03 November 2008

Nationalizing pension funds: more money for the Kirchners?

It's time again for a depressing anti-government post! This time, about the nationalization of AFJPs (private retirement funds). I strongly feel it's a good idea, and as strongly as that I also feel we must keep it from happening as intended by president Néstor Kirchner. (If you think Cristina's the one in charge, you must be living inside a jar, as we say over here. For months she's been devoting her time exclusively to cutting ribbons to [unfinished] public works and, lately, to writing newspaper articles in praise of her husband's ideas. Néstor is de facto big guy.)

Now you mustn't believe I do this because I like destructive criticism. I'm absolutely for "big government" as Americans call it, and I believe important stuff should never be left fully in the hands of private corporate interests whose creed is "make money fast whatever way you can". Kirchner's government has taken us far in this sense, and that's OK.

The problem with the Kirchner administration is that they always, somehow, manage to turn good theory into bad practice, and for a long while now (and not because the media or the far right are trying to make it look so, as C&K passionately believe) everything they've proposed has been born tainted by association. Or, as in this case, destined to fail before (a good part of) public opinion because common sense and the typical Argentine paranoia will kick in, and all alarms will go off, as soon as the state gets close to our pockets.

About 15 years ago, the law that allowed the creation of the AFJP system was drafted and passed, accompanied with a heartfelt defense of private capital accumulation (the so-called "capitalization scheme") by many who now profess to be old-time fans of the old-fashioned state-regulated collective saving scheme, including many faithful Kirchnerists (flip-flopping is another word for pragmatism — the only thing that can be truly called "Peronist doctrine"). Gobs of money were transferred to private capitalization accounts from the state's coffers, and the AFJPs (Administradoras de Fondos de Jubilaciones y Pensiones) started recruiting associates. The law said if you didn't choose where your retirement funds should go, then it would be automatically assigned to an AFJP; thus millions of distracted workers were signed up for a massive speculative operation. The AFJPs invested money in assets of various kinds and for a while they actually increased their clients' funds, although they charged huge commissions.

Pensions were frozen for ten years, as the economy entered into a low-growth phase, unemployment rose steadily, and finally recession entered the picture. After president Carlos Menem (cursed be his name) got away with murder, president Fernando de la Rúa found the dying economy and, instead of trying to resuscitate it, he finished it off with such nice measures as cutting 13% of pension payments. We all know what happened then... so fast forward to 2003.

Néstor Kirchner passed a series of decrees increasing both salaries and pensions, which were well-received, even as employers complained. The economy took off and pensions did as well. There was a small problem, though: the private pension funds couldn't keep up. They started losing money. The law said that the state must guarantee pension payments, if necessary by compensating (subsidizing) the private funds. So the state poured money into the AFJPs, whose risky investments had proven disastrous (does that sound familiar?), and when the companies began accumulating too much debt, the government forced them to buy national debt bonds. Yes, that's right: the government forced the guarantors of retirement funds for millions of Argentinians to accept what amounted to wet paper in order to rid itself of them (the only other feasible destination for those bonds was Hugo Chávez).

In January 2008, after the scarce enthusiasm that followed Cristina's election had faded, someone near her came up with the idea of "letting people choose" where to place their retirement savings. The Kirchnerists hastily passed a law opening up the choice for everyone: 180 days to take your money away from the private box to the state's bag (or the other way round). And the law also established that, if newcomers to the labor market didn't explicitly choose which way, their funds would go to the state system, not some AFJP. The AFJPs understandably lost a lot of clients, but in all fairness they deserved to, and the law didn't force anyone to accept anything against their interest. It had some other very good points as well, so good in fact that, "better late than never" aside, some of us wondered why it hadn't been passed before. Like four years before.

The answer came easily. Why indeed? Because it was only now that the economy had begun slowing down, while debt payments were looming closer and the whole economic structure was showing the strain. High inflation, high interest rates, no way to get fresh funding for things like the bullet train, and the need to pump more and more money into subsidies for electric power, drinking water, fuel, natural gas and everything else. Néstor Kirchner had always ruled with a big wallet of state money freely available to him, but Cristina's future was uncertain. The fresh funds from the AFJPs, of course, should have never been used to fund the state in any respect other than pension payments, but the new law didn't say anything about that. Already in 2007, his last year, Kirchner had signed a decree allowing the government to divert funds from ANSeS (the social security agency) to expenses such as public works.

After the fiasco of Resolution 125 (another, more desperate attempt to get money for the state) came the worldwide financial crisis. After being deprived of juicy taxes on exports of soybean, both exporters and the government have seen the prices of soybean plummet to half the levels of the first quarter: less and less money! Subsidies on buses, natural gas and power were reduced, but that's not enough; with a world recession looming, and the economy visibly decelerating, it would be economic suicide to raise the prices of basic services. On top of that, 2009 is an electoral year, and that means a lot of wills and votes must be bought. Back then, Néstor and Cristina could campaign all year round, visiting one town after another in provinces with "loyal" governors, handing out multimillion checks without any real oversight, and making sure crowds of bussed-in "supporters" would be ready to applaud their presence; but all that costs money.

The national state keeps about 70% of what the provinces contribute, and what it shares, it does so rather unfairly. Most provincial governments are strapped for cash right now, and more than a few are absolutely dependent, on a short-term basis, on presidential whims when it comes to distribution.

