Mexico City’s universal pension explained

I have often wondered whether Mexico City was following the example of others – perhaps New Zealand, Mauritius or Bolivia – twelve years ago when it introduced a universal age pension. Now I have satisfied my curiosity, partially at least. In November of 2003, Rosa Elena Bernal Díaz, editor of a quarterly magazine published by the government of Mexico City, interviewed the intellectual author of the city’s universal pension: Dr Asa Cristina Laurell. In it, Ms Bernal asks Dr Laurell a pointed question concerning the origin of the idea of a universal pension: “How did it happen? Where did the idea come from? Is there some antecedent or not, for this type of programme?”

Before examining Dr Laurell’s response to the question, I would like to provide some background on this remarkable woman. She was born in 1943 in Uppsala (Sweden) and in 1971 graduated from the University of Lund as a physician/surgeon. In 1967 she received a scholarship to study public health at the University of California-Berkeley where she graduated with a Masters in Public Health. During her stay at Berkeley she joined protests against the Vietnam War and in support of civil rights for African-Americans. She emigrated to Mexico in 1971, became a nationalized citizen the same year, and in 1987 earned a PhD in sociology from the largest university in Mexico (UNAM). She was extremely active politically, participating in the founding of Mujeres en Acción Solidaria (MAS, Women’s Solidarity Movement) in 1971, then in the founding of the leftist PRD (Party of the Democratic Revolution) in 1989. Dr Laurell was an integral part of the successful campaign of Andrés Manuel López Obrador (AMLO) for mayor of Mexico City. For this, she was rewarded in December 2000 with the post of Secretary of Health. She left this post in May 2006, with her goals fully accomplished, to support AMLO in his campaign for the presidency of Mexico.

Asa Cristina Laurell

More information can be found here (in English) and here (in Spanish).

Although I admire Dr Laurell and her accomplishments, I am puzzled by how she answers the question in this November 2003 interview. In her response, she alleges that all modern states provide universal pensions to elderly citizens. There is not a single European state, she says, “that does not have a universal pension”. Even the United States, which does not provide all its citizens with access health care, does provide them with “a basic universal pension”. This is simply not true. Universal pensions are not very common. Sweden, Dr Laurell’s country of birth, has never had a universal pension. What Sweden and several other European countries have is a pension-tested benefit, a “universal minimum pension”. Other European countries, and the United States, offer means-tested pensions to those who can prove they are living in poverty. Dr Laurell’s comment makes sense only if we replace “universal pension” with “social pension”. It is true that nearly all modern states provide at least limited access to social (non-contributory) pensions, and Mexico, prior to 2001, had no social pensions at all, not even targeted social pensions.

If Mexico City was following the path of the United States and European countries, why, then did Dr Laurell (and AMLO) insist on a universal pension rather than a universal minimum pension? According to Dr Laurell, they wanted a pension twice as large, with monthly benefits equal to 30 minimum daily wages instead of 15, and an age of eligibility no higher than 65 (rather than 70), but budget constraints did not permit it. Local governments in Mexico are not allowed to borrow, so must balance their budgets each fiscal year. The universal pension was financed – and continues to be financed – with no increase in taxes. Financing of a modest universal pension was possible by reducing government salaries, travel and other expenses, in addition to combating corruption (including evasion of taxes). It is true that the federal government spends vast sums of money subsidising contributory pensions of the social security system. Social pensions at the national level could be financed in large part simply by reducing these subsidies, which go to workers in the formal sector, who enjoy a high standard of living relative to informal workers. But reform of the social security system cannot be done at the local level. Dr Laurell carefully and correctly explains all this in the interview.

What Dr Laurell fails to explain is, Why give social pensions to those who receive subsidized contributory pensions from the federal government? I normally prefer universality to pension-tested benefits, but contributory pensions in Mexico are subsidized by taxpayers, so why provide beneficiaries with a flat benefit on top of their employment-related pension? According to Dr Laurell, 40% of elderly residents of Mexico City had access to a pension, compared to only 30% in Mexico as a whole. Now, some of these pensions might be tiny – smaller than the social pension. In such cases, the pensioner could receive a smaller social pension, a top-up to bring him or her to the minimum amount. Sweden pioneered this system in 1913, and continues to operate it today. The fiscal savings of a pension test could have been used to increase the size of the social pension, or reduce the age of eligibility, or both.

What are the arguments against? Dr Laurell eloquently cites stigmatisation, administrative costs and errors that result from attempts to exclude elderly residents from benefits. For comprehensive tests of income or assets, her reasoning is correct. But a pension test as administered in Sweden applies to individuals, not households, and applies only to government pensions, not personal or occupational pensions. The administrative costs of a pension test are low, and there is no reason for any applicant to suffer stigma. After all, a housewife has the right to claim such a pension, regardless of the retirement income of her husband.

I frankly do not understand why Mexico City opted for a universal pension rather than a universal minimum pension. The latter, to me, makes more sense in the context of Mexico.

The federal pension implemented last year by the outgoing rightist PAN government (70+), and expanded this year by the new centrist PRI government (65+), is not universal. It is a nationwide, universal minimum pension. This is not ideal. It would be better to remove all subsidies from employment-related pensions, and then provide basic, universal pensions to everyone. Without reform of the contributory pension system, a universal minimum pension does trump universal pensions. Workers in Mexico’s formal sector (and the managers of their individual accounts) are receiving far too many federal benefits already.

Excerpts from the interview with Dr Laurell (in Spanish) are posted here, along with a link to the full interview.

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