![Page 1: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/1.jpg)
The Cost of Minimum Pension Guarantee
![Page 2: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/2.jpg)
What is the problem we study?
• Governments often promise a minimum level of benefits under an accumulation scheme
• If future does not turn out to be rosy, what is the likelihood that the government has to foot the bill of this guarantee?
• Using the actual experience of the past eight years, and including actual features of the Mexican system, we calculate the probability distribution of such promises
![Page 3: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/3.jpg)
• Pension System in Mexico
• Investment Regime
• Minimum Pension Guarantee
• Model
• Results
• Conclusions
![Page 4: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/4.jpg)
Current Mexican pension regime (for the formal sector)
In 1997, Mexico moved from a defined benefits system (a la US Social Security) to a defined contribution system (a la Chile)
The system is publicly mandated but funds are privately managed
The funds are called AFORES (Administradoras de Fondos para el Retiro)
There are three components to each fund: government component, private compulsory component and private voluntary component
There is a government contribution
There is also a government guarantee
![Page 5: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/5.jpg)
Contribution is 6.5% of the base salary (SBC)There are three component
Worker
Employer
1.125%
Monthly Contribution as percentage of SBC
5.150%
0.225%
6.5%
Govt
TOTAL
Other Contributions
This is called Cuota Social (cs). 5.5% of minimum wage indexed for inflation
Each individual can also make voluntary contribution to the system. But such funds are maintained separately
Note: There is an upper limit to the SBC equivalent to 25 times the minimum wage
![Page 6: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/6.jpg)
• Pension System in Mexico
• Investment Regime
• Minimum Pension Guarantee
• Model
• Results
• Conclusions
![Page 7: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/7.jpg)
Investment regime under the new system
The AFORES invest in special funds called SIEFORES.
Until 2004, the SIEFORES had extremely restricted investment regimes. For example, investment in anything other than high grade inflation protected bonds were not allowed
In January 2005, new investments were allowed such as foreign bonds in currencies other than pesos as well as in other instruments provided that capital is protected from erosion (through synthetic instruments such as futures and options)
![Page 8: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/8.jpg)
ACTUAL INVESTMENT STRUCTURE IN THE PENSION SYSTEM
SIEFORE-1
SIEFORE-2
Allowed Financial Instruments & Limits Affiliated Workers
Debt Instruments with inflation protection – lower limit 51%
Foreign Debt – up to 20%
Assigned Workes
Workers over 56 years old
Workers who choose to invest under this SIEFORE
Foreign Instruments – up to 20%
Equity Notes – up to 15%
Workers under 56 years
![Page 9: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/9.jpg)
• Pension System in Mexico
• Investment Regime
• Minimum Pension Guarantee
• Model
• Results
• Conclusions
![Page 10: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/10.jpg)
The nature of minimum pension guarantee
The government promises to pay a minimum level of benefits if the amount of money accumulated in the worker’s account does not reach certain minimum value
What does the government promise?
The Federal Government promises the equivalent of one minimum wage to any worker who has contributed to the new system for 1250 weeks or 24 years (even if it is not continuous)
The government promises to pay an annuity of one minimum salary for life for each worker in the system
![Page 11: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/11.jpg)
Although small today, the number of people who become beneficiaries of this promise is rising
Source: IMSS data
Number of people entitled to minimum pension guaranteethousands,2005
Government burden of such a guarantee isrising...(millions of pesos)
1997 1999 2001 2003 2005 1998 2000 2002 2004
4.34
3.5
2.8
2.2
1.7
1.3.9
.19
86
66
49
35
25
17
8
![Page 12: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/12.jpg)
1 to 3 MW
4 to 5 MW
6 to 10 MW
More than 10 MW
....and this will continue to rise because the workers under the regime largely have low wages (with over half earning
no more than 3 times the minimum wage)
M.W.= Minimum Waves
Source: IMSS
55.68%
20.65%
15.06%
8.6%Salary level of workers under the IMSS system2004
![Page 13: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/13.jpg)
• Pension System in Mexico
• Investment Regime
• Minimum Pension Guarantee
• Model to Calculate the Cost of the M.P.G.
