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Argentina: “Pensions, an uncertain future: the pending debate”

29 September, 2013

Source: http://www.lanacion.com.ar

Nearly five years after the elimination of the AFJP, the PAYGO system rewards those who did not contribute and poses challenges in its design, financing and sustainability.

The deafening noise of drums, mixed with shouts and euphoric singing saturated the air in the outdoor parking lot of the head offices of the National Social Security Administration (Anses). It was October, 2008, and the Government had opted for an improvised scenario in this corner of downtown Buenos Aires to announce its pension reform project with a confrontational speech, anticipating little proclivity for debate. The objective – quickly achieved, and to that day ignored by several officials with responsibilities in the area – was to eliminate the option workers had had since 1994 of contributing to an individually funded account system managed by the Pension and Retirement Fund Managers (AFJP) rather than paying them into the PAYGO system.

The then executive director of the pension agency, Amado Boudou, celebrated the fact that the idea he had taken to President Cristina Kirchner would begin to become effective. The working paper published by Anses just four months earlier, in which the current Vice President argued that it was beneficial for many workers to contribute to an AFJP, seemed to be a distant memory.

The Argentine Integrated Pension System (SIPA) was finally born, with law approved and enacted, a little more than one month later. Nearly five years on, while the Government boasts of its achievements, such as the higher rate of elderly people with monthly incomes and the introduction of a mobility index (rooted in inflation, which it managed to surpass in a few years), economists and experts in the matter have issued warnings regarding a system that is losing more and more of its contributory nature and which introduced changes without prior discussion.

The Long-term sustainability of the system; the high number of lawsuits filed against Anses; the way in which the payment of salaries is financed; the management of the guarantee fund, basically comprising the resources that had been accumulated by members of the AFJP; labor informality; a temporary moratorium and inequities, and the lack of answers to those who had made voluntary contributions to the individually funded system are some of the issues for an in-depth debate that is still pending.

There are 5.9 million retirees in the Anses system plus another 1.4 million beneficiaries of non-contributory pensions. Within the former group, 45% of benefits (nearly 2.7 million) were granted by a moratorium that benefited those who had few or no contributions. The plan involved no previous calculations of the cost to public accounts and, although it did enable raising the percentage of senior citizens with income, it did not discriminated by social situation or foresee continuity in time, so the coverage rate will drop again. Today the moratorium causes inequalities, since the possibility of access and the costs involved depend on a discretionary item: the date of birth of individuals. This is due to the limitation of the period in which debt can be declared and paid with cheap contributions and discounts.

“The extent of coverage should not depend on occasional and whimsical moratoriums, but on a policy that ensures universal provision for senior citizens” says Luciana Díaz Frers, Director of Fiscal Policies of the Center for the Implementation of Public Policies for Equity and Growth (CIPPEC), which nevertheless highlights the fact that 96% of the elderly population have incomes as a significant achievement. That index is reached by adding liabilities in the form of benefits of Anses and other systems in force in the country.

As a counterpart to the 7.3 million beneficiaries, there are 8.1 million people who contribute to financing who are active, solvents workers. This ratio of 1.3 contributors per beneficiary flashes a warning light in a system that consumes about one third of the nation’s public spending. According to calculations by the consulting firm Idesa, if one considers only those who retired with full contributions, the ratio becomes 2.75.

It is not a minor detail that 1.3 million taxpayers are one-off taxpayers, who are entitled to the minimum pension amount, currently ARS 2,477 (approx. 431 USD), from a system that has an imbalance: the members of that system contribute 157 ARS (approx. 27 USD) per month to SIPA, whereas a minimum wage employee contributes more than five times that figure (own and employer’s contribution) to finally receive the same benefit.

The relationship between contributors and beneficiaries is linked to the level of informality, which in Argentina affects almost half of those employed, considering employees and the self-employed. “The fact that only one half of 17 million workers are paying contributions is a time bomb,” says the Representative Claudio Lozano, who from the opposition voted in favor of ending the AFJPs and has in recent years questioned the use of nationalized resources, through judicial complaints against Boudou, who no sooner had the funds being transferred to Anses, managed it without any reports or data for more than one and a half years. Now quarterly information is published and, according to Anses sources, its executive director, Diego Bossio, has appeared 17 times before the Bicameral Commission of Congress which is responsible for its monitoring. Nonetheless, Lozano laments that information is provided ex-post and with delays, when there should be – he argues – a Council comprising the State, workers and employers, involved in the management and control of the Fund.

According to Lozano, given the fact that today the labor market makes it difficult to add the 30 years of contributions, one would have to consider a three-tier benefits system: a basic and universal provision; another one granted with the logic of the PAYGO system, with Proportional payments depending on the amount of contributions made, and a third one which enables additional voluntary contributions of those who are able to make them to improve their future income. “This system is unviable in the long term,” says the Economist, who believes that the reform was left unfinished and that employer contributions, reduced in the 1990s and, in some cases, also by the current Government, should be returned to their original value.

