I’ve been asked to discuss what's going on in Argentina. So what’s going on in Argentina? The short answer seems to be simple: President Fernández just made a huge political mistake. She’s nationalized the pension accounts funded by mandatory contributions in a most unwise fashion for a rather unnecessary reason, and probably sealed her political doom in the process.
There are two ironies. The bigger one I’ve already mentioned: AFAICT, it’s bad politics, rather than just bad economics. The smaller personal irony is that I am not a fan in general of “privatized” pension schemes in general (although they can, if designed right, increase savings) and I am certainly not a fan of the Argentine scheme in particular, yet I find myself thinking that ending the scheme the way the government wants to do it is simply insane.
And the weirdest thing is that it seems politically insane. Weren’t the Kirchners supposed to be excellent politicos?
As often, though, it gets a little complicated.
Argentina’s pension system is not a simple thing. There are (I think; it’s been a headache to try to figure all this out) three pillars in the system. The first is the Basic Universal Pension. Everyone gets it, and it’s financed from current taxes. It also sucks, coming to the impressive amount of US$955 per year for someone with a 45-year work history.
The other two pillars consist of a public and a private pension system. An Argentine worker gets a choice between then. (Before last year anyone who switched into the private system was not allowed to switch back out to the public one.) The government withdraws mandatory contributions equal to 11% of wages, up to a wage ceiling of US$24,913 per year. The contributions finance current retirees in the public system, and pays out on retirement (again, I think) 10.2% of the workers’ last ten years of salary up to a cap of US$2,491, not including the basic pension. The private pensions take the mandatory contributions and give it to the private fund of the workers’ choice. The workers then get an annuity upon retirement, financed by their savings.
I am on record as saying that such funds have been unsuccessful in Mexico. In Argentina, they seem to have performed even worse. Since 1994, through April 2008, the funds earned an average nominal return of 12.3%. That’s 6.3% after inflation, but Argentina CPI figures can’t be trusted. So in dollar terms, then, they’ve earned only 3.5%.
To add insult to injury, those returns don’t include fees, which eat up of fifth of the profits. So it wouldn’t be hard to argue that the new system is worse than the public one that preceeded it. In fact, since the government pressured the funds into buying federal bonds during the 1999-02 depression, it’s really hard to see how changing the system was any improvement. After all, taking out payroll taxes and lending them to the government is exactly how the American social security system works.
If you’re going to have an American-style system, why bother with the middlemen? At its peak in 2001, the private system had almost 80% of its assets in government bonds, and even now it’s only down to 56%, including a small number of state bonds. The poor returns generated by the private system is why, in 2007, the government made it possible for workers to choose to transfer back into the public system.
Logical or not, well-designed or not, the system is what it is, especially now that workers have the option to transfer back to the state system. People paid in, and got title to an account that gave them a claim on the income generated by the portfolio of assets owned by a fund manager of their choice, even if we hand-wave for a moment how informed that choice was or how much it actually mattered.
So now comes President Fernández to putatively rescue the pensioneers from the collapse of the private funds with a bill to transfer management of the fund assets to the federal government. According to the (fuzzy and incomplete) version that I’ve seen, pension benefits will be standardized to be the universal minimum plus 18% of the workers’ pre-retirement salary over the last ten years. In addition, anyone who contributed more than the statutory amount into their account will be entitled to withdraw it from the state system and re-invest it however they would like. The workers will retain their accounts under federal administration, although its not clear what that will mean.
Okay ... what a stupid idea. What a mind-bogglingly stupid idea.
Does the transfer of administration help the government’s financial situation? Not really. Even if the government liquidated every last penny of the funds’ non-governmental assets, and even if the government didn’t lose a penny on doing so, it would net all of US$13.2 billion. That’s enough to cover the country’s financing needs for 2009 ... but there is still US$48 billion stashed away in the central bank. So the money isn’t desperately needed.
And even if there were no reserves in the central bank, it’s easy enough for the government to just default on its debt as it rolls over. Hell, it doesn’t have access to international credit markets now. And investors have very short memories. So why anger your voters when you can simply piss off foreign financiers who aren’t planning on lending you any fresh capital anyway?
At the same time, if all the government wanted to do was grab the payroll tax revenues, it would be easy enough to force the funds to start investing in federal bonds on the margin without appearing to seize people’s savings. They did just that back in 1999. Keep the private accounts, but just force all incoming money into the system to be used to buy government bonds. That’s a cool US$4 billion a year.
Does the transfer of administration at least help pensioners? Well, no. The new minimum pension is a good thing, but the government doesn’t plan to start liquidating the funds in order to finance it. Meaning that the government could easily raise the minimum pension while leaving people’s past savings in their hands, since it has to be financed out of tax revenues or new borrowing anyway.
Does the transfer of administration help the government politically? Hell, no. Argentines, like Americans, like their property. It’s one thing to alter the way their payroll taxes are invested from this moment on. It’s one thing to raise their payroll taxes to guarantee a higher minimum pension. It’s one thing to screw over foreign investors.
It’s quite another to take something away from them that they already have.
Crystallized opposition, loads of lawsuits, lots of anger ... and no real economic gain over other options. So what’s the point? I just don’t understand.
Good post, and thank you for it. I have nothing to add, but am grateful to have the info passed along.
Posted by: David Allen | October 30, 2008 at 10:02 AM