Argentina's private pension scheme, once welcomed as an alternative to the meagre state pension, is in a mess. Experts are questioning assumptions made when the government reformed pensions in 1994.
Argentina's private pension scheme, once welcomed as an alternative to the meagre state pension, is in a mess. Experts are now questioning the assumptions made when the government reformed pensions in 1994. Voters, meanwhile, are hoping the upcoming presidential elections will spell an end to the economic downturn and their pension woes.
The run-up to Argentina's presidential elections on 27 April is littered with promises of a better future for the country's 'new poor' who have emerged over recent years of recession and economic collapse.
The candidates have reason to focus on the poor from Argentina's middle classes – raging street protests in December 2001 at the government's handling of the economy forced the resignation of two presidents in as many weeks, eventually leading to an interim government being appointed by Congress.
The 2001 financial crisis made life miserable for millions of Argentines – salaries fell by 40 per cent last year and the number living in poverty jumped from 38.5 per cent to 58.5 per cent, according to the Economist magazine.
Four years of deep recession, high unemployment and a crushing international debt ended with the country defaulting on its $132bn foreign debt in December 2001, the largest such default in history. In January 2002 caretaker President Eduardo Duhalde decided to devalue the peso in a bid to boost exports and kickstart the economy.
But the peso, pegged to the US dollar for a decade at a ratio of one to one, dropped after devaluation to 1.4 pesos to the dollar, and it now stands at about three pesos per dollar.
The majority of private pension funds were held in dollars, and after devaluation the dollar-denominated assets of the funds were converted into pesos. The total fund value dropped from $21bn – the largest in Latin America after Chile – to just $12.8bn.
"I had 2,769 pesos ($2,769) in my account as of February 2001 and now I have 4,711 pesos, which amounts to just $1,472. I lost more or less 47 per cent of my savings value," says a freelance journalist who requested anonymity to protect her personal financial status.
In 1994 the government peddled private pension funds as the best way for people to secure a safe retirement. The state, it said, could not afford to pay pensions to an ageing population and individuals could obtain great benefits by investing their savings in the capital markets.
Initially people were happy with the change, mainly because until the Mexican financial crisis of 1995 dented investor confidence in the region, Argentina's fragile economy rewarded them with reasonable gains. And the monthly state pension was a pittance – well below the cost of basic food and services.
But now many Argentines are worried about the future – their private pension funds have suffered untold damage in Argentina's unstable economy.
Their experience has led Professor Carmelo Mesa-Lago, an expert in social security from Pittsburgh University, US, to question the assumptions underlying Argentina's pension reforms, which he says were introduced "as a result of World Bank advocacy and conditions attached to structural adjustment loans".
Mesa-Lago, who has studied pension reform in ten Latin American countries, says the biggest assumption is that privatised pension schemes would be free from state interference.
But since 1999, the government has used a carrot and stick strategy to force pension fund managers into buying up state bonds – a disastrous investment which was hidden from pension holders.
If fund managers did not show a given rate of return, they had to either invest more of their capital or buy government bonds. And by forcing the fund managers to invest in state bonds, the government was effectively using future pensioners to fund its debt, says Juan Luis Bour, chief-economist of FIEL (Fundacion de Investigaciones Economicas Latinoamericanas), Argentina's most respected economic think-tank.
Now 75 per cent of private pension funds are invested in state bonds. Despite government promises of high interest rates on government bonds, it stopped paying interest altogether when it defaulted on its debt in 2001.
Another myth, says Mesa-Lago, is that private funds allow people freedom of choice. Workers have to contribute to the state pension scheme or to a private pension fund – they cannot opt out altogether, and they cannot return to the state scheme. The government also hoped that the attractiveness of the private system would encourage punctual payments.
The real picture is very different. The pension funds' regulatory body, Union de AFJP, says their membership rose from four to nine million when the scheme was established in 1994, but contributors rose to only three million people.
Argentina's economic crisis is to blame for this trend. The unemployed obviously do not make payments, but even workers are reluctant to part with their hard-earned cash.
"I discovered that stuffing my contributions under my mattress would have been much better for me," says Jorge, an engineer, who also asks for anonymity. Jorge found he lost a third of his savings to administrative fees and insurance alone.
Jorge Beinstein, former programming director of the National Social Security Administration, says: "The funds have amassed fabulous gains robbing future pensioners, charging commissions equivalent to 30 per cent of their contributions – the highest in the world."
"And in the context of our roller-coaster economy, the investments made by the funds proved to be a recipe for disaster and a sure loss of money for the contributors," he adds.
Optimists say that since 44 per cent of private fund holders are between 30 and 45 years old, they have time to wait for Argentina's economy to improve.
Carlos Peguet, the head of Union de AFJP, says, "There have been negative returns, losses, because of the economic crisis. But the case has been overblown. Here people are looking at the short term, but those who invested in a pension fund have a time-span of between 20 and 30 years to collect the payments."
"The challenge is to overcome our credibility problem. This system is based on the public's confidence in the long run. If the economy does not improve and people remain anxious, we will have to face that challenge," adds Peguet.
But with the devaluation of the peso, and losses through government bonds and the spiraling stock exchange, there are now doubts over the profitability of private pensions for both fund managers and pension holders in a country like Argentina.