Critique of Mexico’s New Social Security Act

The new Social Security Act in Mexico implies not only an important reform in terms of the funding mechanism, but will also have consequences of great importance for the economy, the financial sector, labor markets, and politics. The analysis presented here describes the recent history of Social Security in Mexico and the problems it faced before the reform. This paper refers to research done by actuaries and other professionals to outline the main weaknesses (rather than the presupposed superiority) of fully funded schemes vs. a pay-as-you-go (paygo) method, as well as the main pitfalls of the so-called Chilean model. It also presents the ideas of experts showing that an individual capitalization system is not necessarily more secure than a paygo system and that it transfers risks to workers. I am not of the opinion that the former paygo system was optimal, but I do strongly believe that the reform was done inappropriately, among other reasons because the new system abandons insurance techniques and focuses on investment techniques, despite both concepts being complementary. I suggest that a hybrid, two-tiered system, consisting of a paygo system for low-income workers and an individual accounts system for higher-income workers, could have been a better option for Mexico.