In the last year of his administration and with elections looming in June, AMLO sent several constitutional amendments to Congress including a pension reform, changes to the appointment process of judges, among others. The Lower Chamber is expected to set the next steps for the discussion and voting of the reforms on Wednesday February 7. Approval of the reforms require an elevated quorum, and hence appear unlikely to be approved. However, if approved, the pension reform could raise medium-term fiscal pressures, while other reforms add rigidity to fiscal spending, reducing the ability to eventually reduce fiscal expenditures, if needed.
According to the details of the pension reform, formal workers under a defined contribution scheme (after 1997, most pension plans were converted from defined benefit to defined contribution schemes) will have the right to receive a pension equivalent to their last salary but limited to the current average salary of formal sector workers (which would be inflation-adjusted going forward). In other words, only formal sector workers that earn the average salary and below will receive a pension of 100% of their last salary (according to a Banxico study, the current average replacement rate is 64%, but lower salaries have replacement rates closer to 100%). The initiative also considers the creation of a public fund (“Pension del Bienestar”) with an initial capital of MXN 64 billion (0.2% of GDP) to finance said increase in pension expenditures. The fund will have as initial revenue sources the sale of seized assets, sale of state tourism related assets, tax debt from public, legislative and judicial entities and unclaimed resources from individualized pension and housing savings. Additionally, the fund will be financed with the elimination of trust funds from the judicial power, savings from the elimination of autonomous institutions (not referring to the central bank) and regulators, profits from certain public entities, among others. In the short term, the reform appears unlikely to place additional pressure on fiscal accounts considering that the flow of workers retiring are still from the previous pension scheme (defined benefit), but as workers under the defined contribution scheme retire towards 2030-2040 fiscal pressure could be more evident.
While non-contributive pensions were already at the constitutional level, the amendment lowered the minimum retirement age to 65 years (previously at 68 years old). We note fiscal expenditures on pensions are already large, at 27% and 21% of total fiscal revenues and expenditures, respectively. For 2024, the government is expected to spend around 1.4% of GDP on non-contributive pensions and 4.4% of GDP on contributive pensions. The latter reflects the government’s contribution to individual capitalization accounts and the cost of pensioners in the defined benefit scheme (before the 1997 reform).
Other relevant reforms included in the package are: minimum wage increases at least tied to inflation; forbidding GMO maize and fracking; forbidding open pit mining concessions; scholarships for low income families; limiting water supply for industries in certain zones; establish a minimum salary (in line with average formal sector salaries) for teachers, police, soldiers, nurses and medics; a youngsters job training program; support for small farmers (“Sembrando Vida”); guaranteeing prices for agricultural products (the government buys certain agricultural products when the prices are low); use railway concession for passengers; allow the state electricity company to have an advantage over private sector participants (same spirit as the secondary legislation electricity reform which was deemed unconstitutional, recently, by the supreme court); reduce expenditure for political campaigns; eliminate the number of congressman (Senate and Lower chamber) elected by proportional vote (“plurinominales”); elect judges (including from the supreme and electoral courts) by popular vote; reduce the threshold for popular consultations to be binding from 40% to 30% of citizens; public servants cannot earn more than the President; elimination of some autonomous organisms (not referring to the central bank) and regulators.
We note that several of these reforms are already in place and a Constitutional amendment is not necessary. However, including them in the Constitution would make fiscal expenditure more rigid. The table below displays budgeted expenditure of AMLO’s priority programs. Highlighted are the programs that would be included in the Constitution as a right. Assuming these reforms are approved, a total of 1.9% of GDP would be considered rigid expenditure, compared to AMLO’s total priority programs of 2.2% of GDP.
For the approval of the constitutional amendments 2/3’s of both chambers (Lower chamber and Senate) is needed, which the ruling party & coalition currently lack, plus a majority of local congresses approving it. Currently the ruling coalition represent 54.8% and 57% in the Lower Chamber and Senate, respectively. While most of these reforms are unlikely to be approved, not approving the reforms is likely to cost the opposition parties in the election, boosting the ruling party’s candidates. There is, however, a chance that the opposition joins the bandwagon, which could lead to approval of measures with significant fiscal impact.
The long list of reforms seems also a guidance/inheritance for the likely winner of the presidential election, Claudia Sheinbaum (from the ruling party). A recent poll (El Financiero) showed Sheinbaum in the lead with 48%, and Xóchitl from the opposition coalition as a distant second with 32%, while Alvarez from MC opposition party with 10% of voter support.
