VZCZCXRO1358
PP RUEHCD RUEHGD RUEHHM RUEHHO RUEHJO RUEHMC RUEHNG RUEHNL RUEHPOD
RUEHRD RUEHRS RUEHTM
DE RUEHME #1389/01 0801344
ZNR UUUUU ZZH
P 211344Z MAR 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 5889
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUEHXI/LABOR COLLECTIVE
RHEHNSC/NSC WASHDC
RHMFIUU/CDR USSOUTHCOM MIAMI FL
RHMFIUU/CDR USNORTHCOM
RUEHC/DEPT OF LABOR WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 04 MEXICO 001389 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR A/S SHANNON 
STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA, AND DRL/AWH 
STATE FOR EB/ESC MCMANUS AND IZZO 
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GERI WORD 
USDOC FOR ITS/TD/ENERGY DIVISION 
TREASURY FOR IA (ALICE FAIBISHENKO) 
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND SLADISLAW 
NSC FOR CYNTHIA PENDLETON 
STATE PASS TO USTR (EISSENSTAT/MELLE) 
STATE PASS TO FEDERAL RESERVE (CARLOS ARTETA) 
 
E.O. 12958: N/A 
TAGS: ECON ELAB EFIN PINR PGOV MX
SUBJECT: MEXICAN GOVERNMENT MOVING FORWARD ON LONG-AWAITED 
PENSION REFORM 
 
REF: MEXICO 921 
 
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Summary 
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¶1. (SBU) The Finance and Social Security Committees in the 
Mexican Chamber of Deputies (lower house) on March 20 
approved new draft legislation to reform the Social Security 
and Services Institute for State Workers (ISSSTE), the agency 
responsible for providing pension and health care services 
for government employees.  The centerpiece of the reform is 
that it would replace the current "defined-benefit," 
pay-as-you-go pension system with a defined-contribution 
scheme based on individual retirement accounts -- similar to 
the system created in 1997 for private sector employees.  An 
important aspect of the reform proposal is that it would 
allow employees to keep their pension benefits if they move 
from the public sector to the private sector, or vice versa. 
To make the proposal more palatable to Mexico's powerful 
unions, the bill doubles the size of the minimum guaranteed 
pension and increases government contributions to some ISSSTE 
funds.  Although the proposal seems assured of more than 
enough votes for passage, the Democratic Revolution Party 
(PRD) and some unions are opposing it -- arguing that it will 
lead to the privatization of social security for state 
workers.  This reform would relieve significant pressure on 
government finances and would be the first major economic 
reform passed under the Calderon administration.  End 
Summary. 
 
--------------------------------------------- - 
Lower House Committees Advance Pension Reform 
--------------------------------------------- - 
 
¶2. (U) The Finance and Social Security Committees in the 
Mexican Chamber of Deputies (lower house) on March 20 
approved new draft legislation to reform the Social Security 
and Services Institute for State Workers (ISSSTE), the agency 
responsible for providing pension and health care services 
for government employees.  The measure is currently before 
the full Chamber.  If the lower house approves it quickly as 
expected, the bill would go to the Senate as early as March 
¶22. 
 
¶3. (U) The reform bill would replace the current 
"defined-benefit," pay-as-you-go pension system with a 
defined-contribution scheme based on individual retirement 
accounts -- similar to the system created in 1997 for private 
sector employees.  Under the bill, public sector workers who 
have already retired would see no change in their pensions. 
Active employees could remain in the current system, with 
some adjustments to the minimum retirement age and the 
obligatory contribution, or move to an individual retirement 
account system run by a public "Afore" (a pension fund 
managing company) that will be called "Pensionissste." 
Current employees opting for the new system would receive 
government bonds in compensation for their acquired pension 
benefits.  All new public sector workers would be 
automatically enrolled in Pensionissste. 
 
¶4. (U) Pensionissste would be subject to oversight by pension 
regulator Consar, but it would have its own special 
investment regime prioritizing investments in housing, roads, 
petrochemical, and energy projects.  Pensionissste would have 
a board composed of the Director General of ISSSTE and 
members from the union and various secretariats. 
 
