The Argentinean government is robbing the workers!

This week the president of Argentina, Cristina Fernandez, announced her intention to nationalize the private pension funds in the country. This major violation of the sanctity of private property is shocking the World. The capital market reacted immediately to that news and the stock market indexes in the country dived, the stock prices fell by 11% on Tuesday.  This is the assessment of the investors about the Government intentions – withdrawal from the economy and loss of confidence.

The pretext for this decision is, naturally, "protection of the interests of the pensioners and the workers". Similar arguments were used by Stalin, when he was sending millions of people to exile and detention camps and was disseminating communist propaganda in the USSR. Similar rhetoric is used by the President of Venezuela, Hugo Chavez, who does not respect the right of property and is nationalizing with full speed various sectors of the economy, bans access to the market of foreign companies, controls the mass media. When the state apparatus is openly defying human rights, limits the freedom of its citizens and violates the principles of sanctity of private property, this is always shown as being a benefit to the people against the "greed" of the capitalists. But there is nothing truthful in that. In reality these are the greatest evils, which happened to humanity and the consequences have always been tragic.

The lies

During 1994 in the country began to operate private pension funds, where the workers, who elect to insure themselves with a capital pension system, must pay 7% of their wages in personal accounts with the pension funds. In addition, 16% of their wages are paid in the state pension system, which pays the pensions of the retired people.  

Mrs. Fernandez announced that the system of private pension funds had put the Argentinean pensions "into the hands of the speculators".  She is using the status of the capital markets, under the conditions of global financial crisis, as an argument against the effectiveness and the economic expediency of the private capital pension system.

However, the facts totally contradict these accusations. During the last 12 months the pension funds actually have a negative profitability of about 2.25%. But this does not mean that the savings and the future pensions of over 9 million workers are endangered. The investments in private pension accounts are characterized by a long period of accumulation and management of the funds – on the average 35-40 years, depending on the length of service of the worker.  Under professional management of the funds, there is practically no risk of losing the savings. The convulsions of the stock market are short term events, which follow the cyclical variations of the economies. The downfalls are neutralized by the upsurges of the markets and over the period of several decades the real growth of the Global economy is always positive

The data shows that until 2006 the average nominal profitability of the pension funds in Argentina was 15%, while the real profitability was 9,5% (when you take out the inflation)[1]. At the same time the profitability of the state pension system is almost three times lower. That means that if the private pension funds are temporarily performing badly under conditions of economic crisis, the state pension system would be doing at least three times as badly.  

The illegal plan

The opposition in Argentina declared that the plan of Mrs. Fernandez is illegal. However, this is unlikely to stop her. The true reason for the desire to nationalize the pension funds in the country is trivial – the Government needs money in order to be able to pay its debts.  During the next year Argentina must pay approximately 12 billion dollars as interests and loans, which it has not got. While the pension funds have accumulated 30 billion dollars (most of which are invested in Government bonds, due to regulations) and every year additional 5 billion dollars are accumulated as payments of the workers. Apparently, this has attracted Mrs. Fernandez, although in the long run her actions could be catastrophic for the retired people, for the workers, the businesses and the future generations.

Argentina already had the bad experience, after during 2001 it announced a moratorium on its payments of the Government debts, which put the country in insulation from the international capital markets.  The wasteful fiscal policy and the mistakes of the Government in the area of the monetary sector led to the fall of the currency board during this year. However, the Government did not learn from its mistakes (which is not strange since in 2001 the President of Argentina was Nestor Kirchner, the husband of Cristina Fernandez). A representative of the opposition made the following comments to Blumberg: "The Government had two options: to reduce spending, eliminate the subsidies and to pay the political price or to take the free rider on the savings of the people in their personal pension accounts"[2]. Unfortunately, it selected the second option because it is always easier to rob and redistribute than to create wealth…


[1] The entire study is available here.

[2] See the entire comment in Blumberg.


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