• Results
• Conclusions
![Page 14: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/14.jpg)
The model is as follows: The first element describes the distribution of the variable rate of return, the second
describes the law of motion, the third is a contribution at each period taking into account the commission charged
),( 2MMMt Normalr
ttftr
t CVrVV Mte )1)(1(1
csVComAFOREC ttit )065(. ,
Equity Returns
Accumulation
Contribution
![Page 15: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/15.jpg)
The rate of return is the actual rate that prevailed during 1997-2005 in Mexico
= 0.00757452 equivalent of 9.48% annual
= 7.12315%
Adjusted Log Likelihood = 135.017
For the riskless rate, we took the real rate of return of Bondes182 (a government bond with inflation indexation)
rf = 4.63% annual
![Page 16: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/16.jpg)
We assume that a fraction is invested in the broad stock index and the other fraction (1- ) is invested in government bonds
Where: ComAFOREi,t Fee charged by AFORE i at time t cs Cuota Social
ttftr
t CVrVV Mte )1)(1(1
csVComAFOREC ttit )065(. ,
Monthly rate of return of the Mexican broad market index IPC was indeed Normal during 1997-2005
![Page 17: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/17.jpg)
Underlying assumptions for running simulations
- Retirement Age. 65 years
- Contribution period. 25 and 40 years respectively
- Contribution Rate. 6.5% of base salary
- Contribution frequency. Monthly
- Commissions. We use the actual and projected commission structure
taking into account the loyalty discounts offered by some AFORES
- Inflation. We calculate everything in real terms
![Page 18: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/18.jpg)
Measuring the guarantee costWe can conceptually think of the guarantee cost as an implicit put option for the government at the retirement age
Where
PMG: Price of a contingent annuity that pays the equivalent of one minimum salary in real terms
VT: Funds accumulated in the worker’s individual account at retirement
Payoff (T) = max{ PMG – VT , 0}
PMGVT
Pay
off
![Page 19: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/19.jpg)
We could value the option using traditional Black Scholes option pricing model (it requires risk neutral valuation and the assumption of complete contingent markets)
Simulation
Cashflows
Average
1,000 realizations of the final amount for each level of salary assuming different levels of investment in equity
We calculate the present value for each trajectory
The average payment is the value of the option
![Page 20: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/20.jpg)
We need to calculate the single premium contingent annuity of one minimum salary (the government guarantee)
The net premium for such an annuity is calculated using the following euqation
)1(*))1.9(.*( )12()12(97 smfääSMP xxy
Where
SM97: Minimum salary current in 1997 but brought forward to 2005
f : Administrative and acquisition fee 1%
sm: Security Margin of 2%
We also assume that at retirement the worker is married and his spouse is four years
younger than him (average in Mexico)
*We use the mortality table used by the Mexican Social
Security
![Page 21: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/21.jpg)
• Pension System in Mexico
• Investment Regime
• Minimum Pension Guarantee
• Model to Calculate the Cost of the M.P.G.
• Results
• Conclusions
![Page 22: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/22.jpg)
50%
100%
25%
75%
5 MW3 MW
10 MW 25 MW
1 MW
0
0.2
0.4
0.6
0.8
1
*Measured in multiples of minimum wage
PROBABILITY TO EXERCISE THE GUARANTEE UNDER THE ASSUMPTION THAT THE WORKER
CONTRIBUTES TO THE SYSTEM DURING 40 YEARS
Probability
Income* Equity Fraction
MARKETLambda
Percentage Invested in Equity
INCOME* 0% 25% 50% 75% 100%
1 1.000 0.549 0.268 0.224 0.231
2 1.000 0.103 0.103 0.115 0.142
3 0 0.008 0.024 0.055 0.087
5 0 0 0.005 0.022 0.042
10 0 0 0 0.003 0.009
25 0 0 0 0 0
![Page 23: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/23.jpg)
WHEN WE REDUCE THE CONTRIBUTION TIME TO 25 YEARS, THE RESULTS CHANGE DRAMATICALLY
MARKET Lambda
Percentage Invested in Equity
INCOME*0% 25% 50% 75% 100%
1 1.000 1.000 0.967 0.829 0.728
2 1.000 1.000 0.863 0.680 0.603
3 1.000 1.000 0.694 0.499 0.443
5 1.000 0.893 0.327 0.284 0.297
10 0 0 0.034 0.058 0.099
25 0 0 0 0.001 0.0060
50%
100%
25%
75%
5 MW3 MW
10 MW 25 MW
1 MW
0
0.2
0.4
0.6
0.8
1
Equity FractionIncome*
Probability
*Measured in multiples of minimum wage
![Page 24: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/24.jpg)
15%
50%
75%
100%
5 MW
10 MW
1 MW3 MW
25 MW
50,000
100,000
150,000
200,000
250,000
Equity FractionIncome*
Option Price
We also calculate the cost of the option for the government
MARKET Lambda
Percentage Invested in Equity
INCOME*0% 25% 50% 75% 100%
1 216 201 158 127 116
2 181 161 103 85 81
3 147 119 63 50 54
5 78 42 21 24 32
10 0 0 1 3 7
25 0 0 0 .073 .256
Option price, 25 yearsthousands
*Measured in multiples of minimum wage
![Page 25: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/25.jpg)
LOS COSTOS DERIVADOS SON REDUCIDOS DE FORMA IMPORTANTE CON UNA MAYOR
FLEXIBILIDAD DE INVERSIÓN EN EQUITIES
0.00
20.00
40.00
60.00
80.00
100.00
120.00
140.00
160.00
0% 20% 40% 60% 80% 100%
Equity Fraction
If the SIEFORES could invest up to 50% in Equity:
$$63,91363,913
SIEFORE-2:$119,804$119,804
SIEFORE-1:$ 147, 491$ 147, 491
53% Cost Reduction
Guarantee Price for a worker who earns 3 M.W.
![Page 26: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/26.jpg)
• Pension System in Mexico
• Investment Regime
• Minimum Pension Guarantee
• Model to Calculate the Cost of the M.P.G.