¶5. (U) A key aspect of the reform proposal is that it would 
allow employees to keep their pension benefits if they move 
from the public sector to the private sector, or vice versa. 
 
MEXICO 00001389  002 OF 004 
 
 
The reform would bring contract and temporary workers into 
the new pension system, and it would raise the retirement age 
from 48 to 58 for women and from 50 to 60 for men, over a 
20-year period.  The reform also would introduce an incentive 
scheme to increase voluntary savings.  For each peso a worker 
contributes, the government would add 3.25 pesos, up to 2% of 
the worker's salary.  The reform would raise the obligatory 
contribution from 7% to 12.7% of the quoted salary over a 
five year period, with the employee paying 6.125% and the 
government paying 6.625%. 
 
¶6. (U) To make the proposal more palatable to Mexico's 
powerful unions, the government pledged to increase 
government contributions to the various ISSSTE funds, 
including medical.  Notably, the reform would double the 
guaranteed minimum pension to 3,034 pesos (US$278, equivalent 
to 2 minimum wages), indexed to inflation.  The government 
also would contribute a social fee to improve health services 
equivalent to 3.5% of the quoted salary; contribute US$733 
million to strengthen medical services and US$183 million to 
the Fund for Personal Loans; and create a mechanism to offer 
7,000 mortgages to retirees. 
 
¶7. (SBU) Under the reform proposal, Pensionissste would be 
the only pension fund manager allowed to manage the 
individual pension accounts for 36 months.  Government 
workers would be allowed to leave Pensionissste and choose an 
Afore at the end of this time period.  HSBC economist Juan 
Trevino (strictly protect) on March 16 told econoff that he 
did not view the 3-year restriction as a problem.  He said 
this time would allow private sector companies to see how 
things work and get ready to enter this new, attractive 
market.  The creation of a public Afore was critical in 
gaining PRI support for the draft legislation and in helping 
deflect criticism that the reform would privatize ISSSTE. 
 
--------------------------------------------- ---- 
Reform Would Help Defuse Pension System Time Bomb 
--------------------------------------------- ---- 
 
¶8. (U) This reform measure would help relieve pressure that 
ballooning pension and health care liabilities put on 
government finances.  ISSSTE is responsible for paying 
pensions to nearly 600,000 beneficiaries and providing 
medical and social services to about 10 million affiliates. 
The agency has an actuarial deficit in pensions alone 
equivalent to about 50% of GDP.  In recent years, the federal 
government has been forced to make special contributions to 
ISSSTE to address the growing shortfall between its income 
and pension outlays.  This year the government will transfer 
US$3.8 billion to cover ISSSTE's deficit.  According to the 
Secretariat of Finance and ISSSTE, this amount is expected to 
 
SIPDIS 
rise to US$25.6 billion in 2050 if changes are not 
implemented. 
 
¶9. (U) In 2007, revenues from the medical fund are expected 
to cover only 69% of total expenditures.  The difference has 
to be covered by transfers from the federal government 
(US$495 million) and resources from other ISSSTE funds, 
particularly the Fund for Loans and Social and Cultural 
Services (US$247 million).  The reform proposal would allow 
ISSSTE to upgrade medical equipment, reduce wait times for 
life-saving medical procedures, and reduce overcrowding in 
hospitals. 
 
------------------------------------ 
Reaction to Proposal Mostly Positive 
------------------------------------ 
 
¶10. (SBU) The bill has the backing of President Calderon's 
administration, his National Action Party (PAN), the 
 
MEXICO 00001389  003 OF 004 
 
 
Institutional Revolutionary Party (PRI), the Green Party, the 
New Alliance Party.  Press reports say that the bill also has 
the support of FSTSE (Federation of State Employees Unions) 
leader Joel Ayala Almeida and National Teachers Union (SNTE) 
leader Elba Esther Gordillo, and that these leaders had 
significant input into the text of the bill (in part because 
Gordillo placed one of her main allies, Miguel Angel Yunes, 
as Director General of ISSSTE).  A spokesman for Joel Ayala 
confirmed to Labor Counselor that the FSTSE firmly supports 
the reform legislation.  Moreover, HSBC's Trevino told 
econoff that everyone is optimistic the reform will be 
passed, and that is it more matter of "when" than "if." 
 
