Pursue your passion, not your pension.Denis Waitley
A few days ago the President presented an initiative to reform the pension system in Mexico. Various demographic, technological and social factors are creating an unprecedented crisis in pension systems around the world. This is a time bomb that, if left unattended, can create major economic problems with serious implications for the world’s most important economies.
The reform initiative contemplates three important changes to the current system: First, employer contributions are gradually increased from 5.15% to 13.875% of salary over a period of 8 years. Second, the contribution weeks are reduced from 1,250 (24 years) to 750 (14 years). Third, the Guaranteed Minimum Pension is raised. It is encouraging that the Mexican government has taken a proactive approach to try to solve the problem. However, we are far from defusing the time bomb. In my opinion, the reasons why our system – along with many other pension systems in the world – are broken and probably will never be fixed are the following:
- Mexico is a low-wage country, and therefore there is very little income that families can direct to savings, much less to long-term savings. Good pensions start with good wages, and good wages are not achieved by decree, but are the result of an entire complex ecosystem in balance: Health, education, rule of law, macroeconomic stability, public and private investment, efficient tax system, transparency, etc.
- Mexico is a country with high informality, so the current pension system leaves out the millions of Mexicans who work in this sector. An unintended result of the reform presented is that the informality could end up being encouraged by increasing the employment cost for the employer. Rather, we would have to rethink how to “facilitate” formality, so that we could integrate the informal into the fiscal, health, and pension systems.
- It is not enough to save for retirement, but you must also know how to invest what you have saved. One of the main allies of a worker in the construction of retirement savings is precisely time. Having a horizon of 20, 30 or 40 years allows you to benefit from the reinvestment of income and enjoy the magical effect of compound interest. The current Afores system is very good because it allows the worker to invest in shares of certain companies that may have significant growth potential. Ask any American: There is no better retirement strategy than having invested in Microsoft, Amazon or Apple in its early years.
- The retirement age. In this sense, I consider that it is a terrible mistake of the reform to reduce the weeks of contribution. On the contrary, the retirement age has to be raised for multiple reasons, among others, because as people we are living more years, because the productive age does not end as if by magic when we turn 60, and because today those who want to remain active after retirement age often have to do it informally, instead of continuing to contribute and strengthen the system. A curious fact: When the first pension systems were designed in the early 20th century, the retirement age was set at 60, just at a time when the average life span of people was 40 years. In other words, the system worked because there were really very few who were going to collect that pension. If we extrapolate that scenario, today our age to receive the pension would be around 75 or 80 years.
So much uncertainty exists today about the rule of law in Mexico, that the greatest benefit of the proposed reform was to remove from the table the possibility that someone would propose to nationalize the Afores along with their considerable financial assets. I reiterate that it is very good that changes to the system are proposed, but I am not optimistic about the financial viability of this system in the long term. Ultimately what we need is for people to earn more so they can save and invest more. People who stay active longer simply because we are living longer. And people with enough financial education so they become the architects and directors of their own retirement plans.
Managing Partner of Nuricumbo + Partners. His work as a consultant has focused around CFO services and challenges, in companies of all sizes, both in Mexico and abroad. He began his career at PWC. Later, he held the position of internal audit manager for Young & Rubicam and The Interpublic Group, two international advertising groups, working for five years in New York City and performing audit projects in many countries.