Identifier
Created
Classification
Origin
07MEXICO1627
2007-03-30 21:29:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Mexico
Cable title:  

MEXICO,S SENATE APPROVES PENSION REFORM

Tags:  ECON ELAB EFIN PINR PGOV MX 
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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

-------
Summary
-------

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

--------------
Summary
--------------


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.

--------------

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.

--------------
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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