It is summer in Buenos Aires. And it is proving to be a hot one.
Political violence right before Christmas is a recent Argentine regularity. In December 1999, a protest by workers owed back salaries in Corrientes province grew out of hand and resulted in two deaths. In December 2001, the forced conversion of people’s dollar bank deposits into pesos worth a third as much provoked riots that killed 39 people. In November 2005, I was in Mar de Plata for the riots around a visit by President Bush. In December 2010, thousands of Paraguayan and Bolivian immigrants occupied a park in the southwestern reaches of the city. As you can imagine, the locals did not react well: Mayor Mauricio Macri called in the police and four people died before the federal Gendarmerie and naval special forces broke it up and cleared the area. In December 2013 the police themselves went on strike; in Córdoba, the result was looting, the arrival of the Gendarmerie, and at least one death.
And now there is December 2017. Nobody has died, so far, but at last count 81 people were in the hospital ... 48 of whom are cops. A general strike is on, shutting the airports and the subway. That is today; on Thursday there was an earlier wave of rioting resulting in busted windows and burning cars.
What is it all about? Short answer: pension reform. On November 29, the Senate voted 43-23 to advance an administration proposal to rejigger the formula for state pensions. Rejigger how, exactly? Well, that has been giving me a headache but I think I have got it.
The current pension formula adjust pensions as follows. Every six months, the pension fund averages the wage index (the higher of the Ripte or Indec indexes) and the nominal growth in total social security tax receipts. The resulting number (plus a top-off that I still do not understand) gives the percentage hike in pensions. The law has a floor: nominal pensions cannot fall even if nominal salaries and nominal tax collections decrease. (To be frank, in an inflationary economy like Argentina, a nominal fall in anything is unlikely in the extreme.)
On paper, this does not seem like a bad system. It links changes in outflows to changes in inflows. Pension spending might be too high given the level of tax collection, but they should not grow out of control, at least not because of the formula.
But ... the formula does make pensions volatile. For example, in 2015 pensions grew by 4% in real terms, but they fell 6% in 2016, only to recover 3% this year. In other words, there is a case for pension reform beyond the vague “pensions are too expensive” that you usually hear.
Of course, that case would be more persuasive if, well, pensioners were the ones pushing the reform.
The real issue is that the pension system has been underfunded ever since President Kirchner granted state pensions to slightly more than 2 million elderly who had never worked in the formal sector. It does not matter if the current indexing formula is a fine one if the system is paying out more than it takes in. Something needs to be done and this is something.
The proposed change (text here) switches the index to the following: 70% inflation and 30% wage increases, plus a top-up for GDP growth that I do not understand. The adjustments will be switched from every six months to every three months. The reform implies that the pension administrator will miss a top-up during the changeover to the new system, so it proposes an extra one-time adjustment, aka “the splice.” Weirdly, however, the adjustments will still be delayed six months: the end-of-March increase, for example, will reflect inflation in October-December, not January-March.
Does your head hurt yet? Mine certainly did. I found a nice chart at Infobae that runs down the difference between the old and new systems. Short version: most pensioners will come out behind under the new scheme compared to the old one. It might save around $4 billion in the short term, perhaps. In the long term, who knows? But it is likely to reduce expenditures relative to the old formula.
The vote sailed through the Senate based on a deal President Macri struck with the state governors. As part of that deal, he got the governors to agree to let him transfer quite a lot of money to Governor María Eugenia Vidal of Buenos Aires province. Vidal is a member of Macri’s political party, the Republican Proposal (PRO); he needs her to succeed. So it is hard to get past the idea that President Macri is using pension reform to finance Governor Vidal.
The lower house had to cut off debate when it looked like it was about to devolve into a fistfight.
So there you have it. The reform is basically a cut in pensions. Most of the short-term savings will go to the provincial governments in return for their agreement to drop a lawsuit claiming funds from the federal government. The big winner if it passes will be B.A. province, where a PRO governor recently took it back from the Peronists for the first time in 30 years. But the formula change is tinkering around the edges of a massively underfunded pension system; very little economic gain for a lot of political pain.
That said, by current American standards the whole debate seems refreshingly honest, wholesome, fair and open. And no, that is not something I thought I would have written a year ago.
As Argentine and American, I don't find this refreshingly honest, wholesome, or honest. It gives me flashbacks to 2001. I keep on wondering why we don't ever learn from our history. It makes me angry. It makes me sad.
Posted by: Leticia Arroyo Abad | December 19, 2017 at 12:22 PM