Auto mechanic Antonio Flores, 31, has no idea how he's going to get by three decades from now when he retires. After paying rent on his workshop, he takes home about $425 a month, barely enough to support his wife and daughter. Flores is among the more than half of all Mexican workers who toil in the "informal" economy. They do not pay social security taxes and thus will not be able to draw a pension when they reach their sunset years. "I guess I'll just keep working until my strength runs out," says Flores, shrugging.
That's the bleak future most Mexicans face. Today, 52% of Mexico's senior citizens live in poverty. Over the next 20 years the population age 65 and over will more than double, and more than half will have no old-age pension.
Faced with a yawning deficit in its patchwork of social-security programs, Mexico in 1997 followed the lead of Chile, and introduced individual pension accounts for private-sector workers. The old pay-as-you-go schemes still cover about 4 million government employees, from teachers to central bank analysts. Unfortunately, the 19 million or more Mexicans who toil for cash, not paychecks, are not covered by any of these programs. "Private pension funds were not a wise thing to do in Latin America. They simply reproduce the existing inequalities in society," says Andras Uthoff of the U.N.'s Economic Commission for Latin America & the Caribbean.
Still, by some measures, the 1997 reform has been a success. Today there are some 32.6 million private pension accounts with assets totaling $40 billion. By buying up government debt and helping finance infrastructure development, these funds have injected much-needed liquidity into the local capital market. Currently, 11 asset management firms compete for customers, with investment returns averaging 6.9% since 1997. Commissions, which some economists calculate eat up as much as 25% of employee contributions, remain high, though they have declined by more than one-third over the past two years thanks to regulatory changes.
Other problems persist. Of the 32.6 million individual retirement accounts, around 12 million are inactive, with no deposits in the past two years. Many of those belong to people like Flores' wife, who worked in a corporate cafeteria for two years before becoming a mother. She accumulated $265 in her retirement account, which earns $2 to $3 a month in interest. Flores occasionally deposits $15 into it when he has money left at the end of the month. Clearly, that's not much of a nest egg.
Still, Mexican officials stress that the new setup is an improvement on the old one. "We never pretended that a system of individual retirement accounts would resolve the problem of informal employment," says Mario Gabriel Budebo, president of CONSAR, the government pension fund regulator. "Without this reform, the country would be worse off, because we'd have the same problem of informal workers and we'd also have 30 million people without a pension." True. But Mexican policymakers, already wrestling with poverty, inadequate education, and decrepit infrastructure, will sooner or later have to figure out how to provide for workers like Flores.
By Geri Smith in Mexico City