pesos by 2030, and 449,720 million pesos by 2040.
However, by 2050, when pension system reforms take effect, the projected expenditure is expected to decrease to around 358,320 million pesos (based on 2023 figures) and further down to 213,520 million pesos by 2060.
Key Questions and Answers
- What is the CNTE demanding? The CNTE is demanding the removal of the 2007 reform to the ISSSTE law.
- Why is this demand financially unsustainable? Reverting to the old system would put significant financial strain on public finances and inevitably lead to budget cuts in other crucial areas.
- What are the alternatives to address pension costs? Either substantially increase taxes or accept the current contributory pension system’s slower growth rate since the Afore transition.
- What are the projected pension costs in the future? According to actuary Francisco Miguel Aguirre Villarreal, ISSSTE pension spending is expected to reach 401,730 million pesos in 2025, increasing to 431,340 million pesos by 2030, and 449,720 million pesos by 2040. By 2050, the projected expenditure is expected to decrease to around 358,320 million pesos (based on 2023 figures) and further down to 213,520 million pesos by 2060.
