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ARGENTINA How to Sustain Highest Pension Coverage in Region

BUENOS AIRES, May 28 2012 (IPS) - The Argentine pension system, renationalised in 2008, now covers more than 90 percent of people of retirement age, the highest coverage in Latin America. But analysts are concerned about its sustainability.

“In social terms, I think the impact of the high coverage rate is excellent, but the challenge is to sustain the system over the medium term, when 35 percent of workers are in the informal sector,” social policy expert Fabián Repetto told IPS.

Repetto directs the social protection programme of the Centre for the Implementation of Public Policies Promoting Equity and Growth (CIPPEC), a think tank that emphasises the need to preserve the continuity of the pension scheme.

Experts in different fields concur that the expansion of coverage was not directly the result of the decision to renew state control of the pension system, which was partly privatised in 1994, but of a separate government measure enabling people who had never contributed to the system to draw retirement pensions.

Under the plan, originally designed to apply to domestic and informal sector workers with incomplete or no contribution records, they could claim a pension at retirement age and pay off the missing contributions in monthly instalments discounted from the pension over five years.

The programme got off to a timid start in 2005, during the centre-left government of the late Néstor Kirchner (2003-2007), and accelerated in 2007 after his wife and successor, President Cristina Fernández, took office. It enabled 2.4 million people aged over 60 who had never contributed to the system to receive a monthly pension.

The Economic Commission for Latin America and the Caribbean (ECLAC) reported late last year that Argentina had reached the highest coverage rate for pensions in the region, with nine out of 10 of its citizens of retirement age receiving a monthly income. Coverage has risen from 69 percent in 1996 to 90 percent today, the report says.

Although the extensive coverage is praised by experts, they express doubts about how the system will cope in the future, when the number of beneficiaries increases and contributions remain constant or start to decline.

Economist Luciana Díaz, director of CIPPEC’s fiscal policy programme, recognises the “valuable achievements” of the renationalised pension regime, but says any surplus it has is due not to working people’s contributions, but to the substantial proportion of tax revenue the state devotes to supporting it.

The system is no longer self-financed out of workers’ and employers’ contributions, as it was when it was created. According to Díaz, at present 42 percent of the funds paid out as pensions comes from general taxation.

Other challenges also jeopardise the continuity of the system, such as informal work, the ageing of the population and contingent liabilities arising from pensioners’ lawsuits against the system, Díaz told IPS.

Every month more than 1,500 court rulings are handed down against the state and in favour of pensioners for mistakes in payments and the need to upgrade monthly incomes, a problem that may be obviated now that a law has been enacted stipulating that the buying power of pensions must remain steady.

A study by Díaz emphasises that in 1950, when the solidarity-based state system was created, the ratio of contributing workers to pensioners was 10 to one, whereas now it is only 4.3 to one. The system has been “significantly improved” in comparison with the period when it was administered by the private sector, said economist Mariana González of the Centre for Research and Training of the Argentine Republic (CIFRA), associated with the centre-left Argentina Confederation of Workers (CTA), one of the country’s two main union confederations.

González told IPS that she approves of the decision to return pensions to state control because it allows the government “to have control of the resources, guarantee the stability of pension payments and invest in productive sectors, not just financial areas.”

However, she said that in order to maintain and increase pensions, it will be necessary to augment the fund, either by increasing government payments or by increasing the contributions of companies for their employees.

The Argentine social security system, based on intergenerational solidarity, was created in the mid-20th century as a regime under which workers and businesses made compulsory payments to a fund out of which pensions were paid.

In the late 1980s, the rise of unemployment and informal work – which does not contribute to the social security system – meant that the worker- and employer-generated resources no longer sufficed, and made it necessary to draw on general tax revenues to help finance the system.

In the midst of the feverish privatisation policy of the neoliberal government of former president Carlos Menem (1989-1999), a mixed system was created in 1994 under which workers could choose either to continue contributing to the state system, or to join a private retirement and pension fund administrator (AFJP).

The AFJPs, run by banks or other financial institutions, charged workers commissions of more than 30 percent of their total monthly contributions to create individual capitalisation accounts and manage the funds to yield profits for the future. But in 2008 the international financial crisis threatened to put these savings at risk, and the state was forced to guarantee members of the private plans at least a minimum income for life. At this point, the Fernández administration passed a law eliminating the private schemes.

Since then the state National Social Security Administration (ANSES) collects contributions, adds in taxes, and invests the resulting Sustainability Guarantee Fund (FGS) in bonds, shares, fixed-term deposits, negotiable obligations, trust funds and infrastructure financing.

In 2011, the annual average yield on FGS investments was 21.6 percent, ANSES reported – a “moderately successful” result according to Díaz, especially in the light of private estimates of the annual inflation rate that are higher than this figure, she said.

ANSES reported that since the renationalisation, the FGS has grown from 22.3 billion dollars to 47.5 billion dollars. In contrast to the AFJPs, the state-administered FGS invests more heavily in productive sectors and private company shares. The FGS also helps the state finance long-term projects, like building energy plants, or providing laptop computers for public school students.

The strategy is to inject funds into economic expansion, not just to make a profit but also to contribute to formal job creation, which will in turn boost social security contributions, ANSES argues.

At present the fund owns shares in 41 companies, and has 50 representatives on the boards of firms like Telecom Argentina, in which the state holds a 27 percent stake, or steel manufacturer Siderar, where it owns nearly 26 percent of the shares.

With its significant share in these companies, state directors on company boards have considerable influence on business decisions. For instance, in the past year they have managed to get a higher proportion of profits reinvested to increase productive capacity.

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