In the 4th National AFORES Convention, held in Mexico City on October 9 and 10, prominent speakers shed light on the pension reform strategies that could be implemented for improving workers’ pensions.
Mariano Bosch proposed some strategies that could be implemented immediately to improve pension systems, such as: (i) the purpose of the pension system (in terms of replacement rates) must be clearly defined, to inform workers as to whether they are close or far from achieving the stated goal; (ii) commit to an effective monitoring policy to combat high levels of informality at work; and (iii) implement and develop modern voluntary savings systems that use the benefits of behavioral economics to advantage (e.g. automatic enrollment) to overcome the restrictions associated with the political economy of pensions (e.g. difficulty in increasing the mandatory contribution rate).
According to Robert Merton, one must move from a conventional perspective, in which the focus is on the accumulation of savings, and success is defined in terms of the amount of pension wealth accumulated, towards a new approach that informs workers how close they are to reaching their retirement income objectives, using a dynamic, customized asset allocation strategy. Thus, he is emphatic in stating that although there are times when the accumulated fund appears to be very large, it is insufficient when translated into a pension it can finance. This is why it is advisable to pay attention to the pension being financed. With this new approach, workers will also be aware of the need to apply corrective measures to improve their retirement prospects (for example, increase their savings rate). Mexico was the first country in the world to introduce this measure. South Africa is discussing the introduction of said reform, and the United States is planning to make the change soon.
Finally, Brigitte Madrian put forward some conclusions regarding the architecture of options of workers and the generation of better voluntary pension savings results: (i) the results of automatic enrollment are robust, with an increase of between 28% and 33% in pension plan enrollment rates; (ii) simplified automatic enrollment messages are effective in increasing the participation rate, doubling the percentage of workers who choose to enroll in a pension plan (compared to a non-simplified message); (iii) individuals respond more eloquently to the needs of their “future self,” when they have the opportunity of seeing a physical image of themselves in the future, choosing to save more in the present.
