Marco A. Espinosa-Vega and Tapen Sinha
Economic Review, Vol. 85, No. 1, 2000
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Recent projections of a number of countries with pay-as-you-go pension systems have shown significant future actuarial imbalances. As a consequence, several of these countries, including Mexico, are engaged in redesigning their pension systems.
From the U.S. perspective, Mexico's reform is of particular interest because of the similarities of its program to some proposals for the U.S. system. The Mexican government claims that it has started a move to a fully funded system. As proof, it points out that since 1997 Mexico has adopted a privately managed defined-contribution system. However, a pension system can be privately administered without being fully funded. It is the adoption of a fully funded system that would have the most significant macroeconomic effects in an economy: an increase in domestic savings and a drop in interest rates.
The authors of this article contend that after reviewing the new system, one cannot tell whether the government is switching to a fully funded system. They review some potential gains and losses of the change in style of the system. However, they argue that regardless of whether the reform is a change of style or substance, additional information is required to effectively assess its net gains. They conclude that Mexico is in dire need of further research to guide it through its decision of whether and how to switch to a fully funded pension system.
March 2000