¶11. (SBU) Although the proposal seems assured of more than 
enough votes for passage, its private account approach is 
precisely the sort of reform guaranteed to arouse ire on the 
Left.  Indeed, Democratic Revolution Party (PRD) lawmakers 
and some unions have spoken out against what they are calling 
the "bankers law," opposing in particular the provision that 
creates personal retirement accounts, which they have 
characterized as privatization.  They fear that it will lead 
to the privatization of social security for state workers. 
While the PRD and some unions are expected to protest against 
the bill, Trevino told econoff that he did not think the 
reform would spur major demonstrations.  He noted that the 
government had already done a significant amount of lobbying 
and that the person in charge of the union actually helped 
draw up the proposal. 
 
¶12. (SBU) Most organized labor observers agree completely on 
the need to reform ISSSTE, and there seems little doubt that 
the proposed legislation will pass.  However, even these 
people have some reservations about the reform proposal.  For 
example, an analyst with Mexico City's Center for 
Investigations and Advanced Studies in Social Anthropology 
(CIESAS) pointed out that the proposed changes to ISSSTE 
would make it more like IMSS; the pension system that now 
exists for private sector employees.  The analyst remarked 
that IMSS is anything but a success in providing pension and 
health care benefits to the average Mexican in the private 
sector. 
 
¶13. (SBU) The CIESAS analyst also raised concerns that 
Pensionissste would be unduly influenced by labor leaders 
Joel Ayala and Esther Gordillo.  Both of these leaders have 
considerable political power in Mexico and Gordillo, in 
particular, is often pointed to as someone who exemplifies 
the negative aspects of a corrupt labor movement that is 
allowed to act with impunity.  These reservations 
notwithstanding, the analyst recognized that many parts of 
the reform proposal, including the increase in the retirement 
age, would significantly improve ISSSTE's long-term financial 
stability. 
 
------- 
Comment 
------- 
 
¶14. (SBU) This reform would relieve significant pressure on 
government finances and stimulate national savings. 
Moreover, it would be the first major economic reform passed 
under the Calderon administration.  While it will likely be 
more difficult to build consensus for other economic reforms 
(fiscal, energy, etc.), the quick passage of this initiative 
would send a positive signal about the government's 
willingness and ability to pass reform legislation. 
 
¶15. (SBU) It appears that the government worked 
behind-the-scenes to build support for its proposal before 
submitting the measure to Congress, as it did for the 2007 
federal budget.  A Finance Secretariat contact told econoff 
 
MEXICO 00001389  004 OF 004 
 
 
in mid-March that, unlike the previous administration, the 
Calderon government planned to negotiate the provisions of 
its proposals so it could send "passable" bills to Congress. 
The contrast in modus operandi between the two 
administrations suggests a far greater degree of political 
sophistication in the current administration.  And while the 
bill has already generated the expected opposition from the 
Left, it appears the Calderon administration's inclusion of 
union officials in the drafting process may undercut the 
resonance of any such opposition.  If former PRD leader 
Andres Manuel Lopez Obrador (AMLO) and others on the Left are 
unable to generate the public opposition they have 
threatened, it could represent an important defeat for his 
movement. 
 
¶16. (SBU) One aspect that is not clear is how the government 
will fund the transition to the new pension system.  The 
government faces major transition costs over the next several 
years as it pays the pensions of workers who retire under the 
old system.  In the event that all ISSSTE workers opt for the 
new system, the transition costs would total about 30% of 
GDP, according to the Finance Secretariat.  The government 
will also need to consider the   Budget and Fiscal 
Responsibility Law, which prohibits it from running a budget 
deficit.  Post will follow up on the pension reform proposal 
in septel. 
 
 
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