The challenge of Pensions and a More Inclusive Labour Market in mexico Mexico, 12th March 2018 The challenge of Pensions and a More Inclusive Labour Market in mexico Monika Queisser, OECD-ELS Senior Counsellor, Head of Social Policy Division @OECD_Social

Mexico’s labour market has recovered relatively well from the crisis Mexico's labour market has put the severe cyclical downturn that had followed the global financial and economic crisis well behind. The unemployment rate has fully recovered from the impact of the crisis, standing at 3.4% at its latest reading and therefore somewhat below the rate at the onset of the crisis in 2007 (Figure 6.1). This is 2.5 percentage points lower than in the OECD on average and the fourth lowest rate among the 35 OECD countries. The recovery has been somewhat slower in terms of employment rates, which are still half a percentage point below where they were before the crisis. This reflects a decline in the labour force participation of youth and, to a lesser extent, of older workers. Over the next two years, employment and unemployment are projected to stay broadly stable.

Informality remains high…

… and the risk of informal employment varies considerably by the socio-demographic background

Social spending in Mexico remains inadequate to tackle poverty Note: Public social expenditure refers to benefits with a social purpose including the following policy areas: old age, survivors, incapacity-related benefits, health, family, active labour market programmes, unemployment, housing and other social policy areas. This does not include education related expenditure. Estimates for 2016. Data for Mexico, Chile refer to 2015, 2014 for Costa Rica, 2013 for Colombia, 2010 for Brazil. Latest data for Mexico and Costa Rica are based on ECLAC. Data for Chile are not comparable overtime due to a break in series in 2005.

Future pension net replacement rates for average earners are one of the lowest of OECD countries Net replacement rate for mandatory scheme. Does not include the housing supplement which Mexico would like added to the calculation. This would increase the level by around 50%. Source: Pensions at a Glance 2017

Challenges for pension policy Transition process from old to new pension system The level of mandatory contributions Old-age safety net The fragmentation of the pension system Other issues Regulatory framework Low density of contributions The transition process from the old to the new system needs to be smoothed to avoid disillusionment and opposition to the new system One of the main challenges facing the Mexican pension system does not come from the DC system of individual accounts per se, but rather from the transition process from the old defined benefit (DB) pay-as-you-go (PAYG) system to the new funded DC system. This transition process establishes that all individuals who were working or had contributed to the system at the time of the reform, retain the right to choose upon retirement whether their pension benefits are calculated based on the formula of the old DB system or based on the value of the assets accumulated in their retirement account in the new DC system. As this reviews shows, the DB formula of the old system provides a pension benefit that is not fully backed by contributions. It is much larger than what the accumulated savings can grant. Therefore, an individual who worked and contributed to the pension system one month before the introduction of the new system will receive a pension benefit much larger than that for an individual who entered the system one month later, although both individuals contributed the same and have the same work experience. This difference will obviously lead to disillusionment and opposition to the new DC pension. The review proposes a pro-rata mechanism to address this problem. All the rights acquired by workers up to today would be guaranteed, and from tomorrow onwards all workers would accumulate pension assets in the new system. Therefore, the pension benefit of a transitional worker would have two components, one based on the rights acquired under the DB formula, and the other one based on the assets accumulated in the DC individual accounts. This would smooth the convergence from the old system (generous and financially unsustainable) to the new system (balanced and financially sustainable). Contributions to the system have to increase Contributions to the system are too low to guarantee pension benefits of more than 50% of final salary. According to OECD calculations, a contribution rate of 6.5% may lead, in the best case scenario, to a replacement rate of only 26% for the average worker. This low replacement rate is mostly the result of the low mandatory contribution rate. As this review shows, a 50% replacement rate can be achieved with a 75% to 90% probability by contributing on average 13% to 18% over 40 years. Therefore, the review recommends increasing the mandatory contribution rate, but gradually. This increase could be linked to salary increases in such a way that the worker would not suffer a reduction in disposable income. Improve the old-age safety net by integrating and expanding it Like all pension systems in OECD countries, the Mexican pension system has a noncontributory old-age social protection component for those individuals who, for various reasons, have been unable to accumulate enough rights or assets. This old-age safety net provides these individuals with a pension that puts them above a certain income threshold. The review proposes to increase the level of the non-contributory benefit in order to alleviate poverty in old-age. Moreover, it highlights the importance of improving the link between the non-contributory safety net (Pensión para Adultos Mayores) and the minimum guaranteed pension (Pensión Mínima Garantizada). It recommends, as well, improving the coordination of safety net programmes between different levels of government by conditioning part of the transfer to local governments on the adoption of the national scheme. Eliminate the fragmentation of the system Finally, the review recommends harmonising the rules for all pension plans, with the ultimate goal of establishing a truly national pension system equal for all Mexicans. This harmonisation should include the pension plans for private and public-sector workers, as well as the special regimes (for states, municipalities and universities, among others). Source: OECD Review of Mexico’s pension system 2015

To sum up… Mexico’s labour market has overcome the crisis well, both compared with Mexico’s situation in 2007 and the experience of the OECD as a whole. The labour market is, however, marked by pressing structural challenges: High levels of informality Poor quality jobs Insufficiently developed social protection system High levels of inequality continue to challenge Mexico. Past policies have begun to correct some of these trends, but much more needs to be done: to make the labour market and social protection system more inclusive and address pension challenges to speed up the reform process.

Monika.Queisser@oecd.org @OECD_Social Mexico, 12th March 2018 Muchas gracias Monika.Queisser@oecd.org @OECD_Social