VZCZCXRO0759
PP RUEHCD RUEHGD RUEHHM RUEHHO RUEHJO RUEHMC RUEHNG RUEHNL RUEHPOD
RUEHRD RUEHRS RUEHTM
DE RUEHME #1627/01 0892129
ZNR UUUUU ZZH
P 302129Z MAR 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 6216
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 03 MEXICO 001627 
 
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: MEXICO,S SENATE APPROVES PENSION REFORM 
 
REF: A. MEXICO 1389 
 
     ¶B. 06 MEXICO 2220 
 
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Summary 
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¶1. (SBU) The Mexican Senate approved 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 most government 
employees.  The bill, which has already passed in the lower 
house, still has to be signed by President Calderon and 
published in the Official Gazette to become law.  The Senate 
did not make changes to the bill, but lawmakers introduced a 
separate initiative to reform the Savings Retirement Law. 
This bill, among other things, establishes more requirements 
for the person that will head ISSSTE's pension fund managing 
company.  Despite its relatively easy passage, the bill 
spurred protest marches and was criticized by the political 
left.  While the transition costs of changing pension systems 
will be high, the government will bear these costs over time. 
 While the bill's passage and eventual implementation will 
mark a major success in Mexico's reform efforts and will help 
build momentum for other much-needed reforms, it remains to 
be seen if the Calderon government can reform the pension 
systems of other civil service employees that have financial 
problems.  Pemex alone has more than US$ 50 billion of 
unfunded pension liabilities.  End Summary. 
 
--------------------------------------------- --- 
Pension Reform Bill Awaits President's Signature 
--------------------------------------------- --- 
 
¶2. (U) The Senate this week voted 85-32 to approve a landmark 
government workers' social security reform that gradually 
raises the retirement age and replaces the current 
"defined-benefits," pay-as-ysou-go pension system with a 
fully funded system of individual accounts (see Ref A).  The 
bill, which has already passed in the lower house, still has 
to be signed by President Calderon and published in the 
Official Gazette to become law. 
 
¶3. (SBU) The Senate did not make changes to the bill, but 
lawmakers introduced a separate initiative to reform the 
Savings Retirement Law.  This measure passed in the Senate 
with a vote of 77-22, and is currently awaiting approval in 
the Chamber of Deputies.  The bill establishes more 
requirements for the person that will head Pensionissste, the 
pension fund managing company (Afore) for these new 
individual accounts.  This measure is designed to protect 
Pensionissste from appointments linked to National Teachers' 
Union (SNTE) leader Elba Esther Gordillo and other political 
interests.  Currently, employees can only switch to another 
Afore once a year.  This bill would allow them to switch 
before the year is over to an Afore that offers a higher net 
yield.  The proposal opens the door to allow changes more 
than once a year.  The bill also modifies the way Afores 
charge fees.  Instead of charging fees on both the flows and 
balance of the accounts, they would only be able to charge 
fees on the balance.  The Managing Director to the President 
on Strategy at the Mexican Stock Exchange, Alejandro Reynoso, 
(strictly protect) on March 28 told Econoffs that the bill is 
intended to make Afores more transparent, increase the 
returns to workers, and foster competition among Afores. 
 
------------------------------ 
Reaction to the Reform Measure 
------------------------------ 
 
¶4. (SBU) Despite its quick passage, the bill spurred protest 
marches led by the nation's largest unions, including those 
 
MEXICO 00001627  002 OF 003 
 
 
representing university workers, telecommunications 
employees, and the umbrella workers organization known as the 
National Workers' Union (UNT).  Protesters marched on the 
Senate building in Mexico City's historic center and clogged 
up traffic along one of the city's main thoroughfares. 
Opposition to the reform, largely led by the Democratic 
Revolution Party (PRD), is based on the belief that the 
changes amount to a privatization of the pension system. 
Interestingly, a senior staffer in the Senate's Finance 
Committee told Econoffs that many of the people who have 
opposed the measure (referring to PRD) are actually in favor 
of the reform because they understand the importance of 
having it approved.  He said they voted against the bill to 
maintain "political lines." 
 