Kirchner's desperation is now becoming noticeable. Initially he ordered the bill that nationalizes AFJPs to be approved and turned into law at once, without any changes. His parliamentary bulldog, deputy Agustín Rossi, first attempted this, then saw it was impossible, and timidly conceded that the government's bloc would accept discussion of the finer points.

Now, the bill seeks to overturn a 15-year-old system with millions of associates, in a context of financial turbulence, and to do so in a matter of weeks, so that all the money from the private pensions can be transferred to the state's social security before the end of the year. Not only does this negate the choice of millions of people who decided to stay in the private companies earlier this year, but it also looks rather suspicious.

Why the hurry? True, the assets of the AFJPs are taking heavy hits from the world's financial meltdown. But those things come and go. It's also true that the AFJPs haven't given their associates what they promised, and that they've engaged in some dubious practices. That's something to be settled with general audits. If you have a critical system that doesn't seem to work as intended, you don't decide to break it. You fix it and keep it going while you prepare the transition. The president can count on ample powers, a Congress controlled by overwhelming margins, and a social consensus that private pension funds aren't a good idea for most of us. I repeat, why the hurry? Cristina still has three years to go.

This administration has frustrated me time after time. I'm really tired of seeing great ideas given such bad names by the Kirchnerist gang. I'm fed up with having to agree with certain people... being forced to be on the same side as some who hold principles completely opposite from mine.

Yet I have no alternative. It's just plain common sense that the Kirchners want the private pensions' money to continue their incessant campaigning for their own permanence. They have no new ideas, no plan, no policies, nothing but a hunger for power that sometimes translates into seemingly brilliant developments, soon marred by corruption and negligence. Are we as a nation doomed to go from one rotten set of politicians to another?

6 comments:

  1. Some brilliant ideas.
    Much of Argentina's problems stem from either the public's general paranoia that the government can do no good, or from the fact that the government can seemingly do no good.

    Pensions need to be nationalized though. The current financial crisis is not going to be repaired for some time. We may be facing another depression like in the early part of the 1900s. Government can protect people's money, business will waste it away for their own gains.

    What election year is 2009? Cristina should still have 2 years left?

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  2. Next year (2009) we have legislative elections. One of the things that make it important is that opposition in Congress could remove the unconstitutional "superpowers" granted to the Chief of Cabinet that allow him to "redesign" the budget. Presidential elections will take place in 2011.

    Argentina is both paranoid and schizophrenic. While believing the government can do no good, Argentinians will ask government to take care of their personal needs a.s.a.p., or else they'll scream and scream.

    What you say is true: government can protect people's money, business will waste it away for their own gains; but "can" doesn't mean "will". If Kirchner had done this, say, in early 2005, I would've applauded it (and quite possibly I'd be kicking myself now). Now, the whole move seems rather suspicious.

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  3. Pablo -
    I don't really think that you advocate "Big government" in the US sense, since the term is used pejoratively:
    http://en.wikipedia.org/wiki/Big_government

    The biggest criticism of Big government is that it often usurps states rights, and dictates federal mandates upon states without concomitant federal funding. Not to mention that it often encroaches on individual rights.

    The current administration's plan to nationalize AFJPs at this time is obviously highly suspicious. Nobody believes that the government is trying to protect worker's savings - quite the opposite in fact.

    The administration has indicated that all holdings outside of Argentina must be liquidated immediately, just when stock markets are at their lowest points (thus locking in losses). In addition, the fact that the funds transferred from the AFJPs will be available to the administration to use as they see fit indicates that they perceive an immediate need for additional capital, while simultaneously denying it.

    The government will be able to retire a portion of its (junk) bond obligations (since the AFJPs were required to invest most of their funds in government debt instruments (55% at last count), and get an ongoing cash flow from current contributions.

    The plan was obviously announced with no discussion or forethought, hence the immediate disastrous plummet in both the Ibex and Merval. The reality of the government holding major positions in publicly-traded companies has also raised serious concerns. The injunction issued against all AFJP holdings in the US was an action that could clearly have been anticipated by anyone with half a brain.

    It's no coincidence that Argentina's country risk has risen to between 1500-2000, rating agencies have lowered their foreign debt ratings, and the spectre of another default is being discussed. The IMF has reiterated that Argentina will not be eligible for any aid, and the lender of last resort (Venezuela) has been impacted by the precipitous fall in the price of crude oil on which it depends.

    I can see no a priori reason why workers cannot invest in private investment schemes that are highly government regulated (including commissions). Of course that assumes that the government would structure the rules to benefit the workers, and not just itself. A diversified portfolio of investments both within Argentina (thus providing local investment capital), and outside the country would offer the potential for both capital growth and protection against currency devaluation. Forcing investment funds to mostly buy federal government debt is not a wise strategy.

    Having no access to foreign credit markets, the government is now essentially feeding upon itself. Although the current global economic crisis is undoubtedly exacerbating the situation in Argentina, it would be foolish to believe it is the cause.

    Just like there were housing bubbles in the US, UK, Ireland, and Spain, their were bubbles in commodities. The doubling of commodity prices over 12 months was clearly unsustainable considering increasing commodity production and global demand. It seems that the government was expecting commodity prices to continue increasing (along with retencionnes), and was basing its economic forecasting and spending on that mistaken belief.

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  4. Anonymous06:35

    what is a "gob of money"???

    from british reader

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  5. gob (n, countable) a lump of soft or sticky material; make gobs of money earn a lot of money, accumulate wealth, make a fortune. Probably not a good choice of words. Feel free to substitute "loads of money".

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