• Results
• Conclusions
![Page 27: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/27.jpg)
CONCLUSIONS
Minimum pension guarantee is present to serve a social purpose: protecting low income individuals from falling into poverty
But it also binds the government to future costs High commission (between 20% and 30% of contribution) directly
affect the minimum pension guarantee: therefore, governments should seriously consider strategies for reducing commissions
The capital protection regulation currently in place does not eliminate all downside risks
While allowing for investment in broad stock indexes can increase upside for the workers, it can significantly increase the burden for the government especially for low income workers
![Page 28: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/28.jpg)
Income profile of AFORE affiliates who contribute
regularlyTapen Sinha
![Page 29: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/29.jpg)
How did income increase during 1997-2005 among affiliates?
• Main question• Why is it important?• To know how much affiliates would have in
their AFOREs during their lifetimes• To have an idea of how income changes in
a life cycle context in Mexico in the formal sector
• To disentangle the gender gap in income
![Page 30: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/30.jpg)
Limitations
• There are few observations in some of the cells – thus, they are not reliable (example: women in the highest quintile)
• We do not get a picture of all who are contributing – only the ones that are contributing regularly
• We only have data for 1997-2005 much less than lifetime data
![Page 31: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/31.jpg)
Original study
• With macroeconomic data
• Modigliani Bloomberg life cycle hypothesis
• Milton Friedman permanent income hypothesis
• Both posit that people smooth consumption over lifetime income
• Income has less volatility than consumption
![Page 32: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/32.jpg)
IncomeConsumption
income
consumption
borrow? working life retire death
![Page 33: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/33.jpg)
“Typical” income consumption profile
![Page 34: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/34.jpg)
Age consumption income profile in the US matches the typical one......
![Page 35: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/35.jpg)
....but the Japanese data does not match the typical...
![Page 36: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/36.jpg)
Data
• For men and women separate samples• For each quintile, 1000 persons for each age group• 20 or below, 21-25, 26-30, 31-35, 36-40, 41-45,
46-50, 51-55, 56-60, 61 and above• Total ten categories• Thus, (in theory) we have 50,000 observations for
men and women – we have less numbers• Each person has a salary figure for August 1997 to
February 2005 every two months (46 obs)
![Page 37: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/37.jpg)
Simple analysis
• We can collapse all the observations by examining the average salary over (almost) eight years and examine how average salary changes with all the persons put together taking into account sex of the person and the age of the person
• This will be similar to the analysis of the US and Japan (we saw in the OECD Report in the previous slides)
![Page 38: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/38.jpg)
Estimating for the entire sample
• Estimation Equation:
• Log(SalProm) = c0 +c1.sexo +c2edad +c3edad2
• LOG(SalProm) = 4.482169548 - 0.1617908224*SEXO + 0.0318998435*EDAD - 0.0003307339208*EDAD*EDAD
• Highly significant coefficients
![Page 39: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/39.jpg)
Separate estimates
• Males
• SalProm = -9.935 + 9.311*EDAD - 0.0887*EDAD*EDAD
• Females
• SalProm = 18.471 + 6.712*EDAD - 0.06534*EDAD*EDAD
![Page 40: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/40.jpg)
When does the income starts to decline
• From separate estimates:
• Male 52.47
• Female 51.35
• From combined estimate:
• Highest income at 48.23
![Page 41: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/41.jpg)
Wage Equation Estimated
4.6
4.65
4.7
4.75
4.8
4.85
4.9
4.95
5
5.05
5.1
5.15
20 25 30 35 40 45 50 55 60 65
Age
log
(Wa
ge)
male
female
48.22 years
![Page 42: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/42.jpg)
What is wrong with the pictures?
• They are calculated from by combining all the people of different age groups
• They do not tell us anything about cohort effect• Here, we can actually observe the real trajectory
of persons over eight years• What we need to know for constructing income
profiles of actual workers is what they earn over their lifetimes – we have segments in our data
![Page 43: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/43.jpg)
Household Savings and Income Distribution in MexicoOrazio P. Attanasio and Miguel Székely, 1998
![Page 44: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/44.jpg)
Analyzing data controlling for cohorts and gender
• Now examine the data, controlling for "starting income" (which is a proxy for cohort) and follow them for eight years
• How should it look like?• Logically, it should depend on the economic
performance (more about that at the end)• It should also depend on cohort• For young higher growth than old
![Page 45: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/45.jpg)
Time
Wage
Young
Old
Observations from data….that leads to….
