The government of Argentina expropriates workers’ pension funds
21 October 2008
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Government and Institutions
20 October 2008
Labour Market
23 October 2008
Economic Theory
25 June 2024
Today, the government of Argentina will announce the annulment of the country’s private pension system introduced in 1994. The savings funds of 12 million workers will be nationalised. With this move, the government is taking over assets worth 13% of Argentina’s GDP, significantly increasing the state’s role in the economy. The private pension fund industry, which employs 10,000 people, will cease to exist as their clients are forced back into the state PAYGO system.
The official justification is that due to the worldwide financial crisis, “the private system ceases to be a valid option for old-age provision”. Left-wing parties and trade unions welcomed the expropriation of workers’ funds. An MP from the “Solidarity and Equality” Party called the move “brilliant … Currently, private companies are managing US$ 30,000m which should belong to the government”. A Socialist MP added: “Socialism has always been in favour of the PAYGO system, and against the financial business…” A representative of the Trade Union Congress (CGT) called the private system a “big swindle” – a strange remark given that some of the private pension funds are co-owned by trade unions.
The private system began operation in 1994, when Argentinians were given the possibility to opt out of the notoriously unreliable state PAYGO system and transfer their money to a personal retirement savings account instead. This was a great relief to many because in the old system it had been a frequent political practice to plug budget gaps by freezing pensions in nominal terms while inflation was high. Since the beginning, the private system has been heavily burdened with regulation. Tight investment limits, especially for foreign assets, as well as underdeveloped domestic securities markets, effectively forced the pension funds to rely excessively on government bonds.
Despite all the obstacles, the private system managed to deliver real returns of 10% as an annualised average between September 1994 and June 2007. During the crisis of 2001 and in its aftermath, the private system struggled but it still proved to be more resilient than the public one. What is more, it gave workers a stake in the economy, and a range of choice that would have been inconceivable before. Once given the choice, most workers preferred individual accounts over reliance on the government’s promises. Membership in the private system grew steadily while the ranks of the PAYGO system shrank.
Given that there is an election campaign in 2009, it is not hard to imagine what the government will do with this unexpected windfall. But the people of Argentina will sorely miss those funds once their twilight years arrive.
The official justification is that due to the worldwide financial crisis, “the private system ceases to be a valid option for old-age provision”. Left-wing parties and trade unions welcomed the expropriation of workers’ funds. An MP from the “Solidarity and Equality” Party called the move “brilliant … Currently, private companies are managing US$ 30,000m which should belong to the government”. A Socialist MP added: “Socialism has always been in favour of the PAYGO system, and against the financial business…” A representative of the Trade Union Congress (CGT) called the private system a “big swindle” – a strange remark given that some of the private pension funds are co-owned by trade unions.
The private system began operation in 1994, when Argentinians were given the possibility to opt out of the notoriously unreliable state PAYGO system and transfer their money to a personal retirement savings account instead. This was a great relief to many because in the old system it had been a frequent political practice to plug budget gaps by freezing pensions in nominal terms while inflation was high. Since the beginning, the private system has been heavily burdened with regulation. Tight investment limits, especially for foreign assets, as well as underdeveloped domestic securities markets, effectively forced the pension funds to rely excessively on government bonds.
Despite all the obstacles, the private system managed to deliver real returns of 10% as an annualised average between September 1994 and June 2007. During the crisis of 2001 and in its aftermath, the private system struggled but it still proved to be more resilient than the public one. What is more, it gave workers a stake in the economy, and a range of choice that would have been inconceivable before. Once given the choice, most workers preferred individual accounts over reliance on the government’s promises. Membership in the private system grew steadily while the ranks of the PAYGO system shrank.
Given that there is an election campaign in 2009, it is not hard to imagine what the government will do with this unexpected windfall. But the people of Argentina will sorely miss those funds once their twilight years arrive.
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Funded pillar pension system serves as foundation for economic prosperity of a state: funds are not recalled for 40 years of their accumulation being the cheapest financial resources on the market. Argentina will be in a big trouble without restoring such a system in the future.
Besides, no one has waived the factors calling the XX1 century as a century of ageing: demographics change after at least 20 years, leaving future pensioners without enough number of workers for effective PAYG system.
Funded pillar pension system serves as foundation for economic prosperity of a state: funds are not recalled for 40 years of their accumulation being the cheapest financial resources on the market. Argentina will be in a big trouble without restoring such a system in the future.
Besides, no one has waived the factors calling the XX1 century as a century of ageing: demographics change after at least 20 years, leaving future pensioners without enough number of workers for effective PAYG system.
The extremely corrupted Argentine government once more had showed us that there are no limits to their goals, absolute power and no limits to their wishes. The Kirchner couple ruled the country with a complete contempt for the legal system, first they tried to smashed the agriculture sector, with completely disproportionate export taxes,they are using now the global crisis to confiscate the savings of 10 million Argentines, which are worth 30 billion dollars, openly violating our Constitution.
The extremely corrupted Argentine government once more had showed us that there are no limits to their goals, absolute power and no limits to their wishes. The Kirchner couple ruled the country with a complete contempt for the legal system, first they tried to smashed the agriculture sector, with completely disproportionate export taxes,they are using now the global crisis to confiscate the savings of 10 million Argentines, which are worth 30 billion dollars, openly violating our Constitution.
I hope that the Congress stop this measure. Unfortunately here in Argentina we haven’ t got like in XIXth Century the Whigs who limited the government power.
Respectfully,
Hernán
Economist
Bs.As.
Argentina
South America
I hope that the Congress stop this measure. Unfortunately here in Argentina we haven’ t got like in XIXth Century the Whigs who limited the government power.
Respectfully,
Hernán
Economist
Bs.As.
Argentina
South America
Kristian, great post.
Kristian, great post.
The end of the rule of law. That governments might be such unscrupulous to lure citizens into a trap of exploitation has been feared for a long time, e.g. by Nobel laureates Kydland and Prescott in “Rules Rather than Discretion: The Inconsistency of Optimal Plans” (1977). The authors ask for constitutional rules resistant against government opportunism. One wonders that there are no such constitutional restrictions incl. constitutional courts in Argentina?
Charles B. Blankart Berlin Ger.
The end of the rule of law. That governments might be such unscrupulous to lure citizens into a trap of exploitation has been feared for a long time, e.g. by Nobel laureates Kydland and Prescott in “Rules Rather than Discretion: The Inconsistency of Optimal Plans” (1977). The authors ask for constitutional rules resistant against government opportunism. One wonders that there are no such constitutional restrictions incl. constitutional courts in Argentina?
Charles B. Blankart Berlin Ger.