Argentina Attempts to Nationalize Personal Accounts System; Workers Object

Joaquin Cottani at the RGE Monitor reports on some interesting pension developments in Argentina that shed some light on Social Security policy in the U.S. Argentina, like most Latin American countries, bases its pension program on personal retirement accounts. Individuals contribute to their accounts during their working years, then at retirement use the account balance to purchase an annuity paying them a monthly benefit for life.

But the government of Argentina, led by President Cristina Kirchner, is attempting to end their personal accounts system. Is this a response to public pressure from Argentines who want the supposedly greater security and lower risk of a government-provided benefit? Not at all. In fact, it’s a scheme by the Argentine government to paper over its current budget deficit and has parallels to what has gone on in the U.S. Social Security system for the past 25 years.

In the Argentine personal accounts system, workers pay contributions to their account fund, not to the government-run pay-as-you-go program. Argentina’s government, however, is running a budget deficit and is setting their eyes on workers’ account contributions. If workers are forced back into the pay-as-you-go system, the government gets access to their contributions which can be used to cover up deficits elsewhere in the government. Of course, the government is also obligated to pay these workers retirement benefits in the future–but these “implicit debts” aren’t counted on the government’s balance sheet , as they aren’t counted on the U.S. balance sheet, and so the Argentine government effectively ignores them.

The Argentine government first tried to bribe workers back into the pay-as-you-go system by promising increased benefits later. This shows how eager the government is to get its hands on the workers’ cash today. But few workers took the deal, and so now President Kirchner is apparently pushing legislation that would force Argentinean workers back into the pay-as-you-go program.

How does this relate to Social Security in the U.S., in particular the budgetary debate between the current pay-as-you-go system and proposed reforms using personal accounts? Since the last reforms in the mid-1980s, Social Security has been running payroll tax surpluses–collecting more in taxes than is needed to pay benefits. This surplus in Social Security helps cover up deficits in the rest of the budget. In fact, many analysts think that the Social Security surpluses encourage deficits in the rest of the budget. Moreover, when the rest of the budget borrows from Social Security, this borrowing isn’t counted as part of the publicly-held national debt, the debt measure that most people focus on. In short, if we didn’t have the Social Security surplus, both the budget deficit and the government debt would look a lot bigger than they do, and folks in Congress would be feeling more heat to do something about it. This is the situation that Argentina’s President Kirchner is trying to restore.

Now, what happens if we allow people to invest part of their Social Security taxes in a personal account? Well, that immediately erases the Social Security surplus, which means that the budget deficit and the debt would start to look bigger. Now, some on the left blame this increased deficit/debt on the accounts, when in fact all the accounts do is reveal a budget shortfall that already existed. Moreover, to the degree that larger accounts create short term deficits, they also create assets that help pay Social Security benefits in the future. In other words, this claimed increase in the debt is mostly a function of government accounting, not of reality.

Originally published at AEI and reproduced here with the author’s permission.

3 Responses to "Argentina Attempts to Nationalize Personal Accounts System; Workers Object"

  1. Anonymous   October 24, 2008 at 3:50 pm

    You say the argentine gov`t is running a budget deficit – a budget deficit in the country`s pension(pay as you go system)? or the of the entire bugdet of the country – I ask because they say consistently on the news here that there is a superavit – (income greater than expeditures)Just curious in argentina

  2. Anonymous   October 24, 2008 at 8:05 pm

    I was just in Buenos Aires this week, as the whole disaster unraveled. The nationalization of the pension plan, known locally as “el manotazo” ( the “hand grab”) is nothing else than part of Mrs. Kirchner and her Peronist Party thugs’ naked attempt to transform Argentian into a socialist counrty with a governmetn directed economy, which became evident a few months ago with her failed attempt to tax soy exports to an unvelievable level. Mrs. Kirchenr ( who likes to be called “CFK”) is an ecomomic ignoramus who has surrounded herslef with the worst interventionists the cournty can muster and will plunge Argentian into an era of great ecomomic pain and isolation. Sh elaso imposed import controls last week. Populist ecomomics a la Hugo Chavez do not work, and Mrs. CFK will find out the hard way that free markets can not be tampered with as she wishes.

  3. Patrick   October 31, 2008 at 8:02 am

    I’m a Yanqui living in BsAs, I work for a company that produces games for international entities (hence, low Peso makes our contracts more “valuable”). There was a huge demonstration yesterday. Basically this is a bid to stay liquid until the Fed’s inflationary pressures ressurect commodity prices and dilute the country’s dollar debts. I think it’s a solid bet. Social security has always been a scam and most people here are “en negro” about taxes and such anyway, I suspect this move will further incentivize crafty book-keeping by businesses, especially smaller ones, to counter the crafty accounting of the government. That’s one thing I love about Argentina, unlike the States the people know enough to not only distrust the government but actively find loopholes and outlets to escape government control. It’s like a country populated by multi-national corporations, except these people mostly just like to have a good time.