Coverage Expansion in the Informal Sector A Mexican approach Bangkok, November, 2006

1. National Commission for the Retirement Savings System www.consar.gob.mx Coverage Expansion in the Informal SectorA Mexican approach Bangkok, November, 2006

2. Contents • 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

3. In 1997, the reform of the old PAYG system was imperative Rising fiscal cost • 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

4. Main features of the Reform • 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). Fully funded system based on Industrial Organization Role for the Authority 4

5. 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 Defined-contribution system One IndividualAccount Defined-benefit pay-as-you-go system Private sector workersIMSS Public sector workers ISSSTE Informal sector workers Voluntary saving in individual accounts

6. 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 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, Afores. • The government provides a minimum pension guarantee. • The new law considers the possibility of voluntary contributions. • Contributions for all the other services are still managed by the government through IMSS. + 5%*W Housing Fund

7. ISSSTE provides similar services to employees of the government • Workers in the public sector contribute to a defined-benefit system with a complementary defined-contribution system: • Complementary contributions are managed by banks through individual accounts. • Workers can transfer their complementary contributions so they can be managed by an Afore. • This allows them to make additional voluntary deposits to their individual accounts. New The installed infrastructure will facilitate the transition to a DC system based on individual accounts managed by Afores

8. Informal sector workers can make voluntary deposits in an individual account in an Afore • Voluntary contributions are tax-deductible. • If contributions remain in the account for at least 5 years, they can be used to defer taxes. • Regular voluntary saving serves as proof of income to qualify for a mortgage. • Voluntary contributions can also improve the conditions on consumption credits: the credit term increases in up to 12 months. Up to US$8,000 Up to US$15,000 New

9. 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 patterns of behavior: recipient families must invest in their own nutrition, health, and education. • The money is delivered through paychecks or bank deposits. * About 25% of the total Mexican population over 70 years old

10. The government designed a pension saving scheme for beneficiaries of Oportunidades: MAROP New • Cash transfer per every adult over 70 years old enrolled in Oportunidades: Pillar 0 (AAM) $250 pesos per month • Voluntary deposits in an individual account in an Afore for members of the beneficiary family between 30 and 69 years old: • Government provides $1 peso for every peso saved (social incentive). • If the beneficiary obtains a job in the formal sector, the social incentive is suspended. MAROP $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

11. The mechanism is designed to prevent incentives to informality

12. Oportunidades Beneficiaries Banks Mexican Pension System Infrastructure Electronic services Government agencies Formal Sector workerIMSS OR ISSSTE AFORES

13. To prevent duplicate government subsidies, a new operational framework was built to monitor whether the beneficiaries become part of the formal sector BDNSAR Formal Sector workerIMSS OR ISSSTE Central clearing house of the Mexican Pension System MAROP DB 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

14. National Pension System PRIVATE PENSION FUNDS ISSSTE IMSS Oportunidades Beneficiaries Temporalworkers Professional workers I N F O R M A L S E C T O R

15. Oportunidades program enrolment operations NationalIDDB Validates that the beneficiary is identified in National DB Recollects request formats and validates essential information Remote attention desks provide assistance and help establishing identity Beneficiaries voluntarily requests to make contributions NationalIDDB Validates that the beneficiary is not currently in the formal sector Notifies beneficiary the result of request and begins sending subsidy towards individual account MAROP DB Notifies results and adds beneficiary to the MAROP DB

16. Oportunidades program operations Notified to prevent double subsidy Since beneficiaryis working in formal sector, receives formal sector social contribution Beneficiary falls back to Oportunidades AFORE awardsa pension AFORE opens MAROP Account AFORE“mixed” account Beneficiary starts at formal sector ExtremePoverty Funds are automatically transferred to the same account as formal sector funds Oportunidades is notified to re-start social incentive

17. Implementing a hybrid government subsidy program has several challenges • Members of beneficiary families do not have birth 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 operational costs