1997 2005
![Page 46: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/46.jpg)
20s 30s 40s 50s 60s
Wage…the following lifetime wage profile
![Page 47: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/47.jpg)
0.5
0.55
0.6
0.65
0.7
0.75
0.8
0.85
0.9
Mar-97 Aug-98 Dec-99 May-01 Sep-02 Feb-04
m60m55m50m45m40m35m30m25m20m15
Males in Quintile 1
Each point is average
![Page 48: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/48.jpg)
0.6
0.7
0.8
0.9
1
1.1
1.2
1.3
1.4
1.5
1.6
Mar-97 Aug-98 Dec-99 May-01 Sep-02 Feb-04
m60m55m50m45m40m35m30m25m20m15
Males in Quintile 2
![Page 49: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/49.jpg)
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
Mar-97 Aug-98 Dec-99 May-01 Sep-02 Feb-04
m60m55m50m45m40m35m30m25m20m15
Males in Quintile 3
![Page 50: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/50.jpg)
Males in Quintile 4
1
1.5
2
2.5
3
3.5
Mar-97 Aug-98 Dec-99 May-01 Sep-02 Feb-04
m60m55m50m45m40m35m30m25m20m15
![Page 51: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/51.jpg)
Males in Quintile 5
2
3
4
5
6
7
8
9
Mar-97 Aug-98 Dec-99 May-01 Sep-02 Feb-04
m60
m55
m50
m45
m40
m35
m30
m25
m20
m15
![Page 52: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/52.jpg)
Time
Wage rate Stylized Fact
Men in 20s
Men in 30s
Men in 40s
Men in 50s
![Page 53: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/53.jpg)
0.5
0.55
0.6
0.65
0.7
0.75
0.8
Mar-97 Aug-98 Dec-99 May-01 Sep-02 Feb-04
w60w55w50w45w40w35w30w25w20w15
Females in Quintile 1
![Page 54: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/54.jpg)
Females in Quintile 2
0.6
0.7
0.8
0.9
1
1.1
1.2
1.3
Mar-97 Aug-98 Dec-99 May-01 Sep-02 Feb-04
w60w55w50w45w40w35w30w25w20w15
![Page 55: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/55.jpg)
Females in Quintile 3
0.6
0.8
1
1.2
1.4
1.6
1.8
Mar-97 Aug-98 Dec-99 May-01 Sep-02 Feb-04
w60w55w50w45w40w35w30w25w20w15
![Page 56: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/56.jpg)
Females in Quintile 4
0.9
1.4
1.9
2.4
2.9
Mar-97 Aug-98 Dec-99 May-01 Sep-02 Feb-04
w60w55w50w45w40w35w30w25w20w15
![Page 57: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/57.jpg)
Females in Quintile 5
2
2.5
3
3.5
4
4.5
5
5.5
6
6.5
7
Mar-97 Aug-98 Dec-99 May-01 Sep-02 Feb-04
w60w55w50w45w40w35w30w25w20w15
![Page 58: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/58.jpg)
Men and woemn 20s and 60s in the third quintile
0.6
0.8
1
1.2
1.4
1.6
1.8
2
Aug
-97
Nov
-97
Feb
-98
May
-98
Aug
-98
Nov
-98
Feb
-99
May
-99
Aug
-99
Nov
-99
Feb
-00
May
-00
Aug
-00
Nov
-00
Feb
-01
May
-01
Aug
-01
Nov
-01
Feb
-02
May
-02
Aug
-02
Nov
-02
Feb
-03
May
-03
Aug
-03
Nov
-03
Feb
-04
May
-04
Aug
-04
Nov
-04
Feb
-05
Wag
e R
ate m60
m20
w60
w20
![Page 59: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/59.jpg)
Stylized facts
• For the three middle quintiles, all income of all ages grow
• Men's income always stays above that of women's• For men and women in their twenties, the income
grows faster than for men in their forties, fifties and sixties
• Wage gap between men and women is expanding for women in their twenties but not for them in their sixties (see the following slide)
![Page 60: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/60.jpg)
Women's Income as a Proportion of Men's
0.75
0.8
0.85
0.9
0.95
1
Aug-9
7
Feb-9
8
Aug-9
8
Feb-9
9
Aug-9
9
Feb-0
0
Aug-0
0
Feb-0
1
Aug-0
1
Feb-0
2
Aug-0
2
Feb-0
3
Aug-0
3
Feb-0
4
Aug-0
4
Feb-0
5
Inco
me
ratio
w60/m60w20/m20
We ignore this segmentToo few data points
![Page 61: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/61.jpg)
Dependent Variable: M20
Variable Coefficient Std. Error t-Statistic Prob. DATE 0.036276 0.003567 10.16877 0DATE*DATE -7.20E-05 7.36E-05 -0.978116 0.3335C 0.639283 0.036348 17.58766 0
R-squared 0.970604 Mean dependent var 1.43933Durbin-Watson stat0.439952 Prob(F-statistic) 0
For the men in their twenties in the third quintile
![Page 62: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/62.jpg)
Dependent Variable: M50
Variable Coefficient Std. Error t-Statistic Prob. DATE 0.026763 0.002397 11.16667 0DATE*DATE -0.000313 4.94E-05 -6.324 0C 1.451821 0.02442 59.45233 0
R-squared 0.915035 Mean dependent var 1.85297Durbin-Watson stat0.754211 Prob(F-statistic) 0
For the men in their fifties in the third quintile
![Page 63: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/63.jpg)
Wage Varies With Age Group
0
0.5
1
1.5
2
2.5
Aug
-97
Feb
-98
Aug
-98
Feb
-99
Aug
-99
Feb
-00
Aug
-00
Feb
-01
Aug
-01
Feb
-02
Aug
-02
Feb
-03
Aug
-03
Feb
-04
Aug
-04
Feb
-05
Wag
e ra
te
m20q3m50q3
Applying the naïve model
![Page 64: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/64.jpg)
Econometric issues
• Wage rate series for almost all age groups for almost all income quintiles have unit roots
• Thus, simple correlations among level series give spurious correlations
• How do we deal with the problem?• One solution: Instead of the original series,
manage the growth rate of the series
![Page 65: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/65.jpg)
0.4
0.8
1.2
1.6
2.0
2.4
5 10 15 20 25 30 35 40 45
M15M20M25M30
M35M40M45M50
M55M60
![Page 66: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/66.jpg)
-.3
-.2
-.1
.0
.1
.2
.3
5 10 15 20 25 30 35 40 45
DM20DM25DM30
DM35DM40DM45
DM50DM55DM60
![Page 67: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/67.jpg)
Result
• Even though the original series look quite dispersed, the growth rate (log difference) are almost perfectly synchronized
• What would they be related to?• One possible culprit: the monthly GDP
Index produced by INEGI (actual GDP figures are only available every three months, our series is available every two)
![Page 68: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/68.jpg)
100
110
120
130
140
150
0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2
M30
GD
PIN
DE
X
![Page 69: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/69.jpg)
A simple model
Dependent Variable: M30Variable Coefficient Std. Error t-Statistic Prob.
