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Warning: the Argentinian pension system is heading for a crisis

23 March, 2012

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

Through an increase in the coverage rate in the last few years, the pension system has enabled more of the elderly to claim benefits, but at a very high cost: its own sustainability.

Thus, as a report of the School of Economy of the Catholic University of Argentina (UAC) warns, the circumstances in which almost half of current pensions were obtained, with moratorium plans, represent a challenge for the future, especially because no prior estimates were performed of what the inclusion of these almost 2.6 million individuals would cost.

Many of these benefits were granted without any prior contribution – some workers had made contributions, although insufficient – and the financial situation of those applying for the benefit was never examined.

The study also mentions some worrying issues for the future such as the high number of workers with zero contributions and the high rate of recourse to the courts of law, which will continue for reasons such as the low current proportion of pensions, compared to the last salary.
Beyond the observations of the sustainability of the system of pensions by moratorium, the economist, Jorge Molina – who presented the report with Patricio Millan, director for the School of economy – said that its effect as a social inclusion measure is only temporary and does not solve the underlying problem of informality.

Hence, the recommendations chapter of the report recommends the establishment of a new benefits system in which all citizens obtain a basic benefit on reaching a certain age. This benefit would be 82% of the average salary of the entire working life of the worker, but using a ceiling of two or three minimum wages, which will also be valid for calculating the contributions and payments during active working life. These maximum amounts of income subject to contributions and the retirement amount will be less than existing ones, but an additional system of contributions to a private scheme is also proposed, which individuals could belong to in order to improve their pensions.

Regarding the introduction of changes, the report warns that it is essential to perform long-term calculations, something which is now impossible due to the lack of dissemination of information – which should be public – by Anses. “A rigorous policy of information transparency” is considered a basic input.

According to Colina, the substitution rate (the first pension payment as a percentage of the salary when active) is now more than 70% for those receiving the minimum wage of $ 2300. Due to the ceilings, the percentages are gradually reduced to the extent that one considers – as a hypothetical income – a greater number of minimum wages. Thus, an individual earning the equivalent of 10 of such units – $ 23,000 per month – will have a pension of less than half of his last income when active.

In practice, the substitution rates tend to drop because the calculation of the initial pension does not consider the last salary earned, but rather the average income of the last 120 months worked, whose historical values are adjusted using an index that is not always suitable. 1.5% of the average is calculated and the result is multiplied by the number of years of contributions, to which a mobile basic benefit of 797.02 pesos is added as of that month.

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