Mexican President Felipe Calderon is close to achieving a legislative victory by reforming Mexico’s pay-as-you-go public pension system covering 2.8 million retired and active federal employees.
The Wall Street Journal recently outlined the key elements of the legislation:
- Worker-owned personal accounts.
- Current workers can choose to stay in the defined-benefit plan or switch to the defined-contribution plan.
- Those who remain in the defined-benefit plan will have to accept gradual increases in the retirement age (no one cares when you retire under a defined-contribution plan because you are just taking your own money).
- Those moving to the new system receive a bond representing past contributions.
- New employees can’t join the old system; so in a generation all government workers will have their own account.
- Nothing changes for those already retired.
Unfortunately, the government will be managing a bunch of the money. That’s a bad idea. But at least Mexico got most of it right.
And this plan comes on top of the creation of personal accounts for the private sector in 1997.
For our part, we think this sounds like a good model for both the public and private sector in the U.S.—all except for the government investing the funds. Much better to leave that money in the hands of approved private sector financial managers, which have a fiduciary obligation to serve the best interests of the account owner, not some politician running for reelection.
Indeed, the plan is very close to what the Institute for Policy Innovation has been promoting for years.
One interesting point in Mary O’Grady’s Journal column discussing the legislation: Calderon chose to tackle this issue after only four months in office.
The Bush administration was faced with a similar decision back in the fall of 2002: Should it move forward with the Medicare prescription drug legislation of Social Security reform—both of which were campaign promises? The administration decided to focus on Medicare first.
Had President Bush decided to use all of that political capital he held early in his presidency, as Calderon chose to do, we might be saying to Mexico and its new legislation creating personal retirement accounts: Welcome to the club.