Influence of the labor market on pensions in Mexico and Spain based on the internal rate of return

Abstract

The aim of this article is to analyze the financial solvency of PAYG pension systems in Spain and Mexico, incorporating labor market behavior for each case. The methodology employed is based on the Internal Rate of Return and the Cost of Unitary Pension, which allow us to observe the financial actuary imbalance between contributions and future benefits of contributors to the system. The results show that as unemployment increases in their working lives, the profitability offered by the system outweighs the long-term economic growth, in the case of Spain. Whereas in the case of Mexico, informality increases the insolvency detected in the system. The greatest limitation has been the search and processing of information for comparative analysis. The main contribution of the analysis is the incorporation of labor market transition probabilities into the calculation of pensions. It is concluded that labor market behavior directly affects the solvency of pension systems and, therefore, the individual retirement decisions.