Pension battle heats up: workers protest benefits cuts aimed at relieving public finance burden.

In early August, the Mexican Congress approved changes which will reduce pension benefits for social security workers--an initial step on the long road to reforming all public sector pensions, which are quickly becoming an impossible burden on public finances.

But the move sparked nationwide demonstrations, with thousands of protesters facing off against riot police in front of the Senate in Mexico City and hurling bottles, eggs and other objects at lawmakers arriving to vote on the changes. Senators had to be bussed through the mob to hold their session and pass the reform.

IMSS workers, who include hospital staff, are now threatening to strike over the changes. If the protests are any indication, the reform process will be a long and difficult journey.

The reform was hatched after almost two years of fruitless negotiations between the social security workers' union and the directors of the cash-strapped Mexican Social Security Institute (Spanish acronym: IMSS). President Vicente Fox's National Action Party (PAN) and the former ruling Institutional Revolutionary Party (PRI) teamed up to pass the bill over opposition from the leftist Party of the Democratic Revolution (PRD).

"The IMSS is in free fall," PRI Sen. Cesar Camacho said in an interview. "Its financial difficulties threaten not only the financial health of the institute but also have undermined the operational capacity of social security, which nearly half of all Mexicans depend on for their health care."

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There are many reasons for the financial instability of the IMSS--including the inefficiency and corruption that hamstring most Mexican bureaucracies. But recently, attention has been squarely focused on the pension system.

Under the current system, IMSS employees can retire after 27 years of service if they are female or after 28 years if male. Their pension package on average equals 130 percent of their final salary--8.3 times that of the average Mexican worker paying into social security, according to a report prepared for Fox and Congress by private actuaries.

Given those numbers, it is easy to see why many feel the union has too sweet a deal. On average, IMSS workers retire at age 53 - 12 years earlier than most private sector workers. The IMSS has about 370,000 active workers and 120,000 retirees. But the ratio of active workers to retirees is rapidly declining, and IMSS directors warn social security could go bust within 15 years if pension costs are not reduced.

AGING POPULATION INCREASES PRESSURE

Mexico, like many other countries, is undergoing a demographic shift. Rising life expectancy and an aging population mean workers are drawing pension benefits for an increasing number of years. While in the 1980s average life expectancy in Mexico was around 67 years, today it is over 75. Given the early retirement IMSS workers can take, the state can end up paying retired workers pension benefits for nearly as many years as they were active employees.

A 1997 reform forced private sector workers to give up IMSS pensions and open private pension accounts with newly formed fund managers called Afores. This reduced the government's burden somewhat, but public sector workers were left untouched. Now, however, public sector pensions are under increasing pressure.

During the nation's oil boom in the 1970s, government ranks swelled. In the case of the IMSS, around 110,000 workers were hired during the 1970s and early 1980s. All those workers are now approaching retirement age, and the number of IMSS pensioners will double during the next 10 years.

But IMSS workers say mismanagement of the institute, and not the pension burden, is the root of the IMSS financial crisis. And they fear the recently passed reforms, which only affect the pensions of future IMSS workers, are the beginning of an all-out attack on their collective contract.

"Fox is selling us out. He wants to privatize social security and get us all on private pensions where you have to live off minimum wage," said Hortencia Martinez Lopez, a 42-year-old nurse, during a protest in late July. "The media is making it look like this is all our fault, but we have fought for these benefits. The IMSS is not bankrupt because of the workers, but because the directors have robbed so much."

Besides swelling pension liabilities, the number of social security beneficiaries suffering from more expensive, chronic diseases is increasing. Under these burdens, the IMSS has been spending increasing amounts on its workers' pensions and less and less on health care. Furthermore, over half the working age population and their families work in the informal economy or agriculture and are not covered by IMSS health benefits.

While the growing crisis has forced Congress to act, their solution is limited, at best. The reform prevents the immediate replacement of retirees and creates a separate retirement fund for all future IMSS workers. Under the union's current contract, retirees are automatically replaced each year with new workers. On average, some 12,000 IMSS workers retire and are replaced every year, but under the reform new workers will only be hired if the budget permits.

