Abstract
Labor-force participation among Mexican males in their early retirement years (60 to 64 years of age) has decreased in recent decades, from 94.6 percent in 1960 to 65.2 percent in 2010. Similar trends are evident elsewhere in Latin America, and have occurred in the developed world. Such trends pose challenges to financial sustainability of social security systems as working-age populations decrease and those in retirement increase both because of demographic trends and decisions to take early retirement. In this study, we find that the Mexican social security system provides incentives to retire early. The retirement incentives of the Mexican social security system affect retirement behavior, and may be one of the main contributors to early retirement decisions, particularly for lower-income populations. We simulated the effect of the reform from a Pay-As-You-Go (PAYG) to the new Personal Retirement Accounts (PRA) system and we find that the PRA system also provides incentives to early retirement. Further analysis is needed to assess the financial sustainability of the social security system and financial security in old age for the largest cohorts in Mexico that will begin to retire by 2040.