Natacha Pisarenko/AP
Argentina's President Cristina Fernandez gestures during an event to announce the complete
nationalization of Argentina's private pension funds.

Argentina Announces Plan to Nationalize Pension System

October 24, 2008 02:15 PM
by Anne Szustek
President Cristina Fernandez is proposing a bill to socialize Argentina’s privately run retirement account system. She says it’s a safeguard; critics say it’s a sign of despair.

Argentina Pension Nationalization Plan: Security or Surrender?

Argentine President Cristina Fernandez made an announcement on Tuesday that she was putting forth a bill to Argentina’s national legislature for the country to take over the 14-year-old pension system, currently worth some $30 billion.

The move would channel an additional $400 million into public coffers, helping to buffer against default. “The government could also force the pension system to roll over the 10% of public debt held by the private funds on terms of its own choosing,” writes The Economist.

Fernandez defended the move by saying, “The G8 countries are protecting their banks, and we’re protecting our workers and retirees.” But some politicians and economists fear the deal may be a reprise of the government raids that sparked the privatization of the retirement accounts in the first place.

In response to Argentine pension accounts getting routinely gobbled by government takeovers and rampant inflation, former President Carlos Menem set up a private pension scheme in 1994 that gave workers the choice of staying with a state-run retirement plan or switching to one of 10 privately managed pension accounts, among them U.K.-based HSBC and Spain’s BBVA.

Nine years later, 83 percent of the Argentine workforce had moved their nest eggs into the private pension accounts. And in 2008, the 9.3 million retirement accounts are the biggest investors in Argentina’s fragile capital markets.

Locally traded stocks fell almost 18 percent on Wednesday and 24 percent over two days on the back of the news that Argentina-based bonds fell an average of 10 percent on Wednesday, and 28 percent over the same two-day period.

Eduardo Blasco, an economist with business consulting firm Maxinver, told Reuters, “Investors are extremely panicked. People start imagining things like [former president and Fernandez’s husband] Nestor [Kirchner] and Cristina can start expropriating as if it were a war.”

If the proposal gets the green light from the legislature, there will likely be a barrage of lawsuits from panicked account holders. Blasco also told Reuters, “If they’re going to rob my house I don’t care if it’s worth $200,000, if someone offers me $40,000 I take it because it’s going to be stolen anyway.”

Argentina’s sovereign bond debt for both local and foreign currency is at B/Stable/B, according to Standard and Poor’s. Yet recent drops in sovereign bond prices show a lack of confidence in the country’s economic viability. A chief financial officer at an Argentine bank told Reuters that the nationalization of pension accounts “decreases the risk of default in 2009 and 2010,” and that “the risk of default is overstated in the short term.”

Yields on short-term Argentinean peso bonds have gone up to more than 90 percent, the CFO points out. Yet the current economic picture in the country conjures images of the peso’s recent struggles.

Historical Context: Argentina’s recent economic history

In the 1990s, Wall Street considered Argentina to be one of the world’s hottest economies. Investment bankers, brokers and money managers made millions of dollars marketing the country’s stocks and bonds. But when Buenos Aires officially defaulted on most of its $141 billion debt in early 2002, Argentina’s economy went into a catastrophic tailspin that left over a fifth of the labor force unemployed, hurled millions into poverty and made the country’s currency nearly worthless.

In Jan. 2002, Argentina abandoned its peso’s one-to-one peg with the dollar and had all dollar-denominated bank accounts in the country changed over into local currency, exchanged into an “official” rate set at 1.4 pesos to the dollar.

The local currency rapidly devalued. That summer, Argentina stopped fulfilling its debt load.

There was a silver lining in this however: the subsequently cheaper exports resulted in an influx of hard currency, bolstering the Argentine economy. On top of a successful debt swap in 2005 of $81 billion in defaulted Argentine bonds in exchange for new debt instruments worth some $0.35 on the dollar, that Latin American economy has largely bounced back.

Related Topic: Other countries’ pension plan woes

Estimates project that by the year 2030, about one out of every five Americans will be 60 or older, compared to roughly one in eight now. The first baby boomer applied for Social Security benefits in Oct. 2007. As that generation approaches retirement age, pundits are questioning the viability of the nation’s support networks for the elderly.

Megan McArdle argues in Atlantic Monthly that Social Security can survive the onslaught of baby boomers cashing in on their benefits. AARP, an organization that lobbies on behalf of senior citizens, and former Federal Reserve Chairman Alan Greenspan concur. In an article by media watchdog group FAIR, Greenspan is quoted as saying, “We’re approximately 2 percentage points of payroll short over the very long run. It’s a significant closing of the [Social Security] gap, but it's doable.”

Washington Post columnist Dana Milbank believes that the wave of Social Security applicants that started last October may grow to consume the federal pension system. “As the boomers retire, Social Security will go into the red in 2017 and become insolvent 24 years later, according to the system’s trustees,” he writes.

Western Europe, whose population is lopsidedly older than America’s, also worries about the viability of its social security systems. “Instead of four workers to support every retiree, we’ll have only two,” Hans Ulrich Maerki, chairman of IBM Europe, Middle East and Africa, wrote in The Wall Street Journal.

Years of China’s “one child per couple” policy have led to similar demographics in that Asian country. China has also experimented with wildly varying economic models over the past 60-odd years to the effect that seniors raised during the era of Mao don’t know how to cope. “Trained to create a communist utopia, they now find themselves in a post-industrial, knowledge-led economy, where cozy old neighborhoods are torn down to make way for huge shopping centers and office high-rises,” Jehangir S. Pocha wrote in The Boston Globe.

Key Player: Cristina Fernandez de Kirchner (1953– )

On Oct. 29, 2007, Cristina Fernandez de Kirchner became the first woman to win an Argentine presidential election.

Technically, Isabel Peron was Argentina’s first woman president, but she was never elected. As vice president to her husband, Juan Peron, Isabel took office in June 1974 after he fell mortally ill.

Fernandez is the second woman in two years to be elected president of a South American nation. The first was the current Chilean president, Michelle Bachelet, who came to power in 2006.

In a region where traditional attitudes toward women are more likely to put them in the kitchen than on the Senate floor, Fernandez’s election underscores Latin America’s changing mores.

Most Recent Beyond The Headlines