1 coverage expansion in the informal sector a mexican approach bangkok, november, 2006 national...
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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