The End of Private Pension Funds in Argentina

Argentina’s decision last week to end private pension funds effectively killed the primary institutional investor in its emerging capital market. Confidence in the market has predictably suffered from this measure, the latest in a series of government meddlings.

Argentina created private pension funds (AFJPs) in 1994. People had the option of remaining in the state-sponsored pay-as-you-go system, but most switched to the new privatized option. AFJPs were constrained to invest a large part of their portfolios in Argentine government debt. In the months ahead of the 2001-02 crisis, the government forced AFJPs to take a larger share of government debt to help it address its budget deficit. In early 2002, the government defaulted on its debt and thus on the savings of millions kept at the AFJPs.

When debt was restructured a few years later, the private pension funds were given new bonds indexed by the official inflation rate (those were in high demand in the markets at that moment). However, since 2005-06 it was widely evident that the official inflation index was significantly lower than the real inflation (8-9% vs. 25-30% in 2007-08). This represented a partial default on indexed-bond holders, including AFJPs. The current government gave people a new option to return to the pay-as-you-go system in 2007 in order to increase fiscal resources. Some switched, most did not.

Last week the government decided to kill the AFJPs and sent a project to Congress to transfer their funds ($30 billion) to the state. Pensions return to a full pay-as-you-go system and the savings of 9.5 million people invested in private accounts over the last 14 years are to be held in state-run accounts. The government will also receive around $1.5-2 billion in cash flow from workers' annual contributions to the pension system, currently required by law.

Why such a sweeping measure? The official reason was to protect future pensioners from the fall in global markets. The real reason: the government is facing significant problems in rolling over maturing debt. As 2009 is an electoral year, implementing measures to rein in spending is not part of the government's plan.