Aims, outcomes and prospects of pension reform in Argentina: An assessment ten years after

ARZA, CAMILA

Policy Paper, Argentine Observatory

New School for Social Research

Lugar: Nueva York; Año: 2005 vol. 6 p. 1 - 28

Old-age income security has a long history in Argentina. In 1993, the National Parliament passed a bill that redefined the structural basis of the pension system and the public-private mix in pension provision. The reform came short before the publication of the highly influential World Bank report on pension reform: Averting the old age crisis (World Bank 1994). Unsurprisingly, it followed most of the new policy prescriptions set out by the World Bank including a paradigmatic shift from public PAYG defined-benefit models to three-pillar pensions where most of the income replacement function is left to the private sector on a funded defined-contribution model. A shift of this kind had significant implications, not just for pension policy itself, but also for the overall economic policy of the country. It made the implicit pension debt explicit, involved an enormous transition cost, to be borne by the state and the taxpayer, and has substantially increased the primary deficit of the social security system. Ultimately, the reform constituted not only a shift to the market, but a revision of the principles underlying pension policy. Pension benefits came to be largely presented as a ‘property’ of the contributor and benefit entitlements ceased to be based on previous earnings to largely depend on contribution records. How was such a costly reform possible? Why was it pursued at all? Was it worth it? This paper will attempt to provide some preliminary answers to these questions. In the light of the recent literature on path dependence and constraints to institutional change, it reviews the conditions that have made it possible, for the Argentine case, to completely change the pension system in a short time period. Among them, the existence of a crisis, a strong government and the demonstration effect of pension reform, come to the fore. To a large extent, agreement for a reform of this kind was feasible because in the context of economic restructuring it was viewed and promoted by its advocates (who had significant influence in national policy), as a major improvement for pension administration. Ten years after the new pension system was put into practice, it is now possible to evaluate the extent to which some of the gains expected from the reform were actually achieved on the ground. The paper shows the limitations of the newly reformed system to bring in some of the expected improvements, including:  (1) financial sustainability, (2) better income smoothing and poverty prevention, (3) less political risk, (4) less perverse redistribution, (5) more compliance and savings, (6) better administrative efficiency, (7) and more individual choice. In ten years of operation, the system was not able to show any evident improvement in neither of these seven areas of concern. The paper concludes with a discussion of the major lines for future reform in an attempt to illuminate the finding of new policy alternatives.