The price of populism.
Like many countries with an aging population, Mexico is facing a pension crisis. In just the last five years, the universal pension for older adults quadrupled its budget.
Coupled with low growth, the ever-rising cash transfers and subsidies have become a major drag on the country’s economy. Welfare payments to individuals—such as the universal pension for older adults, disability pensions, and student stipends—have grown at a pace that outstripped investment in infrastructure, education, and security. These programs are politically attractive: beneficiaries can clearly see where the money goes, while the returns of better public infrastructure, or of a more effective police force, are harder to measure. The result is a fiscal structure that privileges visible redistribution over the less glamorous but essential foundations of long-term growth.
During Andrés Manuel López Obrador’s administration (2018–2024), subsidies and welfare payments grew by almost 50% in real terms, reaching 1.3 trillion pesos (about 70 million dollars) in 2024. Research shows that these increases were six times larger than the growth in government salaries and nearly four times the increase in federal transfers to states. Most of the growth came from just two programs: the non-contributory pensions for the elderly and for persons with permanent disabilities. AMLO made non-contributory social pensions the centerpiece of fiscal policy. As a result, total pension expenditures rose to 5.7% of GDP in 2024, up from 3.4% in 2018. Public spending as a share of GDP climbed to 27%—its highest since 1990. These programs absorbed fiscal space that previous governments had allocated more evenly between redistribution and investment.
Claudia Sheinbaum inherited both the popularity and the fiscal weight of these transfers. Her budget for 2025 maintains and even expands them: the Ministry of Welfare (Secretaría del Bienestar) is set to receive the largest allocation of any federal ministry. The universal pension for older adults remains intact, with more than 12 million beneficiaries, while new programs—such as a partial pension for women aged 63–64—add further commitments. But this comes at a cost: 16 out of 19 federal ministries face budget cuts, with health, environment, and even defense seeing double-digit reductions. Nearly a third of the programmable budget is now locked into pensions.
Redistributive policies can alleviate short-term poverty but do little for long-term growth. As Charles I. Jones argued in “The Outlook for Long-Term Economic Growth” (2023), living standards ultimately depend on the growth of human capital and ideas, not on cash transfers. Cash transfers create fiscal pressures: higher taxes on the young and productive, reduced spending on infrastructure, and greater public debt. These lead to crowding-out effects: higher taxes suppress consumption, less infrastructure spending undermines private sector productivity, and rising interest rates discourage investment.
Economic growth in the long run stems from institutions that reward innovation, entrepreneurship, and integration into global markets. Douglass North, Nobel laureate, emphasized that secure property rights and the freedom to exchange are essential foundations of prosperity. Transfers may win votes, but they cannot replace the institutional framework that fosters investment and idea creation.
AMLO’s policies left Mexico with record deficits of nearly 5% of GDP in 2024, the largest in more than three decades, and rising debt-to-GDP levels. The deficit was driven not only by the expansion of non-contributory pensions and social transfers, but also by mounting subsidies to Pemex and gasoline prices. Fiscal stabilization funds were depleted, leaving little buffer for downturns. Sheinbaum, therefore, faces a narrow fiscal space: her government can either raise taxes, cut essential investment, or increase debt further. Each path carries economic costs. The challenge for Mexico is clear: the country must shift from a politics of handouts to a politics of growth. Otherwise, transfers will remain popular but will come at the expense of prosperity, stability, and opportunity.
Beyond the immediate fiscal debate, the political economy of pensions reveals why they have become central to Mexico’s budgetary landscape. Transfers create concentrated and visible benefits for millions of voters, while the costs—in the form of higher taxes, reduced public investment, or rising debt—are diffuse and less noticeable in the short run. This asymmetry explains why programs like the universal pension are politically untouchable, even when they impose long-term risks. Economists describe this as a classic case of concentrated benefits and dispersed costs. It is easier to win elections by promising direct cash than by arguing for reforms in property rights, judicial efficiency, or deregulation, even though the latter would contribute more to productivity and growth.
As life expectancy rises, other nations are raising the retirement age to qualify for payments, or reducing the amount younger generations will receive. Mexico has moved in the opposite direction—promising more generous transfers earlier in life. This dynamic risks locking the state into an unsustainable path, especially as the working-age population shrinks relative to retirees.
Without measures to prioritize investment in growth-enhancing areas, the burden of transfers will weigh more heavily on future generations. Mexico thus faces a trade-off: preserve the short-term popularity of transfers or build the institutional capacity for sustained growth.
