1 Coverage Expansion in the Informal Sector A Mexican approach Bangkok, November, 2006 National Commission for the Retirement Savings System

2 The Mexican Pension System Foundations of informal sector in Mexico Oportunidades and focus on extreme poverty population MAROP Program Pension System Infrastructure MAROP Operations Challenges Contents

3 In 1997, the reform of the old PAYG system was imperative Rapidly ageing population. Increasing dependency ratio. Resources were placed into a general pool of funds. Pension funds were not inheritable. Use of pension resources for other ends (not reserves). Partial contributory periods meant no pension (existence of cross subsidies against low income earners and women). Pension rights were lost when workers moved out of the sector covered by the pension scheme. Absence of alternatives translated into poor quality services. Although there was a minimum pension, it was financed with contributions taken from workers than did not complete the minimum contributory period. No Property Rights Lack of Mobility Unique fund manager “Regressive” Solidarity Rising fiscal cost

Individual capitalization accounts. Minimum pension guaranteed by the State. Specialized Private Pension Funds Managers (Afores) and institutional investors (Siefores). Centralized processes in a private entity (Procesar): collection, transfers, and withdrawals. Specialized regulation and supervisory entity (Consar). Main features of the Reform 4 Fully funded system based on Industrial Organization Role for the Authority

5 However, the pension reform focused on Private sector workers and to date the bridge between the different Pension System remains to be the Individual Account Informal sector workers Defined- contribution system Private sector workers IMSS Defined-benefit pay-as-you-go system Public sector workers ISSSTE Public sector workers ISSSTE Voluntary saving in individual accounts One Individual Account

6 Private sector workers are affiliated to the Social Security Institute (IMSS) IMSS provides coverage for Accidents or injuries at work, Disease and maternity, Disability, Child-care services, and Old age retirement. Old age retirement insuranceOld age retirement insurance: The 1997 reform substituted a DB pay-as-you-go system with a fully funded DC system based on individual accounts, with provisions for those who contributed before the reform (the transition generation). AforesIndividual accounts are managed by specialized pension fund managers, Afores. minimum pension guaranteeThe government provides a minimum pension guarantee. voluntary contributionsThe new law considers the possibility of voluntary contributions. Contributions for all the other services are still managed by the government through IMSS. Worker1.125%*W Employer5.15%*W Government.225%*W + 5.5%*Minimum wage Total6.5%*W + Social contribution + 5%*W Housing Fund

7 ISSSTE provides similar services to employees of the government complementary defined-contribution systemWorkers in the public sector contribute to a defined-benefit system with a complementary defined-contribution system: banksComplementary contributions are managed by banks through individual accounts. AforeWorkers can transfer their complementary contributions so they can be managed by an Afore. This allows them to make additional voluntary deposits to their individual accounts. Defined-benefit pay- as-you-go system 7%*W Complementary contributions 2%*W The installed infrastructure will facilitate the transition to a DC system based on individual accounts managed by Afores New

8 tax-deductibleVoluntary contributions are tax-deductible. defer taxesIf contributions remain in the account for at least 5 years, they can be used to defer taxes. proof of income mortgageRegular voluntary saving serves as proof of income to qualify for a mortgage. consumption creditsVoluntary contributions can also improve the conditions on consumption credits: the credit term increases in up to 12 months. Informal sector workers can make voluntary deposits in an individual account in an Afore Up to US$8,000 Up to US$15,000 New

9 Population in extreme poverty, however, require a focused effort. Oportunidades is the ideal candidate to assess such an effort Oportunidades dispenses money directly to poor households. conditioned on specific patterns of behaviorCash transfers are conditioned on specific patterns of behavior: recipient families must invest in their own nutrition, health, and education. bank depositsThe money is delivered through paychecks or bank deposits. Families5 million Population25 million Maximum monetary transfer per household $1,500 pesos per month People over 70 years old1 million* * About 25% of the total Mexican population over 70 years old

10 Pillar 0 (AAM) Cash transfer per every adult over 70 years old enrolled in Oportunidades: $250 pesos per month The government designed a pension saving scheme for beneficiaries of Oportunidades: MAROP MAROPMAROP individual account in an AforeVoluntary deposits in an individual account in an Afore for members of the beneficiary family between 30 and 69 years old: $1 peso for every peso savedGovernment provides $1 peso for every peso saved (social incentive). formal sectorIf the beneficiary obtains a job in the formal sector, the social incentive is suspended. $20, $30 ó $50 pesos per month * * Capped at $180 pesos per month per family. These funds are deducted from Oportunidades subsidy, i.e. the beneficiary decides to save these funds New

11 The mechanism is designed to prevent incentives to informality BenefitsAAM/ MAROPFormal sector Social contribution (pesos/month) $50$82.06 Pension 17% of minimum wage Minimum wage (minimum pension guarantee) Other servicesNone Disease and maternity insurance, child- care, etc. Employer contribution None5.15% Retirement age70 years old65 years old Contribution period40 years25 years

12 Mexican Pension System Infrastructure Government agencies Banks AFORES Formal Sector worker IMSS OR ISSSTE Electronic services Oportunidades Beneficiaries

13 To prevent duplicate government subsidies, a new operational framework was built to monitor whether the beneficiaries become part of the formal sector BDNSARBDNSAR MAROPDBMAROPDB Formal Sector worker IMSS OR ISSSTE Beneficiaries Procesar makes sure that any Oportunidades beneficiary who obtains a job in the formal sector is not granted two social contributions National ID Number is Crucial Central clearing house of the Mexican Pension System

14 National Pension System IMSS I N F O R M A L S E C T O R ISSSTE PRIVATE PENSION FUNDS Professional workers Temporal workers OportunidadesBeneficiaries

15 Oportunidades program enrolment operations Recollects request formats and validates essential information Beneficiaries voluntarily requests to make contributions Remote attention desks provide assistance and help establishing identity Validates that the beneficiary is identified in National DB National ID DB Validates that the beneficiary is not currently in the formal sector National ID DB Notifies results and adds beneficiary to the MAROP DB Notifies beneficiary the result of request and begins sending subsidy towards individual account MAROPDBMAROPDB

16 Oportunidades program operations Extreme Poverty AFORE opens MAROP Account Beneficiary starts at formal sector Beneficiary falls back to Oportunidades AFORE “mixed” account AFORE awards a pension Funds are automatically transferred to the same account as formal sector funds Notified to prevent double subsidy Oportunidades is notified to re-start social incentive Since beneficiary is working in formal sector, receives formal sector social contribution

17 Implementing a hybrid government subsidy program has several challenges birth certificatesMembers of beneficiary families do not have birth certificates, critical Given the individual account contributions, it is difficult to make it financially viable for an Afore to want to take on record keeping for oportunidades accounts Determining who is responsible to provide service to beneficiaries becomes less clear (Afores, Oportunidades?) What does working in the formal sector mean? What happens to employer who are late in contributions? Social Security contributions evasion? To continue in the saving scheme, it is imperative to comply with nutrition, education, and health requirements Higher operational costs