GDPINDEX 0.032815 0.003322 9.878397 0C -2.3587 0.419274 -5.62567 0
R-squared 0.689228 Mean dependent var 1.774597Adjusted R-squared0.682165 S.D. dependent var 0.322315S.E. of regression0.181711 Akaike info criterion -0.5303Sum squared resid1.452829 Schwarz criterion -0.45079Log likelihood 14.19678 F-statistic 97.58273Durbin-Watson stat1.370915 Prob(F-statistic) 0
![Page 70: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/70.jpg)
But the model is wrong
• Why?
• Using Augmented Dickey Fuller test we cannot reject the hypothesis that M30 and GDP Index have unit roots
• Next logical pass: cointegrated model
![Page 71: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/71.jpg)
Cointegration test results
Unrestricted Cointegration Rank Test (Trace)Hypothesized Trace 0.05No. of CE(s) Eigenvalue Statistic Critical ValueProb.**
None * 0.34862 28.62281 15.49471 0.0003
We reject the null hypothesis that thereis no unit root: one unit root
![Page 72: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/72.jpg)
What comes first? Change in GDP or Wage rise?
Pairwise Granger Causality TestsSample: 1 46Lags: 4
Null Hypothesis: Obs F-Statistic Probability
GDPINDEX does not Granger Cause M30 42 4.54527 0.00492 M30 does not Granger Cause GDPINDEX 5.01425 0.00286
![Page 73: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/73.jpg)
• Lump sum– Usually there are many restrictions– Justified to prevent "double dipping"
• Phased withdrawal (also called programmed withdrawal)– Problem of adverse selection
• Annuities– Individual or joint– Criticism against individual annuities
Options for Retirement BenefitsOptions for Retirement Benefits
![Page 74: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/74.jpg)
Country
Payout Market
StructureLump-sums
Allowed?Degree of
AnnuitizationDegree of
PWs
Australia Competitive Yes Very Low Low
Chile Competitive Yes, but restricted > 60% < 40%
Denmark Competitive Yes, but restricted > 50% < 50%
Sweden Monopoly No 100% 0%
Switzerland Competitive Yes, but restricted Very high 0%
Colombia Competitive Yes, but restricted
Hungary Competitive No Starts in 2013 Starts in 2013
Poland Competitive No Starts in 2009 Starts in 2009
Source: Rocha, IIFA, Istambul, 2006
Types of PayoutTypes of Payout
![Page 75: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/75.jpg)
In Chile (best case scenario)
Year Programmed Withdrawal
Annuities Insurance
1988 32.20% 10.00% 57.80%
1990 42.10% 23.30% 34.40%
1995 46.00% 39.60% 11.20%
2000 40.60% 52.20% 5.30%
2005 37.30% 58.60% 2.80%
2006 38.30% 57.90% 2.60%
Source: SAFP, 2007
![Page 76: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/76.jpg)
• Where is the meat of contribution?• 6.5% of base wage (upto a limit) for
retirement• 5% on housing account• 2.5% on life and disability• Workers compensation• All the money in bold red are
managed by the ubiquitous IMSS and in blue by INFONAVIT
What happens in Mexico?What happens in Mexico?....and why should the rest of the world care?....and why should the rest of the world care?
![Page 77: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/77.jpg)
• SAR-97 reform treats differently members of the “transition cohort” from members of the “new cohort.”
• If a new entrant to the labor force after July 1997 ( “new cohort”) becomes disabled or dies, she or her beneficiaries must buy an annuity from a private insurance sector specialized annuity provider.
RulesRules
![Page 78: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/78.jpg)
Where is the meat?Where is the meat?
Workers Number Distribution
Transitional generation
7,743,057 63 percent
New generation
4,604,993 37 percent
Total 12,348,050 100 percent
Source: IMSS, data for 2004
![Page 79: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/79.jpg)
Source: CNSF, 2008
Types of Companies in the Annuities Market
0%
20%
40%
60%
80%
100%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Other
Financial Groups
Foreign Subsidiaries
![Page 80: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/80.jpg)
Number of companies
0
2
4
6
8
10
12
14
16
Life and Pension
Specialized
Source: CNSF, 2008
![Page 81: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/81.jpg)
• The 1997 LGISMS reform stated that insurance companies licensed to practice life insurance were allowed to offer pension annuities for a five years transition period.
• After that period, those insurance companies would have had to separate annuities operations in specialized pension annuity companies.
