Government pensions: Mexico’s ticking time-bomb

According to the SHCP, Mexico's government pension expense will represent 3.5% of the GDP in 2019

Government pensions: Mexico’s ticking time-bomb
Pensions and retirement benefits are some of the most binding categories of expenditure for the federal government - Photo: File photo/EL UNIVERSAL
English 27/12/2018 14:20 Mario Alberto Verdusco Mexico City Actualizada 14:20

Mexico’s pension expense is likely to show a snowball effect during the six-year term of Andrés Manuel López Obrador, since he will be forced to disburse more and more resources each year in order to fulfill his financial commitment to the country.

According to the General Criteria of Economic Policy, an expense of nearly 3.4% of Mexico’s Gross Domestic Product (GDP) is expected at the end of 2018.

The document details that the figure had risen throughout the administration and will increase to 3.5% next year; to 3.7% in 2020; to 3.8% in 2021, 4% in 2022, 4.2% in 2023, and 4.3% at the end of 2024.

This means that the pension expense will increase by 0.9% during the present administration, according to projections of the Ministry of Finance and Public Credit (SHCP), based on actuarial studies and trends from the past few years.

Pensions and retirement benefits are some of the most binding categories of expenditure for the federal government.

In addition to including payment obligations to government workers and beneficiaries upon retirement, pensions expenditure also entails seniority premium benefits, post-retirement supplementary pension schemes, and any other remuneration granted at the end of employment relations.

The government has admitted that one of the main causes of the recent increase in pension expense is population aging, which results in increased longevity and lower fertility rates. This begs the need for an effective strategy to deal with the problem.

“For some decades, the adult working-age population entering retirement in Mexico has grown at a higher rate while the youth population decreases. This demographic transition represents a challenge for the sustainability of public finance, since the expense on pensions and healthcare will only increase on a par with the older-adult population.

It is estimated that, by 2019, the older-adult population in Mexico will be of 9.5 million people, while in 2040, it is expected to rise to 19.5 million, the document states.

A high expense

According to the document issued by the Ministry of Finance, which was approved by Congress, pension expenditure will rise to 877.46 billion pesos next year, which is 6.4% higher than the amount executed this year.

What the Mexican government will have to spend to fulfill said commitment would be enough to finance the Ministry of Public Education (SEP) three times.

However, the largest fraction of the pension budget is concentrated on the Mexican Social Security Institute (IMSS), which accounts for a public expense of 432.94 billion pesos, and the Institute for Security and Social Services for State Workers (ISSSTE), representing an expense of 226.14 billion pesos.

Another MXN$104.22 billion are assigned to former employees of the state’s productive companies, out of which MXN$63.56 billion are for PEMEX, and the remaining MXN$40.65 billion are for the Federal Electricity Commission (CFE).

PEMEX’s resources for pensions would be enough to cover the expense of the Ministry of Communications and Transports (SCT), which rose to 66.55 billion pesos in 2019.

The remaining 114.15 billion pesos are for former public servants of the federal government.