Tuesday, April 14, 2009

Social Net Reform in Mexico

A few days ago the lower chamber in Mexico passed a reform that allow unemployed workers in the formal economy to withdraw a higher fraction of their pension savings once every five years, thus working as a kind of unemployment insurance. It is different form an unemployment insurance in some sense, workers are exchanging future consumption in order to get more consumption today, clearly because he/she is unemployed, so government is not subsidizing this benefit. Furthermore, rules established imply that withdrawing is a one time action every five years, as opposed to the social benefit in the United States where a monthly payment is made.

In macro terms this new rules are designed not to make a government further liable of pension resources, but to improve automatic stabilizers. Consumption will certainly increase in the short run, since unemployed workers will have a full month pay. In the long run consequences are less clear. It is true that the flow income of pensions will not stop, however, the inverted population pyramid demands ever increasing present savings. The reform will certainly not increase present savings.

The only way to escape a future (sooner) collapse of the pension system is to achieve a higher saving rate in future employees. This is, that current unemployed, with the expectation of getting a job sooner or later, will more than compensate for present withdraws.

The subject then is a good counter-cyclical measure, but it will not solve any pervasive incentive there is in Mexican pension system. In this context, further reforms to achieve perfect mobility across public systems (there are two public systems one for public service workers and the one for the rest of population). There are, otherwise, inefficiencies arising from people having, or looking for, more than one job in public sector, and alike.

Much more emphasis should be posed in automatic stabilizers yet, revenue tax is a mechanism that present a great gap between its present situation and its perfect functioning.

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