• This explains the transition
Why all specialized companies now?Why all specialized companies now?
![Page 82: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/82.jpg)
Concentration of top 5
60
65
70
75
80
85
90
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: CNSF, 2008, vertical axis in percent
Bancomer 32.8%Porvenir GNP 18.3%Génesis 14.7%Inbursa 13.3%Comercial América 6.2%
BBVA Bancomer 23.0%Pensiones Inbursa 15.8%Profuturo GNP 15.5%Pensiones Banorte 10.9%Pensiones Banamex 10.6%
![Page 83: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/83.jpg)
• Foreign subsidiaries have come to dominate– This is a general pattern due to NAFTA
• Number of companies have shrunk somewhat – dominated by specialized companies– This is due to laws related to who can
sell• Concentration in the industry has
stayed the same since 1999
Summary of what has happenedSummary of what has happened(the tip of the iceberg)(the tip of the iceberg)
![Page 84: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/84.jpg)
Performance of annuity market
LR = the loss ratio; OR the operational expense ratio; UR = the underwriting expense ratioSource: CNSF
![Page 85: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/85.jpg)
0%
20%
40%
60%
80%
100%
Pensions
Accidents & Health
Life
Other P&C
Motor
Source: CNSF, 2007
The Iceberg: Pension becomes a The Iceberg: Pension becomes a significant player significant player but then it shrinks but then it shrinks
![Page 86: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/86.jpg)
A closer look: A clear drop from the peak in 2001A closer look: A clear drop from the peak in 2001
The Rise And Fall of Annuitants
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
Eligible Insured
Annuitants
![Page 87: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/87.jpg)
• When the new regulatory regime came into effect in Mexico, the initial plan of 1995 called for buying single premium annuities for the widows and disabled workers under the new system.
• Given that all these affiliates under the new regime would not have enough money in their accounts, the government (through the IMSS) would pay a lump-sum to pay for such annuities
• Specialized companies would enter this market
The Initial PlanThe Initial Plan
![Page 88: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/88.jpg)
Additional benefits offered by private companiesAdditional benefits offered by private companies
Company Additional Benefits %Allianz 14.5
Inbursa 12.0
Comercial América 8.0
BBV 7.3
Banamex 7.0
GNP 7.0
Bital 7.0
Banorte 6.5
Génesis 6.3
Bancomer 3.7
Source: Own, data from 2000
![Page 89: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/89.jpg)
• Before 1997, during the defined benefit regime, beneficiaries were paid annually and no annuity was bought
• Under the new regime, IMSS observed two facts between 1997-2000– First, cash outflow rose dramatically to pay for the
disabled workers and the widows– Second, more than a third of the disabled workers
died within three years
What happened during 1997-2000What happened during 1997-2000
![Page 90: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/90.jpg)
• It depended on the size of the annuity• On the average, the cost was between
800,000 and 900,000 pesos per case• With over 30,000 cases in 2001, it put
severe pressure on the budget of the IMSS (which still had a pay as you go structure – the current expenditure came from current year's budget of the federal government)
How much did it cost per annuitant to IMSS?How much did it cost per annuitant to IMSS?
![Page 91: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/91.jpg)
• A study by IMSS showed that the minimum pension guarantee is a little less than USD 200 per month
• This pension is 10% more than what people got under the old law
• The lump sum required for a worker receiving a minimum pension is of a little less than a USD 100,000.
Summary of additional outflow of IMSS due to annuitiesSummary of additional outflow of IMSS due to annuities
![Page 92: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/92.jpg)
Comparative benefits under 1973 versus 1997 regimes
Source: Fernandez Reyes (2004)
![Page 93: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/93.jpg)
• In order to lower the costs, IMSS adopted a new policy:
• All disability pensions were going to be treated as provisional pensions
• This would avoid the lump sum payment of buying a single premium annuity for at least two years
• Why two years?
How much did the cost rise for IMSSHow much did the cost rise for IMSS
![Page 94: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/94.jpg)
• By law, all temporary pensions must be renewed as temporary or changed to definitive pension within two years
• After this two year period rule during 2001-2003, outflow due to single premium annuity were dramatically reduced
• Most of the pensions granted were "renewed" temporarily instead of reassigned as "definitive"
Why two years?
![Page 95: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/95.jpg)
• Mexican law establishes that a disability pension must be granted whenever a person is unable to fulfill the exact same job they were doing before the disease or accident
• The IMSS established more stringent medical criteria before granting a permanent disability pension
• Essentially, a person had to prove to be VERY sick in order to get it.
This ruling became know as theThis ruling became know as theLast Temptation of the IMSSLast Temptation of the IMSS
![Page 96: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/96.jpg)
• In Mexico, proving one's identity can be difficult
• For tax and social seucurity purposes– First, the names have to match exactly– Second, the identity by RFC have to be
right– Third, new identity by CURP have to be
right• Many people get multiple Ids• It affects them severely when they try
to collect their social security benefits
Common problems got compounded with tighetened Common problems got compounded with tighetened requirementsrequirements
![Page 97: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/97.jpg)
• The IMSS did an internal study• It projected forward the cost had the
lump sum payment to buy annuities continued (called the "benchmark")
• It projected forward the cost with the new policy of payment with the tightened policy
• The comparison is shown in the next slide
Does the IMSS REALLY reduce the cost in the long run?Does the IMSS REALLY reduce the cost in the long run?