Mixed Financing

Today, 56 of every 100 pesos used in pension payments come from personal and employer contributions. The other 44 are siphoned off from general taxes, on the basis of already established percentages and in a system not devoid of conflict. With the reforms of the 1990s, the provinces assigned 15% of common funds to Anses. In recent years, requests for the restitution of these resources have emerged. There is also another discussion, because several provinces not governed by the Kirchner movement, like Cordoba and Santa Fe, claim that the nation owes them compensation for the deficits of the provincial social security funds which were not transferred to the nation in the 1990s.

A calculation performed by the Ieral of the Mediterranean Foundation projects a surplus in the accounts of Anses equivalent to 1.12% of GDP for this year. Data provided by the Agency show that between 2009 and 2012 surpluses (net of income from the guarantee fund) of ARS 22,417 million (approx. US$ 3.896 Million) were accumulated. The positive result shows the balance between what enters and what is paid, without considering what liquidating assets would entail, in general, according to the criteria of the Supreme Court in its judgments on adjustments. To do so, according to Anses, would imply falling below the equilibrium line. Hence, the current result is largely explained by the lack of adjustment for inflation suffered by many retirees between 2002 and 2006. The policy of discriminatory hikes prevailing in those years is also the explanation for the 283,100 lawsuits filed for adjustments, according to Anses statistics. Apart from these considerations, and according to the Ieral, if current payments depended only on the contributions of workers and companies, the deficit would be 3.6% of GDP.

These data show that mixed financing of the system (genuine income and tax) is an unavoidable fact. And the context – fights between provincial governments – indicates that any eventual discussion for adding resources would have its degree of conflict. When the time arrives to adjust the screws of the system, which path will be chosen? “If more money is taken out of shared funds, there will be more problems – anticipates Juan Luis Bour, Chief Economist of the Foundation for Latin American Economic Research (FIEL).”The worldwide tendency is for social security systems to have some general taxes in their sources of financing, but the latest reforms go in the direction of making them more solvent through their genuine revenues.” According to the economist, Argentina today has a system “that uses the fund and does not envisage issues in the future, so it leaves problems to be addressed later.”

According to data published by Anses in 2010, when it rejected the bill of law to set the basic pension at 82% of the minimum wage (a law that was approved and vetoed) in the last decade, 10% of the population was over 65 years of age. That proportion is growing and will reach 19% between 2045 and 2050, when current contributors are in the passive stage.

Although projections of medium- and long-term outcomes of the system are not known, Government sources say that, according to a study commissioned after the last reform, problems would appear in the 2025-2030 period. “Accounts should be reviewed every year and mechanisms for doing so have been put forward internationally,” said an expert on the subject, who worked in the public service.

The emergence of problems in the financing scheme should trigger the Sustainability Guarantee Fund (FGS) to which the savings accumulated in the AFJPs were sent (see graphs below). The law provides that the resources should be used to pay pensions in case of a temporary imbalance. Thus, while sustainability depends on the requirements for access to benefits, the formula for calculation of assets and the sources of funding, the role of temporary relief is reserved for the fund. Although this may not be compelling today, what is compelling is the need to subject questions that involve society as a whole to a comprehensive debate.

Inherited resources and obligations

The financial assets in which the Guarantee and Sustainability Fund (FGS) of the social security system are invested have been valued at ARS 292.172 million (approx. USD 51.717) as of August 30, 2013. The amount exceeds by more than 200% the value of the resources at the time they were transferred from the AFJPs, in December 2008. Despite the triumphal tone with which the Government refers to this evolution, the truth is that this increase is mostly due to the recovery of asset prices, which at the time of the transfer were depressed by the global financial crisis.

The nominal rise in the value of the Fund is 41% in real terms, considering the inflation of the period, as pointed out by Marcelo Capello, Chairman of the Ieral. The Economist added that the current real value of the Fund is less than it was in 2010, since the subsequent yield was less than the inflation calculated by private consulting firms. This led to another effect: a drop in the ratio between the value of the FGS and expenditure on social security; that ratio today is 91% compared to the peak of 136% in September 2009, according to the Ieral.

Since the Law provides that the fund may be used to pay benefits in the event of a deficit, the economist Eduardo Levy Yeyati proposes that, since the State is the guarantor of compliance with the obligations of the system, the public debt part, which is ARS 183,500 million (approx. USD 32,481 million), 63% of the total amount, should be deducted from the balance.

Since the nationalization, ARS 23.184 billion (approx. USD 4,104 million) of net financing to the Treasury was added to the public securities that were held by the fund managers. In the view of the Economist, that would be of no use for the role assigned to the Fund. “The most logical thing would be to deduct this public self-debt and invest the rest in a fiscal anti-cyclical fund,” he says.

In a PAYGO system, the accumulated resources have a very different function than in an individually funded system, which considers some aspects that are currently not available, such as for example, the possibility of workers making voluntary contributions to improve their future pensions. Not only does the current system not allow this, but the Government never managed to regulate the mechanism whereby the savings accumulated through this form of contribution would be returned to their owners. The issue is in the courts of law, where several rulings have ordered an immediate refund.

Furthermore, the reform did not include equal rights for those who were already receiving benefits from the eliminated system. So those who opted to receive their pension through a life annuity taken out with an insurance company, and without the participation of the State, today have no guarantee that they will receive the basic minimum pension.



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