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In Praise and Criticism of Mexico's Pension Reform
| Cato Policy Analysis No. 340 |
April 14, 1999 |
by L. Jacobo Rodríguez
L. Jacobo Rodríguez is assistant director of the Project on Global
Economic Liberty at the Cato Institute.
Executive Summary
The privatization of Mexico’s government-run pay-as-you-go social
security system, which went into effect in July 1997, is the Ernesto Zedillo
administration’s most important structural reform. It is a measure that, if
successful, will help bring much-needed social and economic stability. The Mexican
peso crisis of 1994–95 underscored the fragility of Mexico’s economy, its need
for independent institutions, and its need for a large pool of long-term domestic
savings. An increase in the rate of private savings in Mexico, which this reform
will promote, would make the Mexican economy less dependent on short-term fluctuations
of international capital flows and, thus, more stable. More important still,
the privatization of social security will erect one of the basic pillars of
a free society by turning Mexico into a country of property-owning workers.
The private system, however, has several structural flaws that
should be corrected in the near future if it is to provide workers with the
right incentives. Chief among those flaws is the requirement to invest a minimum
of 65 percent of workers’ savings in government instruments, a rule that is
not consistent with the notion of pension privatization. Other flaws include
prohibiting investment in equities or abroad; allowing the government agency
that administered the old pay-as-you-go system to establish a pension fund company
while retaining some regulatory functions; prohibiting public-sector workers
from joining the new private system; and having the government subsidize every
worker’s retirement account, a measure that politicizes the private pension
system and weakens the link between individual efforts and rewards.
President Zedillo should use his remaining time in office to
strengthen the new pension system so that Mexican workers can enjoy financial
security and other benefits in their old age.
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