In Mexico, Lessons in Pension Reform

Latin America is a recognized leader in social security reform. But lately the golden years there have been anything but.

Federal employees across Mexico have staged massive demonstrations to challenge government efforts to ax their pension benefits. Leaders in Brazil and Argentina are under fire from workers angered by cutbacks in their retirement funds.

These frictions are cautionary tales for the U.S. as it struggles to fix its stressed Social Security system. One clear lesson: Reforms are inevitable, but they will undoubtedly cause unrest.

Beginning with Chile in 1981, Latin governments that had promised retirees more than their struggling economies could deliver were forced to make radical changes that the U.S. and many other developed nations so far have ducked.

While U.S. policymakers debate the merits of partially privatizing Social Security, as well as cutting benefits and raising the eligibility age, nearly a dozen Latin nations have already retooled their rickety publicly financed systems with individual savings plans that require workers to finance at least a portion of their retirements.

Mexico in 1997 forced all private-sector employees to tuck part of their salaries into personal 401(k)-style accounts. But an effort to extend those reforms to government workers recently hit a roadblock, as civil servants took to the streets to protect their publicly financed pensions.

Tens of thousands of unionized federal medical workers jammed city centers in Mexico City, Guadalajara, Monterrey and Cuernavaca this month to protest government proposals to raise their retirement age and move them toward funding the lion’s share of their own pensions, like their counterparts in private industry.

“Our union fought hard for these benefits,” said 40-year-old Ricardo Lopez, a nurse in Mexico’s vast public health system who joined an estimated 60,000 protesters in Mexico City’s central plaza. “We’re here today to show [Mexican President Vicente] Fox that if he wants to fight, we’re ready.... We’ll strike if we have to.”

Such talk is being dismissed as mere posturing. But it illustrates how difficult and divisive social security reform remains in the region that pioneered the trend two decades ago.

Change hasn’t been smooth or easy. Like Mexico, other Latin American countries are finding that pension reform isn’t a one-time quick fix but a long-term process fraught with obstacles. These countries continue to grapple with the question of how to provide for their seniors without crushing taxpayers, shortchanging other social programs or stunting economic growth.

Some nations are struggling under two-tier systems that kept previous benefits intact for older workers with no clear way to pay for them. Others are bedeviled by large and growing underground economies that siphon off workers who could help pay some of the freight. Others didn’t make needed changes to other parts of their economies that were necessary for pension reform to succeed.

“The lesson is that not all reforms are created equal,” said L. Jacobo Rodriguez, a financial services analyst at the Cato Institute in Washington. The U.S. “could learn a lot by watching our neighbors,” he said.

There has been plenty to watch:

* Brazilian President Luiz Inacio Lula da Silva in December won approval of legislation to deflate ballooning pension benefits for state workers, who typically retired with full salaries plus cost-of-living adjustments. In the process, the leftist leader angered some of the people who had swept him to power as part of a popular revolt against conservative economic policies.

* An unemployed Bolivian miner, distraught over the government’s refusal to return what he had paid into the state pension system, strapped on dynamite and blew himself up inside a federal building in La Paz last month, killing two policemen as well. The deaths focused attention on the plight of thousands of other Bolivian workers who have been stiffed on retirement benefits due in part to a gap in coverage between the old state pension plan and the private system that Bolivia created in 1996.

* Workers in Argentina saw the value of their personal retirement savings accounts plunge in 2002 after the nation devalued its currency and defaulted on government bonds held by private-sector pension funds. The government has offered to settle its debts for the equivalent of 25 cents on the dollar, enraging workers who have been required to contribute to these individual savings plans since 1994.

These conflicts underscore the tough work that lies ahead for the United States. Federal Reserve Chairman Alan Greenspan caused a tizzy in February when he called for reducing Social Security benefits and raising the retirement age.

Without changes, the Social Security system is expected to be insolvent in less than 40 years, as the retirement of 77 million baby boomers swamps the program’s finances.

Some conservative policymakers, including those in the Bush administration, have proposed that workers be allowed to divert some of their Social Security taxes into private investment accounts. Some Democrats and others argue that such privatization would be too risky.

