Argentina Abandons Partial Privatization; To Go All the Way

November 21, 2000

Six years after adopting partial Social Security privatization, Argentina's center-left President Fernando de la Rua has announced the total replacement of the country’s leftover pay-as-you-go system in favor of private retirement accounts. This move serves as a warning to those would only partially privatize the U.S. Social Security system: when a government-run system is left running alongside personal retirement accounts, political manipulation and loss of fiscal discipline can easily occur. The best long-term solution is to move as quickly as possible to full privatization, where workers can invest all of their payroll taxes in personal accounts.

In 1994, Argentine President Carlos Menem allowed workers to deposit 11 percent of the 27 percent total payroll tax in optional personal accounts, while keeping the pay-as-you-go system funded with 16 percent of wages funning alongside. While millions of workers have opted for accounts, the old pay-as-you-go system has fallen deeper and deeper into debt. In announcing the move to full privatization, current President de la Rua said that in light of a new anti-poverty safety net being established, "the state-controlled pension fund will be rendered pointless. Thus, it will be abolished. Members of the armed forces and of the security forces will be incorporated into the capitalization system run by private pension funds. State funds will be used primarily for the have-nots so that the state may achieve better the sacred goal of promoting equity. We shall obtain huge savings with these changes in our social security system. In addition to reinforcing fiscal solvency, they will gradually improve the annuities of pensioners who are today in a more vulnerable situation."

Economy Minister José Luis Machinea said: "What is important here is that all discussions and doubts about the private or public system are terminated. The president has just announced that within the context of these measures, the government-controlled pension system is senseless, that it will be abolished, and that the capitalization regime will be the only one in force. This modification definitively eliminates a bankrupt system and presents us with a system that will allow the financing of not only the public sector but also private enterprise." Machinea also announced measures to increase competitiveness in the private pensions system, create greater transparency in commission fees and give workers more choice of funds to invest in.

Many Social Security reformers in the U.S. propose establishing personal accounts investing just a small portion of the current 12.4 percent payroll tax. While a courageous step in the right direction, these small accounts would leave the current pay-as-you-go system permanently running alongside. These small accounts are politically easier to establish because they require smaller amounts of savings. But for that very reason, the long-term benefits of smaller personal account plans pale in comparison to those of full privatization.

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