¶5. (SBU) However, a labor activist closely linked to the PRD 
commented on the irony of the fact that a massive police 
presence was needed to protect the Senate building while the 
legislators debated the reforms.  During a labor conference 
held when the Senate was debating the bill, a speaker 
rhetorically asked the attendees why it was necessary for the 
police to protect the Senators from the workers while they 
were debating a law that would supposedly benefit the workers. 
 
¶6. (SBU) A spokesperson for the PRD's National Executive told 
Post's Labor Counselor that his party had three major 
concerns about the ISSSTE reform.  First, he said, the reform 
legislation was being hailed as a fiscal savings when in fact 
it only shifts cost of pensions from one part of the federal 
government to another and then, using the much lauded bonds, 
postpones that cost.  Second, the spokesperson said the 
reform was based on the privatized system implemented in 
Chile, which looked good at first but ultimately reduced 
pension benefits through the high costs of related banking 
services.  Third, the PRD representative stated, if the 
ISSSTE reform is allowed to be implemented as is, the Mexican 
government would then try and do the same thing with Pemex's 
retirement system, thereby "harming" even more workers. 
 
¶7. (SBU) Some politicians and analysts have criticized the 
"requirement" that Pensionissste invest in domestic 
infrastructure projects, which can be risky.  The Senate 
staffer told Econoffs that this requirement was not included 
in the legislation because it would have been difficult to 
put such restrictions in a law.  He said that Pensionissste's 
board will be responsible for deciding how funds will be 
invested. 
 
------------------- 
Fiscal Implications 
------------------- 
 
¶8. (SBU) Samuel Aguilar Solis, secretary of the Chamber's 
Social Security Committee, said publicly that the cost of 
reforming ISSSTE will reach US$183 billion and exceed 20% of 
GDP.  The Senate staffer told Econoffs that the reform will 
have "a zero fiscal cost" at the time it is approved because 
it does not include immediate expenditures.  He said that the 
government will incur the costs gradually.  The bonds issued 
to savers who decide to switch to the new system will 
represent a cost, but this burden will be spread out over 
time since payments are only made when a person retires.  The 
expenditures for workers about to retire have already been 
taken into account, so they do not represent an additional 
cost.  The staffer noted that the fiscal benefits of the 
reform will be seen in the long term, and that without such a 
reform, liabilities would eventually represent 40% of GDP. 
He added that future workers will gain because if changes are 
not implemented, eventually the government would be unable to 
pay pension benefits. 
 
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MEXICO 00001627  003 OF 003 
 
 
Benefits 
-------- 
 
¶9. (SBU) Reynoso said that the ISSSTE reform is important not 
only because of the reduction in pressure on public finances 
and the political consensus achieved, but also because of how 
it will benefit financial markets.  ISSSTE's assets to be 
invested total US$550 million, while the bonds granted by the 
government represent an additional US$3.7 billion that will 
be gradually introduced into the secondary market. 
 
¶10. (SBU) A number of contacts told Econoffs that this reform 
will help build momentum for other much-needed initiatives, 
such as a revenue-enhancing fiscal reform and Pemex reform. 
The Senate staffer thinks that the government will push 
fiscal reform next because the more resources the government 
collects, the more the government can reduce Pemex's tax 
burden.  He was confident that political consensus on these 
reforms can be achieved, but both he and Reynoso expect the 
fiscal and Pemex reforms to be less "spectacular" than the 
ISSSTE reform. 
 
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Comment 
------- 
 
¶11. (SBU) This bill's passage and eventual implementation 
will mark a significant achievement in President Calderon's 
reform agenda.  While it will also be significant progress in 
defusing Mexico's ticking time bomb of unfunded pension 
systems (Ref B), the government will need to reform the 
equally or more troubled pension systems of state government 
employees and those government organizations whose political 
clout have blocked critical pension reform, including 
employees of the Mexican Social Security Institute (IMSS), 
Pemex, the Federal Electricity Commission, Nacional 
Financiera, and public universities.  Pemex has more than US$ 
50 billion of unfunded pension liabilities, and the situation 
for IMSS employees is significantly worse.  The workers in 
all of these organizations will most likely resist an 
ISSSTE-like reform.  Pemex workers and the electricity 
commission unions have considerable financial resources, and 
the universities and state governments have large staffs that 
can and will take to the streets in protest.  Overcoming 
money and willing foot soldiers will be a daunting task for 
Calderon's government. 
 
 
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