The reform also requires new workers to pay for their own retirement by having a certain percentage taken out of their paychecks. Former IMSS director Ricardo Garcia Sainz says this reform won't solve anything, since it leaves current workers unaffected. "The change, maybe, will be noted in 30 years," he wrote in a recent column in La Revista, a weekly magazine published by El Universal newspaper. "They have ignored the real problem. It is a trivial reform."

Historically, IMSS workers' pensions have been paid for predominantly by the IMSS payroll deductions of private sector workers, who have covered around 60 percent of IMSS workers' pension costs. The government has covered roughly 25 percent while IMSS employees contributed nearly 15 percent.

But as the ratio of active workers to retirees continues to narrow, the amount paid by the IMSS workers themselves has dwindled. For the current year, the congressional study projects that IMSS workers will only contribute 6 percent of pension costs, the government will cover 17 percent, and social security beneficiaries will pay 77 percent.

In order to keep the pension system going, more and more cash will be needed for pensions, and less and less will be available for health care.

UNFAIR SYSTEM?

Reforma columnist Enrique Canales says the current system is unfair. "We have to eradicate the belief that any benefit a union manages to negotiate above the great majority of workers is free," writes Canales. "Many do not recognize that these above-average benefits are effectively being paid for by urban workers or farmers who receive less-than-average benefits from the state."

But convincing the workers of this will be no easy task. They feel the pension plan is their entitlement, and they have their populist supporters.

"[The reformers] don't want the employer to pay out anything for pensions," said PRD Dep. Pablo Gomez. "It should be employer and employee. The Constitution says this, we can't go against the Constitution."

Following Gomez's logic, the union says it will file a lawsuit with the Supreme Court over the new reform. But lawmakers who voted in favor of the reform are confident a lawsuit will not succeed.

"They can go to the courts if they want, but we are sure this reform is legal," said PAN Sen. Marco Antonio Adame. He said the unions needed to realize they were holding on to their pensions at the expense of the rest of the society. "We need a whole new pension system. This will become an issue of national security if we don't resolve it soon," Adame said.

Besides IMSS, the rest of the public sector pension plans are facing similar crises.

The state-run oil company and electricity companies, federal government secretariats and development banks and the government workers' health care system (ISSTE) all face growing pension liabilities that will increasingly cut into their operational budgets.

The looming liabilities of all these programs total around 31 percent of the nation's gross domestic product (GDP). Adding in the future costs of IMSS pensions and IMSS beneficiaries, the total is around 56 percent of GDP, according to a report by the Institute of Mexican Finance Executives.

Given the limited nature of the recently approved IMSS reform, it is difficult to see how the government will cope.

COMPLETE OVERHAUL NEEDED

In the case of IMSS, the institute needs a complete overhaul. A report by the social security committee of the Mexican Employers Confederation (Coparmex) lays out some possibilities for pension reform. Coparmex says IMSS workers with less than 15 years seniority need to be given a slight salary increase and convinced to pay into private pension funds.

Workers with more seniority will be harder to convince, the report says, so they should be given pay incentives to keep working until they are 65. This would be cheaper than paying a full pension and the salary of their replacements at the same time. Union leaders also need to convince workers to accept a fixed retirement age, rather than a set term of service. And IMSS workers' deductions should be more than the 3 percent of their salaries they currently pay.

But getting workers to accept this will be difficult. Legally, the government can't change benefits in the collective contract. Acquired rights are acquired rights, and they can't be taken away.

Besides directly confronting the union, the IMSS needs to increase efficiency and trim its costs, like the price of its drugs, which have risen 22 percent over the last four years. It should also work to eliminate the evasion of deduction payments by employers, especially among small and medium businesses and the self employed, which make up more and more of the nation's job market.

There is much more the IMSS can do, but it will be to little effect if the ballooning pension liabilities cannot be brought under control. The front line has been drawn, and the battle is just beginning.

Michael O'Boyle is a reporter for the Mexico City edition of the Miami Herald.