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Old 04-28-2015, 01:33 PM
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Mary Pat Campbell
Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
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Argentina is one of several countries that implemented a major structural reform of the pension system during the 1990s and then, more recently, decided to reverse itself. This note presents a summarized discussion of the motivations and main characteristics of the early reform, the performance of the system since then, and the rationale for and impacts of the recent changes.

Argentina first reformed its pension system in 1993, introducing important modifications to a system that had almost 90 years of history and was designed as a traditional pay-as-you-go scheme. The law change was the Government’s response to a growing financial imbalance in the old system, fueled by the combination of generous parameters, aging participants, and weakening labor markets (with growing informality and declining real wages). This long-term imbalance imposed growing pressures on fiscal resources: the rising percentage of general revenue funds had to be used to finance the pension system’s deficits against a backdrop of public finances also facing trouble. The pension reform was also implemented amidst a strong pro-privatization political climate, and it was part of a larger strategy that included the transfer to private management of many publicly-owned companies such as the utilities, transportation, and communication providers.

Unfortunately, the new system did not perform as well as expected with regard to financial sustainability, increased coverage, and improvement of capital markets. Figure 1 shows that the new funded scheme did result in additional financial pressures for the system, since contributions previously directed to the PAYG scheme were now deposited in individual accounts. Nevertheless, the parametric reforms partly compensated for this, and by 2003, the net effect was positive. Less positive was the impact of the reform on pension coverage rates, despite stronger incentives to contribute. While it is difficult to assess this impact without a clear counterfactual, particularly in the context of a declining labor market performance, the sharp reduction in the percentage of salaried workers contributing to the pension system, falling from around 72% in the early 1990s to 63% by 2000, and as low as 52% by 2003, indicates that, at best, the new model did not result in more participation in the retirement system.
Argentina’s experience with pension reform offers some interesting lessons which may be useful for other countries considering changing their own programs. Among those, we see the following:

Overselling the expected positive impacts of a reform may help to get it approved, but will be probably damaging in the medium term, as stakeholders compare real-world performance to what was promised.

No system design is free of political or financial risks. While combining PAYG and funded elements might help to balance these risks, a major financial and or political crisis will most certainly affect all policies, as policymakers worry more about their short-term survival than the system’s long term sustainability.

A reform of the magnitude implemented in Argentina in the 1990s requires not only approval from the legal system, but also a wide social and political consensus that ensures it can remain resilient to short term negative performance.

In the long term, the fate of all pension systems depends on the sustained growth of output per capita which allows distributing all generations to benefit. Unfortunately, during times of economic decline, no pension system can deliver satisfactory results, regardless of its design features.


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