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How much will Mexican pensions be? A sensitivity analysis of the AFORE account prior to parametric changes – CONSAR – November 2018

10 December, 2018

There are multiple factors that play a relevant role in the calculation of pensions. The purpose of this document is to identify those factors and show how and to what extent they could affect the income of workers after retirement. The document identifies 9 relevant parameters for determining the amount of a worker’s pension: 1) contribution density, 2) mandatory savings, 3) age of entry into the formal labor market, 4) retirement age, 5) wage evolution 6) the number of the pensioner’s beneficiaries 7) the voluntary savings amount 8) returns and 9) commissions.

If the case of a “base” worker, maintaining the SAR´s current parameters, compared to another “model” worker with improved parameters, the result is diametrically opposite: the pension amount rises from $ 3,899 pesos to $ 7,852 and the replacement rate rises from 39% to 79%.

The following conclusions can be reached from the contents of this document:

  • Pensions and replacement rates in Mexico can be improved, in some cases without changing the legal framework.
  • Pensions will be higher or lower, depending on the level of each one of the parameters.
  • Each worker, even in cases with similar wage and age conditions, could obtain totally different pension results depending on the decisions that will determine their accumulated balances for financing the years after retirement.
  • It is necessary to continue disseminating the advantages of voluntary savings; it would also be advisable to explore the possibility of doing so automatically and enhancing it through a pari-passu system.
  • It is necessary to continue disseminating the benefits of choosing an AFORE that provides high returns and low commissions.
  • Depending on the situation of each worker, consider the possibility of a late retirement, beyond the official retirement age.
  • It is essential to raise the mandatory contribution amount, since the existing mandatory contribution is very low.
  • The analysis shows the importance of the formalization of the labor market. A greater degree of formalization would give rise to higher pensions and replacement rates.
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