On the closure of the Argentine Fully-Funded System

Abstract

Argentine demography more closely resembles southern European countries than most other Latin American nations. Its pay-as-you-go welfare system, implemented in the first half of the twentieth century, was reformed in the 1990s. The new fully funded scheme intended to solve its stressed pay-as-you-go system, as well as to yield positive externalities in the financial system, the savings rate and economic growth. After 15 years in place, the system was closed in 2008; its affiliates were sent back to the pay-as-you-go plan and the accumulated savings were transferred to the public social security administration, which must pay all future benefits. The official explanation for such a measure was twofold: the international financial crisis imperiled the value of the savings of future pensioners, and the (private) pension funds administrators were not managing the funds properly. In Congress, the political support for this reform was remarkably strong in both chambers. In a country with a tradition of mass demonstrations, the owners of the savings accounts protested little. How and why did this happen? Did pension funds administrators, given the regulatory constraints, act in the best interests of their affiliates? Can we learn some lessons that would be relevant to other countries with similar characteristics (that is, in Latin America, Eastern Europe or Central Asia), despite the uniqueness of the local circumstances? We think we can, and have developed some lessons based on this experience. We discuss the process and ask whether it could occur elsewhere. We think it could occur if a weak political consensus on the reform were built and/or if the objectives and instruments were not properly differentiated. Does the reform intend to fix the social security system or to promote national savings? In addition, the marketing and counter-marketing of the reform could polarize the debate and hamper the per se complex achievement of the extended consensus. Finally, the counter-reform has had unexpected pay-offs by hiding the public debt of the social security system, which the previous reform had made explicit. In addition, the available resources from contributions to finance the State budget in the short run increases the appeal of eliminating the fully funded scheme, where that contribution went to personal savings. The long-run responses to the aging process and the short-run political horizon have given rise to the counter-reform coalition.