MEXICO ENACTS NEW SOCIAL SECURITY LAW
By:
Javier Jimenez
Mexico City
Melissa E. Loyd
Houston
The Mexican Federal Congress enacted a new Social Security Law (the "New Law") (published in the Diario Oficial de la Federacion on December 21, 1995) which will become effective on January 1, 1997. The purpose of the New Law is to improve the quality and scope of the services provided by the Mexican Social Security Institute (Instituto Mexicano del Seguro Social) (the "Institute"), to strengthen the Institute's financial position, and to promote general economic growth and internal savings throughout Mexico. The following is a brief description of the current social security system in Mexico and of some of the most important changes that will take place under the New Law and the impact such changes will have on employers' contributions to the system.
MEXICO'S CURRENT SOCIAL SECURITY SYSTEM
Mexico's social security system provides benefits and protection to employees in five areas: 1) work-related risks; 2) illnesses and maternity benefits; 3) disability, old age (voluntary or involuntary unemployment at or after age sixty-five), involuntary unemployment between the ages of sixty and sixty-five, and death; 4) day care; and 5) retirement. Mexican law requires employers to register their employees with the social security system. The system is financed through contributions made by the employer, the employee and the State.
Under the current law, an employer's contributions may fluctuate between approximately 18.05% and 27.74% of each employee's salary (not including a 5% contribution required under the Housing Law), depending on the degree of danger involved in the company's activities and the company's history of accidents. These percentages, however, are subject to limitations. The calculation of contributions for illnesses and maternity benefits (for which the employer's contribution is 1% of the employee's salary), retirement (for which the employer's contribution is 2% of the employee's salary) and work-related risks (for which the employer's contribution fluctuates between 0.34785% and 10.035% of the employee's salary, depending on the degree of danger involved in the company's activities and the company's history of accidents) is based (i) on the employee's actual salary if such salary is less than twenty-five times the current minimum salary in the Federal District, or (ii) on twenty-five times the current minimum salary in the Federal District if the employee's salary exceeds such figure. The calculation of contributions for disability, old age, involuntary unemployment between the ages of sixty and sixty-five, and death (for which the employer's contribution is 5.95% of the employee's salary) is based (i) on the employee's actual salary if such salary is less than ten times the current minimum salary in the Federal District, or (ii) on ten times the current minimum salary in the Federal District if the employee's salary exceeds such figure.
At present, funds derived from social security contributions are managed directly by the Institute, with the exception of contributions for retirement. Retirement contributions were established through amendments to the current Social Security Law, that were published in the Diario Oficial de la Federacion on February 24, 1992. The amendments provide that all employers (including public entities) must deposit an amount equal to 2% of each employee's salary with a banking institution selected by the employer. Each employee's account consists of a retirement sub-account and a housing sub-account. Employees may instruct the banking institutions where the employer originally made the deposits to transfer the retirement funds to investment companies managed by banking institutions, stock brokers, insurance companies and other companies and may, at any time, make additional contributions to their retirement sub-accounts. Except in the event of temporary unemployment, in which case an employee may withdraw up to 10% of the balance of his retirement sub-account, withdrawals from the retirement sub-accounts may only be made if an employee is sixty-five years old or acquires pension rights as a result of old age, involuntary unemployment between the ages of sixty and sixty-five, disability, or permanent incapacity (subject to certain limitations). The amendments to the Social Security Law that were published in 1992 were the first step in the efforts to modernize the Institute which will continue with the enactment of the New Law.
IMPORTANT CHANGES INTRODUCED
BY THE NEW SOCIAL SECURITY LAW
Under the New Law, the Institute will not directly manage contributions for old age and involuntary unemployment between the ages of sixty and sixty-five nor will banking institutions manage retirement contributions. All contributions for the foregoing will be managed by new companies known as Managers of Retirement Funds (Administradoras de Fondos para el Retiro). The structure and the scope of the authority of these new companies have yet to be defined, but will be the subject of future legislation.
The New Law also provides for modifications to employer contributions in some areas. With respect to day care (which will now include other social services), the employer will continue to contribute an amount equal to 1% of the worker's salary. With respect to old age and involuntary unemployment between the ages of sixty and sixty-five, the employer will contribute an amount equal to 3.150% of the worker's salary. With respect to retirement, the employer will have to continue contributing an amount equal to 2% of the worker's salary. With respect to illnesses and maternity benefits, the employer will contribute (for benefits received in kind) an amount equal to 13.9% of the current minimum salary in the Federal District, and if the worker receives a salary greater than three times the current minimum salary in the Federal District, the employer will contribute an additional 6% of the difference between three times the current minimum salary and the worker's actual salary. Further, with respect to illnesses and maternity benefits, the employer will contribute (for benefits received in cash) an amount equal to 0.70% of the worker's salary. With respect to work-related risks, companies with a low record of accidents will owe fewer contributions under a new formula; however, new companies and existing companies engaging in new activities will contribute at the current rate, which is determined by the degree of danger of the company's activities.
Finally, under the New Law, the calculation of contributions for disabilities and death, and for old age and involuntary unemployment between the ages of sixty and sixty-five will be based (i) on the employee's salary, if such salary is less than or equal to fifteen times the current minimum salary in the Federal District or (ii) on fifteen times the current minimum salary in the Federal District, if the employee's salary exceeds such figure. The number by which the current minimum salary in the Federal District will be multiplied will increase by one each year until such number reaches twenty-five in the year 2007. As of the year 2007, the current minimum salary in the Federal District will be multiplied by twenty-five.
