Kristian Niemietz Blog

Published on the Institute of Economic Affairs blog, October 2008

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.