How Do Management Fees Affect Retirement Wealth under Mexico's Personal Retirement Accounts System?

Abstract

In 1997, Mexico transformed its pay-as-you-go social security system to a fully funded system with personal retirement accounts, including management fees. This article examines changes in retirement wealth resulting from this new system. It shows that management fees have drained a significant proportion of individuals' retirement wealth and have increased the number of persons claiming a government-subsidized minimum pension, particularly from the time the system was introduced in 1997 until adjustment to management fees in 2008. Since 2008, retirement wealth accumulation has been similar to that of the previous system. En 1997, México transformó su sistema de pensiones basado en cotizaciones individuales a uno de ahorro para el retiro que incluyen cuotas por la administración de las cuentas. El presente estudio examina los cambios en el monto de las pensiones como resultado de la introducción del nuevo sistema. Los resultados muestran que las cuotas de administración han drenado una proporción significativa del ahorro para el retiro de los individuos por lo que ha aumentado el número de personas que solicita la pensión mínima garantizada subsidiada por el gobierno desde que se introdujo el sistema en 1997 hasta que se hicieron ajustes en las cuotas de administración de los fondos de pensiones en 2008. A partir de 2008, la acumulación del ahorro para el retiro ha sido similar que la del sistema anterior.

Identifying heterogeneity using recursive partitioning: evidence from SMS nudges encouraging voluntary retirement savings in Mexico

“…Firms today only charge balance fees. In 2012, after the pension system reform, median losses in wealth from firm balance fees were 19.9% ( 28 ).…”

Choice of Pension Management Fees and Effects on Pension Wealth.

“…We seek to evaluate the potential effect of the choice of fee scheme on the level of pension wealth; that is, on the final balance accrued for retirement. An illustrative and easily implementable measure for this purpose is the so-called "charge ratio" (Whitehouse (2001), Tapia and Yermo (2008), Murthi et al (1999), Aguila et al (2014)). The charge ratio indicates the proportion of fees in the accumulated fund:…”

“…Latin America is an interesting case because it has experience an important wave of pension reform starting in 1981 with Chile and then moving to other countries (e.g., Peru 1992, Colombia 1993, Mexico 1997. Studies have reached some agreement on the positive spillover effects of these reforms, which include greater national savings, enhanced growth, and robust financial and annuity markets (Kritzer et al (2011), Aguila et al (2014)). This stream of research provides little knowledge of how management fees affect individual pension wealth.…”

“…Other studies analyze the effects of fees in compulsory IRA systems on pension wealth, such as Whitehouse (2001), Alonso et al (2014), Aguila et al (2014) and Chávez-Bedoya (2017).…”

“…Importantly, we are also able to account for distributional concerns regarding the relationship between the individual's position in the income and pension wealth distribution and the potential gains or losses from the fee change. Aguila et al (2014) study the Mexican IRA system that, prior to 2008, had three types of fees (load fee, balance fee and return rate fee), but then moved to only a load fee. They find that before 2008, the management fees significantly reduced pension wealth and increased claims for publicly subsidized minimum pensions.…”