Spotlight: Argentina pension reform

Thursday, December 21, 2017

Pensions is a sensitive issue, as the recent violent demonstrations in Argentina over a reform bill attest.

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The government managed to pass the draft legislation in question, which changes how pension and other social outlays are calculated.

Business-friendly President Mauricio Macri introduced the bill to help tackle the country's large fiscal deficit. It will happen indirectly, as money saved following the implementation of the law will be transferred to the country's provinces.

Macri and his cabinet will no doubt be analyzing the whole pension bill saga to help ensure that, in the future, potentially explosive draft legislation eases through congress with much less friction.

And more pension reform bills will come - they have to come.

Argentina's pension system, which comprises a pay-as-you-go social security system as well as voluntary plans, has some major structural issues. One is the ratio of active workers contributing to the system to those drawing from it. And with a population that is ageing - albeit not as fast as that of some European countries like Spain - the situation could deteriorate, piling on more fiscal pressure.

In March 2017 there was 1.7 active workers contributing for each person drawing from the system, a figure that ideally should be 4.0, local media outlet Apertura reported, citing Ana María Weisz, a regional executive with global consultancy Mercer.

In terms of outlay, 49% of the 2018 national budget corresponds to social security payments, which includes pensions. In 2017, the rate was 46%, and in 2003, before the previous administration set out its own reform in 2004, it accounted for 37.4% of the budget.

Argentine pension lawyer Adrián Tróccoli told BNamericas the pension reform should not be viewed as the first step in a detailed plan. Further changes to the pension system are vital and the government may start floating additional proposals next year, such as gradually increasing the retirement age.

"It's fundamentally important," said Tróccoli. "The state's accounts are a disaster. If we don't fix this, the truth is we're demonstrating that, as a country, we don't take things seriously. It's that simple."

Moody's forecasts the fiscal deficit will end 2017 at over 6.0% of GDP but that, on the back of reduced spending, it could come down to 5.5% next year and fall below 5.0% in 2019.

The agency said the current administration, which came into office in December 2015, focused on macroeconomic stability rather than the deficit during its first two years. It projects the new indexing formula contained in the bill will lead to savings of around 0.6% of GDP next year "and potentially more over time."

"Passage of these reforms demonstrates the government's commitment to structural adjustments that will support government finances and preserve macroeconomic stability, and pave the way for the passage of further reforms," Moody's said in a report.

Argentina's system was ranked the worst out of 30 measured globally in the Melbourne Mercer Global Pension Index 2017.

In a report on the index, the authors say Argentina's system - and that of others that were similarly ranked, including Mexico's - has some "desirable features, but also has major weaknesses and/or omissions that need to be addressed. Without these improvements, its efficacy and sustainability are in doubt."

The authors suggest various measures in areas such as savings, contributions and tax incentives.

They also suggest raising the minimum pension available to the poorest aged individuals. Under the new pension law, Tróccoli said, overall payments will drop by about 70bn pesos (US$3.929bn) next year --- and that the most vulnerable will be hit hardest.

"If we don't look after the elderly it speaks very badly of us as a society," said Tróccoli, who added that the political cost of passing the law was "savage" and that solving major issues facing the country, like pensions, is a difficult and unappealing challenge for lawmakers.

Indeed, the Mercer report authors suggest raising the minimum pension available to the poorest seniors in Argentina.

"The new pension formula adjusts payments based mainly on past inflation. Compared with the previous mechanism, which was indexed to salary increases and changes in social security revenue, the new payment structure will be less volatile and result in higher payments during a recession but smaller outlays as the economy expands," Moody's said.

In terms of challenges facing policymakers in the areas of pensions, the key is striking a "balance between adequate coverage, sufficient benefits and financial sustainability," the UN's Eclac said in a release accompanying a report on poverty levels in the region.

The Argentine pension reform was the first approved following October's midterms, when Macri put in a solid showing. Further pension reform moves may come next year or the year after that. But grab the bull by the horns Argentina must.

Pictured: Pensioners and activists protest changes to Argentina's pension system.