![Page 98: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/98.jpg)
Cost of two options 2005-2068
0
100200
300
400
500600
700
800
2005 2025 2045 2065
year
(mil
lion
US
D)
Current Policy
Benchmark
IMSS study of cost comparison
![Page 99: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/99.jpg)
• The big spike in the cost of year 2006 from the benchmark comes from assuming the costs of all the lump sums generated by the pensions that were handled as temporary but were supposed to be definitive.
• The current policy is cheaper until the year 2053
• Which one is cheaper? • We have to choose a discount rate to make a
comparison of the two vectors by converting them into scalars
Some observations of the cost projection 2005-2068Some observations of the cost projection 2005-2068
![Page 100: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/100.jpg)
Comparison of the regimesComparison of the regimes
Rate PVCurrent PVBenchmark0% $276,993.62 $314,310.602% $132,821.26 $163,091.39
3.5% $83,659.71 $109,329.315% $56,633.42 $78,594.50
10% $23,065.99 $37,416.61
![Page 101: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/101.jpg)
• New policy has reduced the “cost to IMSS” in the NPV sense in the order of $20 billion pesos (at a benchmark rate of 3.5%)
• However, such a reduction in cost has a price in the future
• The market for contingent annuities has collapsed
• This reduction in competition could increase the transactions cost of buying annuities in the future thus compensating for the saving that IMSS has generated
ConclusionsConclusions
![Page 102: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/102.jpg)
• Institutional structures are important– It is possible that loopholes in reform can
allow the (bad?) old regime to play havoc in the annuities markets
• Strict regulation does not necessarily benefit annuitants– Mexican companies offering annuities have
heavy restrictions on investment regime– A quick change in market condition can
actually make matters worse – it also discourages new entrants
So what? So what? General lessonsGeneral lessons
![Page 103: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/103.jpg)
Cultura Financiera, Información y Elasticidad de la Demanda: El estudio y la Evidencia Experimental de México
![Page 104: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/104.jpg)
Introducción• Una mayor capacidad de elección• La privatización en tradicionales mercados de bienes
y productos • La elección permite a la gente usar la información
privada • La elección crea incentivos para la eficiencia• Ejemplos• La elección escolar• El cuidado de la salud • La seguridad social
![Page 105: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/105.jpg)
Introducción
• En todos los mercados, la eficiencia y los resultados dependen del comportamiento del consumidor
• Altos costos de la toma de decisiones podría colocar a los consumidores en posición para determinar las características, como la marca, utilidad y publicidad más que el precio
![Page 106: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/106.jpg)
Conclusiones
• La competencia no conduce a la eficiencia
• Hace más grande la brecha del estatus socioeconómico
• Las empresas podrían no tener incentivos para proporcionar información eficiente
![Page 107: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/107.jpg)
Problemas de Cultura Financiera
• (1) Suponga que tiene $100 en una cuenta bancaria y el tipo de interés que otorga es del 2% por año. Después de 5 años, ¿cuánto cree que habrá en la cuenta: más de $ 102, exactamente $ 102, menos de $ 102?
• (2) Imagine que la tasa de interés en la cuenta de ahorro fue de 1% y la de inflación de 2% por año. Después de 1 año, ¿sería capaz de comprar más, exactamente lo mismo o menos de lo que hoy puede comprar con el dinero de la cuenta?
![Page 108: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/108.jpg)
Problemas de Cultura Financiera
• (3) Si 5 personas tuvieran el número ganador de la lotería y el premio fuera de 2 millones de dólares, ¿cuánto le tocaría a cada uno?
• En EUA, menos del 50% de las personas podrían contestar (1), (2) y (3) correctamente
• Un estudio similar está haciéndose en México y Chile
![Page 109: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/109.jpg)
Estudios
• Los trabajadores son inelásticos al precio
• Altos costos de cambio• Cambios en el trabajo implican
cambios en su duración• Efectos importantes cuando se trabaja
en equipo con los patrones
![Page 110: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/110.jpg)
Estudios
• Los trabajadores responden a la publicidad en lugar del “precio”
• Los consumidores NO tienen visión futura
• Son demasiado sensibles a la información irrelevante
• Comportamiento diferente en los trabajadores con salarios altos
![Page 111: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/111.jpg)
Estudios
• Hastings y Mitchell examinan los vínculos entre la actual tendencia, la cultura y decisiones financieras en los ahorros y pensiones en Chile.
• Experimento de campo y uso de datos de encuestas de hogares
• Implicaciones para el diseño de políticas
![Page 112: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/112.jpg)
Este estudio
• Se discuten los resultados de la encuesta piloto en la ciudad de México
• Este proyecto recoge los datos de la encuesta de una muestra para examinar
• ¿Cómo se mide el impacto de la cultura financiera en la sensibilidad al precio?
• ¿Pueden los políticos usar la información y enmarcar dichas desviaciones causadas por el “analfabetismo” financiero?
