Hot potato

Who's going to pick up the bill for the pensions promised to retiring workers? That's the question at the heart of the controversy over the size of the pensions to be paid to retiring private sector workers sparked by the recent Supreme Court ruling, which reduced the maximum pension from 25 minimum salaries to 10.

For the estimated 1.2 million individuals who qualified for a pension of up to 25 minimum salaries prior to the Supreme Court's ruling, cutting the maximum pension to 10 minimum salaries means, roughly, slashing the maximum monthly pension from Ps$42,000 / month to Ps$16,000. The savings for the government (via reduced transfers to the Social Security Institute) will be substantial.

The employees of those companies who have complementary pension plans won't be affected since their employers will have to make up the difference between the pensions they've promised their employees and the pensions paid by the Social Security Institute. The companies, however, will find themselves footing a much larger pension bill than they'd planned for. The monthly income of future retirees will be slashed if their employer doesn't have a complementary pension plan and if they are eligible for a pension of between 10 and 25 minimum salaries if the Supreme Court jurisprudence stands.

In the end, it comes down to who will pay for the pension promises made in the past, the bill for which is coming due. The Supreme Court's ruling effectively passes the cost of paying for promises that contributed to winning elections to companies and individuals.

The root of the problem goes back to 1997 when the private sector pension reform was approved. Then, workers who had contributed to the existing pension program were given the option of choosing between retiring under the 1973 law or the new law, the SAR, which introduced individual retirement accounts. Over time, Congress raised the limit of the maximum pension from 10 minimum salaries to 25. With the maximum pension at 25 times the minimum salary, there's no question that workers who have the choice of which system to retire under will opt for the 1973 law: the pension benefit is greater.

Like most budgetary snowballs, politicians have known that this one is building for a while. No one has wanted to tackle it for obvious reasons. Now that it's out in the open, we'll see whether the same political considerations that created the problem perpetuate it or pass the bill on to parties who believed in the promises the government made to them.