_Mexico: The 1997 Pension Reform_ _7_

- the majority of the Mexican population is still young - in 1990 only 6.4 % of the population was above 65 (Figure la);

- rapid growth in aging as a result of lower fertility rates and improvements in life expectancy (Figure lb) which will result in 10.4 % of the population above 65 years of age by 2020;

- a sharp increase in the dependency ratio; in 1960 there were four pensioners per one hundred contributors, by 1994 this ratio increased to 12.5 per one hundred pensioners (Figure Ic); and

- Mexico's current demographic structure limits the fiscal costs of pension reform. In 1994 almost 50 % of IMSS contributors were between 15 and 30 years old, while the peak of the average wage distribution is reached at about age 40 (Figure ld); this implies that wages for the 15 to 30 year old population will increase in time enabling them to acquire a pension higher than the minimum.

# **IMSS: Heading toward Bankruptcy**

**Financial Disequilibrium.** Severe financial disequilibrium was the most pressing reason why pension reform could not wait. Based on various measurement methods, the overall financial condition of the pension system would have reached crisis proportions soon. As mentioned earlier, the surplus generated by the pension program has been used to finance infrastructure requirements of IMSS and to partially finance health and maternity insurance, which has been traditionally in deficit. In fact, pension reserves were not constituted until 1960, 16 years after the establishment of IMSS. In summary, the level of actuarial reserves was not enough to finance the net present value associated with an aging population and increasing evasion.

Current contributions were insufficient in the medium and long term to finance increasingly generous benefits that had been extended to workers and their relatives. Originally, the system covered only the worker and not his family and benefits were defined as fixed nominal quantities. The minimum pension increased from 35% of the minimum wage prior to 1989 to 100 O in 1995. In other words, the IMSS changed the benefit structure 40 times between 1943 and 1995, while the structure of contributions changed only three times during the same period. **Table 2. IMSS-IVCM Present Value of Future Pension Deficits (as of 12/31/94) 1994 NP$1000 million**

||**-** - *<br>**U'A**<br>**sm**<br> <br>i'<br>'''''|<br> <br>"|**s**||
|---|---|---|---|
|| , ......**..**.**.**<br>: - :.:. ... ....**.**...<br>:.::5-<br>...............<br>..<br>**Reserves**<br>**Present value of future**<br>**contributions**<br>**Actual affiliates**<br>Future generations|im<br>h<br>.<br>**3.25**<br>683.67<br>179.74<br>503.93|**Present value of old**<br>**pensions**<br>Present value of future<br>**liabilities**<br>This generation<br>Future generations|**96.93**<br>**2,390.61**<br>1,017.40<br>1,373.21|
|**TOTAL ASSETS**|683.92|**TOTAL LIABILITIES**|2,487.54|
|_Source:_IMSS.||||

**Financial pressures from an unfair system.** During the 1970s and the 1980s, pensions decreased sharply in terms of their real value, thus affecting pensioners' real income. This issue was partially corrected in 1989 by indexing pensions to minimum wages. As a consequence, a funding problem arose for IMSS since pensions that were financed with current contributions were periodically