![Page 113: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/113.jpg)
Cambio de México
• Objetivos: Reducir la desigualdad presente del sistema anterior, aumentar la cobertura y el monto de las pensiones, hacer del sistema de pensiones financieramente viable
• El sistema toma lugar entre 2005 y 2008
![Page 114: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/114.jpg)
Hasta 2008
• Los trabajadores deben elegir el fondo en el momento de entrar al mercado laboral formal
• El trabajador puede cambiar con bastante facilidad los fondos: Llamar a CONSAR En línea Llamar a las Afores
![Page 115: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/115.jpg)
Tasas
• Las AFOREs cobraban una tasa sobre flujo y/o una tasa de equilibrio
• Comisiones variables está calculado como un porcentaje del salario
• Comisiones variables de 1% = 15.4% del salario (1/6.5 = 0.154).
• El balance de los comisiones son calculados como un porcentaje de los activos manejados
![Page 116: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/116.jpg)
Tasas• CONSAR publica un “Balance de comisiones
equivalentes anuales” (CEF)• El balance de comisiones de una Afore podría
contener un cargo para hacer el mismo efecto al final de un año que si no carga comisiónes variables
• Hipótesis que deben ser formuladas: El balance está establecido con relación al salario del sistema, el cual sobreestima el pago de comisiones,pero hace que el CEF se vea mas en el rango de una comisión de manejo razonablemente alta
![Page 117: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/117.jpg)
Tasas
• Con el fin de cambiar o elegir una Afore, los trabajadores deben firmar un documento constando que ellos han visto y entendido la tabla equivalente de últimos tres años de las comisiones equivalentes.
![Page 118: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/118.jpg)
Cuestionario
• Serie de preguntas sobre el conocimiento del sistema, la elección de comportamiento, la cultura financiera
• Seguido por las opciones hipotéticas • Comisiones anuales solamente• Comisiones sólo en pesos por año• Comisiones sólo en pesos por 10 años• Comisiones y tasas de retorno por un año• Comisiones y tasas de retorno por 1 y 3 años• Cada trabajador es seleccionado aleatoriamente para
obtener 4 de estos cálculos de balance
![Page 119: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/119.jpg)
Cuestionario
• Identificación
• Precios (rendimientos) y nombres de empresas a través de encuestas al azar y dentro de la encuesta
• Preguntan por las 3 primeras empresas clasificados
![Page 120: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/120.jpg)
Cuestionario
• Universidad de Yale: • Encuesta sobre el Ahorro para el Retiro • Estamos realizando una encuesta para entender
mejor la perspectiva de los trabajadores Mexicanos sobre el ahorro para retiro. Sus respuestas de esta encuesta serán completamente confidenciales y usaremos solamente con fines de análisis e investigación en nuestra universidad.
![Page 121: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/121.jpg)
Cuestionario
• La encuesta le quitará aproximadamente 10 minutos de su tiempo. Por favor lea instrucciones para cada pregunta y señale su respuesta. Nos interesa su opinión, y para ello, no hay respuestas correctas o incorrectas.
![Page 122: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/122.jpg)
Cuestionario
• Ahora, nos gustaría pedirle que elija una AFORE en base a la información presentada. Suponga que su hermano favorito, José, está considerando cuál AFORE elegir. José tiene 40 años de edad, gana $3,300 pesos al mes, y actualmente tiene una cuenta de ahorro para el retiro con un saldo de $17,500 pesos. José le ha pedido su consejo sobre cuál AFORE debería de elegir.
![Page 123: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/123.jpg)
Cuestionario
• Suponga que usted sabe que las AFORES cobran una comisión anual, y la CONSAR le ha facilitado una tabla que indica la comisión anual que cada AFORE le cobraría a su hermano José.
![Page 124: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/124.jpg)
Cuestionario
• De acuerdo a su actual conocimiento sobre las AFORES y a la siguiente tabla, que le ha sido facilitada por la CONSAR, indique las TRES MEJORES AFORES que le recomendaría elegir a su hermano José. En la casilla en blanco a la izquierda del nombre de la AFORE, escriba el número 1 para la mejor opción, el número 2 para la segunda mejor opción, y el número 3 para la tercera mejor opción.
![Page 125: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/125.jpg)
![Page 126: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/126.jpg)
![Page 127: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/127.jpg)
![Page 128: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/128.jpg)
![Page 129: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/129.jpg)
![Page 130: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/130.jpg)
![Page 131: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/131.jpg)
![Page 132: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/132.jpg)
![Page 133: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/133.jpg)
![Page 134: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/134.jpg)
![Page 135: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/135.jpg)
![Page 136: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/136.jpg)
![Page 137: The Cost of Minimum Pension Guarantee What is the problem we study? Governments often promise a minimum level of benefits under an accumulation scheme](https://reader033.vdocuments.net/reader033/viewer/2022042822/5665b4681a28abb57c914cb7/html5/thumbnails/137.jpg)
Conclusión
• Información simplificada tiene un impacto causal en la elección del comportamiento de los “analfabetos” financieros
• Revisando las comisiones y retornos reduce la elasticidad del precio de la demanada
• Los “analfabetos” financieros son un gran segmento del mercado, y el cambio en su comportamiento puede tener grandes efectos sobre las tasas
• Observando la elección y demanada se puede entender los incentivos de las firmas para diseñar políticas que minimícen las distorciones en mercados privados para bienes públicos