Economy

Fernández pension reform aims at ‘flattening the pyramid’

26th December 2019

By Martín Trombetta

Fernández pension reform aims at ‘flattening the pyramid’

The economic emergency bill passed last week in Congress carries important and controversial changes in the pension mobility regime, the system by which pensions and other social benefits (mainly, the Universal Child Allowance and family stipends) are adjusted quarterly to compensate for inflation. The measures are undoubtedly bold: the mobility regime imposed by Mauricio Macri’s 2017 reform has been suspended for the next six months, and hikes during that semester will be done at the discretion of the Executive.

</p> <p>At the same time, two special 5,000-peso bonuses will be granted to pensioners who receive either the minimum pension for retirees (currently at 14,000 pesos, roughly USD 230 at the official exchange rate) or the PUAM, a benefit for non-retirees (11,250 pesos). Retirees whose pensions fall short of 19,000 pesos will also be compensated for up to 5,000 pesos, so as to prevent distortions. These one-shot payments are larger than what the lowest earners would have secured with the March and June quarterly hikes, so it is safe to say that the poorest pensioners will be better off with the change. But no announcements have been made on what will happen with the remaining 35% of pensioners, whose benefits may well be raised below inflation.</p> <p>Since social security accounts for 50% of national public expenditure, it is no surprise that fiscal concerns have forced the new administration to take unpopular measures. In fact many economists consider inflation adjustments (or “indexation”, as it is known in Argentina) in public expenditure as powerful fuel to the flames of inflation. But recent history shows reductions in pensions are extremely costly in political terms – so this measure might open dangerous battle fronts for Fernández to deal with.</p> <h2><strong>A history of pension reforms</strong></h2> <p>Argentina has undergone three large pension reforms in the last 25 years, as well as several smaller changes. In 1994, a private pension system was created with the aim of expanding the financial sector and boosting private credit. But the reform was ultimately a failed one. The remaining public system suffered a huge reduction in revenues, as workers’ contributions went into private pension funds. This loss was not compensated by reductions in public expenditure, as the state was forced to subsidize private pension fund administrators so as to keep pensions at socially desirable levels.</p> <p>By 2008, the situation was critical as many pension fund administrators were close to bankruptcy and the public pension system ran large deficits that required compensation from the Treasury. That is why the Kirchner administration took advantage of the grim international financial context to nationalize the private pension system, re-unifying the pension regime.</p> <p>But this was not the end for pension troubles. With inflation already becoming the norm during the Kirchnerite era, pension adjustments gave room for a discretionary and often unfair distribution of payments. The lowest pension earners gained in real terms, but lawsuits against the state piled on, as others felt that either the nationalization or the uneven inflation adjustments were violating their rights. Cristina Kirchner made it clear she would not answer to such claims, but this changed with Macri, who decided to favor plaintiffs in 2016, in line with his base of older and upper- and middle-class supporters.</p> <p>Macri’s 2016 reform was labeled “historic reparation”, and considerably raised benefits for the highest-earning pensioners. After his win in the 2017 mid-terms, Macri went further, passing a new indexation formula against a backdrop of harsh criticism and violent protests.  The 2017 reform indexed pensions and social benefits to a combination of consumer price index and wage variations (70 and 30% of each, respectively).</p> <h2><strong>Flattening the pyramid</strong></h2> <p>This recent history shows tension between two policy approaches – a flattening or steepening of the pension payment pyramid, either benefitting the lowest earners (in the second most unequal region in the world) or paying more to those at the top (who could argue that they made more financial contributions).</p> <p>Pension payments in Argentina have a high variance. While the average pension is only 20,000 pesos, the 10% with the highest benefits receive about 60,000 pesos and the top 1%, more than 90,000 pesos. Even more controversial are so-called special regimes, which include over 200,000 retirees from particular sectors that feature benefits well above the general level. The usual suspects are judicial clerks and diplomats, whose pensions average 228,000 and 326,000 pesos respectively, which many see as brutally excessive.</p> <p>Special regimes also benefit from different indexation rules. When the emergency bill was first announced, it included such indexation rules in the general freezing, but that decision was swiftly modified and the bill that was finally passed by Congress will not affect mobility for special regimes.</p> <p>Sources at the ANSES social security administration told <em>The Essential</em> that the decision to exclude special regimes from the pension freezes was based on legal concerns — every special regime rests on a particular law and there is often an article in such laws stating the pension levels and indexation mechanism to be applied. Suspending mobility for these regimes could have led to big legal challenges and potential lawsuits.</p> <p>There is also the matter of political feasibility. Eliminating special regimes’ mobility affects other important groups such as teachers, who protested against the bill when it was announced, and eventually secured that their group was exempted from the suspension. Still, the exemption of high-end judges and diplomats from the freezes was not a popular move. Shortly after it was announced, Fernández took it to Twitter to announce that Congress would extend its special summer sessions to discuss further changes in the matter.</p> <p>All in all, the measures point in the direction of a reduction in social security spending, albeit one done in a progressive manner. If the top 35% do receive raises below inflation in March and June, then redistribution will have taken place &#8211; high pensions falling and low pensions rising, thus flattening the pension pyramid once again, also in line with its voting base.</p> <h2><strong>One reform to rule them all</strong></h2> <p>The new approach is likely to trigger renewed discontent among the losing 35%, as the highest earners, even those in special regimes, receive higher benefits but also pay larger contributions. Still, the point that indexation undermines disinflation strategies also deserves attention, so questions against the old formula make sense when seen in that light. Yet discretionary updating is certainly no long-term solution, which means that Fernández will need to find a more stable approach during this six-month window.</p> <p>The pension system calls for one last reform. The Peronist government will need to combine more equality in benefits with macroeconomic sustainability. But the reform will need to be a well-thought one, which doesn’t require further changes in the following years, as a succession of failed reforms only feeds instability and harms incentives. As J. R. R. Tolkien might have put it, one reform to rule them all.</p> <p>

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Martín Trombetta

Martin Trombetta holds a PhD in Economics from Universidad Nacional de La Plata, a research grant at the CONICET institute, and teaches at the Universidad Argentina de la Empresa (UADE). His publications have focused on labor markets, income mobility, gender gaps and other topics.