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Argentina: Pension Fund Fallout

How would Argentina's pension fund takeover affect the economy? Four experts share their predictions.

Inter-American Dialogue

Argentine President Cristina Fernandez [recently] announced a plan for the government to take over the country's approximately $26 billion in pension funds. Fernandez has said she wants to protect the funds from turmoil in the global financial markets. What other factors are motivating the government’s action? What would be the impact of the pension takeover on Argentina's economy? How would it affect government spending and Argentina's credibility among investors?

José Octavio Bordón, former Ambassador of Argentina to the United States: In 1994, the state pension system, which had reached a point of crisis, was privatized at the peak of the Washington Consensus. Many of us who believed in the necessity of democratizing both society and the economy objected to the 'anticompetitive, statist, and compulsory' design of this privatization. The high costs of administration, interferences of a number of governments, and the crisis in the international financial system have generated a significant drop in total amount of capitalized funds. The state had to back them up with budgetary resources. In Argentina, the Pension Fund Administrators (AFJPs) have earned more than $12 billion in profits. There is a broad consensus on the need to transform the Argentine pension system. However, the government should avoid passing legislation too quickly. There are many technical and political concerns, especially regarding the future use of $30 billion in stock. In addition to avoiding the errors of the past, it is necessary to act now with greater prudence and institutional quality. In play are the millions of current and future retirees, the rights of Argentines who opted for the private capitalization and legal safeguards for the companies who acted within the current legal framework. During times of crisis, it is both a necessity and a right to assure that changes guarantee the well-being of citizens, but it shouldn't be an excuse to disregard people's rights and endanger the credibility of the country. A broad debate, both respectful and transparent, needs to happen in the Argentine Congress, similar to that which occurred over the taxes on the rural sector. This is the best road toward change, with legitimacy and legality both in the international and domestic context.

Milko Matijascic, Head of the Institute for Applied Economic Research at the UN Development Program's International Poverty Center in Brasilia: Pension reform is a complex problem in South America. First, local financial markets were small and couldn't easily absorb such a large volume of funds; second, with large informal sectors and low contribution densities, large numbers of workers are not generating sufficient savings to fund their retirements; third, with defined contribution schemes, market risks fall upon the shoulders of individual workers. As one considers the current crisis, these factors are critical. By October 20, the average pension fund fell 16 percent compared to the average value in 2007. A steep market decline and a precarious labor market would lead to poor returns for the pension system. Ironically, the debate in Argentina did not touch upon these three factors. The government appears motivated by fiscal concerns. If the pension funds' resources are taken over by the government, it may provide short-term relief, but at the expense of significant problems in the long term (including loss of credibility). Such drastic reforms should be preceded by extensive public debate and deliberation. This is the approach that Chile took as the Bachelet Administration achieved consensus prior to its landmark reform earlier this year.

Claudio Loser, Senior Fellow at the Inter-American Dialogue and former Head of the Western Hemisphere Department at the International Monetary Fund: The announced nationalization/expropriation of the Argentine pension funds constitutes one of the most blatant acts of financial piracy in the country's recent history. In terms of its gravity, it stands on par with the freeze on deposits of the banking system introduced at the time of the collapse of convertibility (the relation of one to one between the local currency and the US dollar). Contrary to the alleged claim that, once approved by Congress, it will protect the pension money saved by many Argentines, the action is intended to provide the government with fresh resources to solve its mounting fiscal problems. The proposed expropriation would eliminate individual savings, and convert them into a pay-as-you go system, with large funds that could be spent almost freely by the Argentine government. The transfer is equivalent to 10 percent of GDP, plus an annual flow of pension contributions equivalent to about $5 billion (1.5 to 2 percent of GDP). The unexpected and ill-designed plan has brought the financial system into crisis, with a precipitous decline in the stock market, pressures on the exchange rate, and a sustained loss of reserves at a time when Argentina is facing a drastic decline in export prices. Argentina was being shunned by foreign creditors and investors before this measure but it is now considered in virtual default, with grave and possibly unintended consequences on the country's economy.

Robert C. Helander, Managing Partner at InterConsult LLP in New York: Where to start on Argentina? After repeated demonstrations of fiscal sinverguenceria, one wonders how any government in Argentina will ever be able to convince its own citizens that their elected leaders can be trusted. Years ago, in an effort to attract foreign capital, the government guaranteed national treatment for foreign investors. Some invested on that premise, and they surely got the 'national treatment,' pesification, phony statistics, pressure to invest in government paper, etc. If Peronist government after Peronist government has mismanaged the economy and maltreated its own citizens, it is hard to think that any foreigner, save for the politically-motivated Venezuelan leader, might invest. As for lenders, there is no way to quantify the moral hazard. Absent a multinational bailout, another devaluation and default will be hard to avoid. The proposed 'protective measure' of nationalizing the private pension funds would only delay the deluge and make it that much harder for a future president to regain internal balance and respect. Do cry for Argentina; it is a sad story without a visible good ending.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.



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