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Coverage Expansion in the Informal SectorA Mexican approach

Bangkok, November, 2006

National Commission for the Retirement Savings Systemwww.consar.gob.mx

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• 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

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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

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Fully funded system based on

Industrial Organization

Role for the Authority

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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

Informal sector workers

Defined-contribution

system

Private sector workers

IMSS

Private sector workers

IMSS

Defined-benefit pay-

as-you-go system

Public sector workersISSSTE

Public sector workersISSSTE

Voluntary saving in individual accounts

One IndividualAccount

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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).

• Individual accounts are managed by specialized pension fund managers, AforesAfores.

• The government provides a minimum pension guaranteeminimum pension guarantee.

• The new law considers the possibility of voluntary voluntary contributionscontributions.

• Contributions for all the other services are still managed by the government through IMSS.

Worker 1.125%*W

Employer 5.15%*W

Government

.225%*W + 5.5%*Minimum wage

Total 6.5%*W + Social contribution + 5%*W Housing Fund

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ISSSTE provides similar services to employees of the government

• Workers in the public sector contribute to a defined-benefit system with a complementary defined-complementary defined-contribution systemcontribution system:

• Complementary contributions are managed by banksbanks through individual accounts.

• Workers can transfer their complementary contributions so they can be managed by an AforeAfore.

• This allows them to make additional voluntary deposits to their individual accounts.

Defined-benefit pay-as-you-go

system7%*W

Complementary contributions

2%*W

The installed infrastructure will facilitate the transition to a DC system based on individual accounts managed

by Afores

The installed infrastructure will facilitate the transition to a DC system based on individual accounts managed

by Afores

New

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• Voluntary contributions are tax-deductibletax-deductible.

• If contributions remain in the account for at least 5 years, they can be used to defer taxesdefer taxes.

• Regular voluntary saving serves as proof of proof of incomeincome to qualify for a mortgagemortgage.

• Voluntary contributions can also improve the conditions on consumption creditsconsumption 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$8,000

Up to US$15,000

Up to US$15,000

New

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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.

• Cash transfers are conditioned on specific conditioned on specific patterns of behaviorpatterns of behavior: recipient families must invest in their own nutrition, health, and education.

• The money is delivered through paychecks or bank depositsbank deposits.

Families 5 million

Population 25 million

Maximum monetary transfer per household

$1,500 pesos per month

People over 70 years old

1 million** About 25% of the total Mexican population over 70 years old

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Pillar 0 Pillar 0 (AAM)(AAM)Pillar 0 Pillar 0 (AAM)(AAM)

• Cash transfer per every adult over 70 years old enrolled in Oportunidades:

$250 pesos per month

$250 pesos per month

The government designed a pension saving scheme for beneficiaries of Oportunidades: MAROP

MAROPMAROPMAROPMAROP

• Voluntary deposits in an individual account in an Aforeindividual account in an Afore for members of the beneficiary family between 30 and 69 years old:

• Government provides $1 peso for $1 peso for every peso savedevery peso saved (social incentive).

• If the beneficiary obtains a job in the formal sectorformal sector, the social incentive is suspended.

$20, $30 ó $50 pesos per month*

$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

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The mechanism is designed to prevent incentives to informality

Benefits AAM/ MAROP Formal sector

Social contribution (pesos/month)

$50 $82.06

Pension17% of minimum

wage

Minimum wage (minimum pension

guarantee)

Other services None

Disease and maternity

insurance, child-care, etc.

Employer contribution

None 5.15%

Retirement age 70 years old 65 years old

Contribution period

40 years 25 years

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Mexican Pension System Infrastructure

Government agencies

Banks

AFORES

Formal Sector worker

IMSS OR ISSSTE

Electronic services

Oportunidades Beneficiaries

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To prevent duplicate government subsidies, a new operational framework was built to monitor whether the beneficiaries become part of the formal sector

BDNSARBDNSARBDNSARBDNSAR

MAROPMAROPDBDB

MAROPMAROPDBDB

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

contributionsNational ID Number is Crucial

Procesar makes sure that any Oportunidades beneficiary who obtains a job in the formal sector is not granted two social

contributionsNational ID Number is Crucial

Central clearing house of the Mexican Pension System

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National Pension SystemNational Pension System

IMSSIMSS

I N F O R M A L S E C T O R I N F O R M A L S E C T O R

ISSSTEISSSTE PRIVATE PRIVATE PENSION PENSION FUNDSFUNDS

Professional Professional workersworkers

TemporalTemporalworkersworkers

OportunidadesOportunidades

BeneficiariesBeneficiaries

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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

NationalNationalIDIDDBDB

NationalNationalIDIDDBDB

Validates that the beneficiary is not currently in the formal sector

NationalNationalIDIDDBDB

NationalNationalIDIDDBDB

Notifies results and adds beneficiary to the MAROP DB

Notifies beneficiary the result of request and begins sending subsidy towards individual account MAROPMAROP

DBDB

MAROPMAROPDBDB

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Oportunidades program operations

ExtremePoverty

AFORE opens MAROP Account

Beneficiary starts at formal sector

Beneficiary falls back to Oportunidades

AFORE“mixed” account

AFORE awardsa 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 beneficiaryis working in formal

sector, receives formal sector social contribution

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Implementing a hybrid government subsidy program has several challenges

• Members of beneficiary families do not have birth certificatesbirth 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 Higher operationaoperationa

l costsl costs

Higher Higher operationaoperationa

l costsl costs