Institutional Design of Pension Systems and Individual Behavior: How do Households Respond?

Abstract

Mexico introduced a Defined Contribution (DC) Pension System in 1997. We analyzed the behavior of affiliated workers under the institutional design of the reformed system. Before the reform, 75% of affiliated workers could receive a lifetime annuity upon retirement; we project that under the new rules only 30% of participants will be able to transform savings into pension income. Furthermore, participation is positively related to income and privileged workers (males, living in richer regions and having a mortgage). The new institutional design is not entirely serving as a pension system and may not prevent poverty at old age.

Keywords: Pensions, DC pension system, institutional design, household behavior

JEL Classification: G23, G28, H75, J31