What could Mexico learn from India's voluntary pension savings system?

In 1997, Mexico introduced its new system of defined contribution IRAs for private-sector workers, and a decade later the system for public sector workers came into force.

What could Mexico learn from India's voluntary pension savings system?
What could Mexico learn from the complimentary retirement savings plans implemented by India? Photo by Caroline Hernandez / Unsplash

The Organization for Economic Cooperation and Development (OECD) highlights the success of the initiative in increasing the capacity of the Mexican economy to finance pensions. However, according to the OECD, significant improvements are needed.

According to the OECD, four main areas require improvements in Mexican pension models: transition to the new model; compulsory contributions; social protection network for the elderly (social pensions); fragmentation of the pension system.

In the particular case of contributions, they are very low, they do not guarantee pension benefits of more than 50% of the last salary received before retirement. The average contribution rate is 6.5% and this, in the best of scenarios, leads to a replacement rate of just 26%; increasing the pension contribution rate to 13% or 18% (over four decades) could guarantee replacement rates of between 75% and 90%.

Pension contribution systems in other developing countries could benefit from programs similar to the Indian Voluntary National Pension System (NPS), a complementary defined-contribution retirement plan characterized by the fact that subscriptions are entirely voluntary.

Anil Lobo, a business leader in India and an expert in retirement practice at Mercer, points to three successful practices and valuable lessons from the Indian pension system and its supplementary retirement savings plans:

New solutions for unsustainable public debt

Economic and demographic factors (such as inflation or prolonged life expectancy of retirees) contributed to the 120-fold increase in the cost of the retirement program in India from 1980 to 2006 (from $5 billion to $600 billion).

One of the measures taken by policymakers to help ensure a decent quality of life while protecting national finances was to raise awareness among workers of their responsibility to prepare.

Promote complementary retirement savings schemes through tax breaks

While some of India's top executives may have access to a variety of retirement savings plans, the majority of the working class have only defined-contribution retirement plans sponsored by their employers at their disposal.

The Indian government then encourages workers to join the NPS through three different tax saving options; in addition, the system has recently been made more flexible by allowing up to 60% of savings to be withdrawn tax-free.

Dissemination of the benefits of the voluntary pension savings system

Despite the additional advantages offered by the NSP to savers, in reality, participation rates are still low; some workers still do not understand the importance of saving for retirement or the advantages of the system itself.

India's NSP leaders now make use of various channels and platforms to communicate and educate the population about how the program works: workshops, seminars, meetings, camps, media, and so on.

Mexico could learn from the experiences of India's voluntary pension savings system.

According to Fernando Solís Soberón, economist and general manager of Banca de Ahorro y Previsión de Banorte, the list of pending issues on the agenda of the Mexican pension system is long.

The country could solve some of its most serious problems in the matter by creating a national pension system aimed at all salaried and non-salaried workers, in addition to improving the management of risks of investments of pension funds and widening the scope of decision of workers, in order not to inhibit product differentiation.