How to Best Address Afores’ Much Needed Reform?

President Andrés Manuel López Obrador’s intended changes to Mexico’s pension system, known as Afores, have been roundly criticized by political opposition as dangerous and without a plan, reports Reforma.

The president’s reform plan has been somewhat thin on details and most attention has been given to his public denunciation of the system as “neoliberal.” But the president’s concerns that workers retiring between 2021 and 2024, the first generation to put money into Afores, will receive less than the money they put in, he says, highlights an underlying problem.

While this claim is disputed, it is clear that savings in the Afores funds, which currently stand at around US$249 billion and equivalent to around 15.5 percent of the country’s GDP, will not be sufficient to finance the post-work lives of this retiring generation. According to Grupo Financiero BASE, the average pension that this first generation has saved is between 20 percent and 40 percent of their salaries for the last five years of their working lives.

Grupo Finaciero BASE says that there certainly are problems with the Afores system which should be resolved. One of the improvements President López Obrador is intending to make, via the Retirement Savings Systems (SAR) Law, is to the administration fees of each individual Afore fund. At the moment, administration fees are fixed at a price regardless of the amount in the individual’s account, or the yields they are receiving. Yields have been falling iver the last few years, meaning retirees are receiving less on their retirement investment. With the law change, fees would be based on the value of the assets in the individual’s fund, thus helping soon-to-be pensioners with smaller savings from higher fees.

Other experts believe that regardless of changes to the law, Afores will continue to be insufficient for retiring workers without cooperation from several sides, including the government.

The President of the Mexican Association of Afores (AMAFORE) President Bernardo González told Mexico Business News last month that a reform to the system is needed, including increasing the minimum mandatory savings. However, education on how Afores function must also be improved.

“The challenge is related to misinformation. Mexican workers have several misconceptions about Afores,” he said. “We have been promoting a reform to the system and the laws overseeing the industry because the parameters that determine a worker’s pension, that is the mandatory contribution and the weeks required to access a pension, do not represent the current reality.”

In contrast to President López Obrador, González highlighted the role of the private sector in contributing the most to workers’ pensions.

“When it comes to increasing workers’ mandatory savings, there is resistance from several actors. The first is the unions that say workers earn very little and that they cannot provide more money from their wages for long-term savings. The government says that it cannot contribute more to workers’ savings since it has several budgetary pressures. Businesses tend to contribute the most to workers’ savings,” said the director.

The Afores issue has become more complicated after the leader of MORENA in the Chamber of Deputies, Mario Delgado, recently presented an initiative involving the Afores to help those who had lost their jobs in the ongoing COVID-19 crisis. The suggestion was to allow workers to withdraw up to MX$13,300 (US$606.8) from their pension plans to help sustain themselves and their families during this difficult period.

Delgado rejected criticisms of his initiative, telling Expansión that the withdrawals would have an impact on the amount saved in an individual’s pension but not on the pension in general as the amount most people have saved, between MX$50,000 (US$2,300) and MX$70,000 (US$3,200) is too little to sustain them throughout their retirement.

As reported by Mexico Business News last week, Senior Specialist in Labor Markets and Social Security at the IDB David Kaplan tweeted that allowing access to pension funds should be “a tool of last resort” in times of crisis.