And some observers worry that the dust-ups surrounding pensions in Latin America could discourage the U.S. from doing much of anything.

But analysts such as Anita Schwarz, an economist and pension expert with the World Bank, said the headlines coming out of Latin America should motivate developed nations to act decisively rather than back away from change.

Although social security restructuring has had mixed success in Latin America, and some reforms have been downright botched, the consequences of doing nothing have typically been worse, Schwarz said.

The bottom line, she said, is that traditional social security structures can’t handle the demographic changes sweeping the globe. Doing nothing only ensures that inevitable changes become more painful the longer they’re avoided, Schwarz said.

“Every country is essentially facing the same problem,” she said. “Latin America is just facing it sooner.”

That might seem surprising given that much of the region is still quite young compared with the developed world. In Mexico, for example, more than half of the population is under 25.

But because of plummeting fertility and rising life expectancy, Mexico is graying rapidly, according to the Federal Reserve Bank of Atlanta. Researchers there calculated that in 1985, 5% of Mexico’s population was over the age of 60. That percentage is projected to triple by 2025 -- a span of only 40 years. By comparison, in France it took 235 years for the over-60 crowd to grow from 5% to 15% of its population.

Mexico’s warp-speed aging and sluggish economic growth forced the nation to undertake radical fixes to its old pay-as-you-go pension system.

Starting in 1997, private-sector employees were compelled to sock away at least 11.5% of their salaries for their golden years -- 6.5% into new privately managed funds. As of June, Mexican workers had funneled $35 billion into more than 30 million individual retirement accounts.

One of the big problems, critics say, is that the reforms largely skipped the public sector, which employs about 1 in 7 Mexicans. The deal crafted under the administration of former President Ernesto Zedillo allowed unionized government employees to hold onto retirement benefits much more generous than those enjoyed by average Mexicans, who continue to foot most of the bill via their taxes.

Rising costs for those plum pensions are straining the budgets of public agencies such as the Instituto Mexicano de Seguro Social, the principal provider of healthcare to more than 12 million workers and their families.

Pension liabilities for the agency’s 370,000 unionized employees and 120,000 retirees are ballooning so fast that its directors have warned of a gaping shortfall within a few years unless costs are slashed or more tax money is injected into the system. One estimate has shown that if changes aren’t made, in about 15 years every peso of the agency’s budget would be needed just to pay pensions -- with nothing left to provide healthcare to the public.

Union members, who include doctors, nurses and administrative workers, can qualify for about 130% of their salaries in retirement after 27 years of service for female employees and 28 years for males. They can begin drawing their pensions at age 52.

In contrast, most of Mexico’s private-sector workers must wait until age 65 to start receiving benefits that fall well short of their previous salaries. And an estimated 40% of Mexico’s workers toil in the underground economy, where formal pension benefits are nonexistent.

“The union is powerful and Zedillo didn’t want conflict,” said Carmelo Mesa-Lago, a retired professor of economics at the University of Pittsburgh and an expert on Latin American pension systems. “Now Mexico is paying for that decision.... The healthcare of millions of people is in jeopardy because of the pensions of a privileged few.”

A committee exploring ways to shore up the healthcare agency’s finances has suggested raising the retirement age to 65 while boosting what workers contribute toward their retirement to 15% of wages from 3%.

The union, which blames the fiscal crisis on decades of mismanagement by the agency’s top brass, opposes such dramatic changes. It wants Mexican companies to share in any bailout through increases in taxes that employers pay to enroll workers in the public health system.

Business groups have vowed to fight any such attempt, arguing that it would do little to solve the social security system’s structural problems while making Mexican companies less competitive at a time when the country has already lost thousands of factory jobs to China.

Olivia Mitchell, head of the Pension Research Council at the University of Pennsylvania’s Wharton School and an expert on retirement systems, said Mexico faced tough choices.

“The fundamental math is pretty simple,” Mitchell said. “The hard part is finding the political will and coming to an agreement on how to make changes. Mexico isn’t alone on that one.”

Times staff writers Henry Chu in Rio de Janeiro and Hector Tobar in Buenos Aires contributed to this report.