Argentina’s Pension and Social Security System: a Sustainability Analysis1
1. During the past ten years, Argentina’s social security spending has been posing increasing pressure on the fiscal accounts. In particular, spending on pensions doubled, in percent of GDP, during 2005–15, not only reaching one of the highest level in the region (7.4 percent of GDP) but also becoming the largest single expense in the federal budget (about 35 percent of total federal government spending, MECON, 2015). The excess of social security spending above contributions reached 2.8 percent of GDP in 2015, weighing heavily on public finances.2
2. This paper addresses the following questions:
What are the major structural challenges that Argentina’s social security (and pension system in particular) currently faces?
Is the system sustainable over the long run, under current policies?
What are viable reform options, and how much savings would these yield?
3. We discuss the key features of Argentina’s social security system and present an actuarial study on pensions. To project social spending over the long-run we simulate the effects of the current system on Argentina’s population dynamic, cohort by cohort, under long-run economic assumptions for growth, inflation, productivity growth, and participation rates.
4. We find that Argentina’s social security system needs to be reformed to remain financially viable in the long run. The deficit of the pension system would increase to over 5 percent of GDP in 2066, and the public pension fund is not large enough to finance this deficit. Correcting this imbalance would require parametric reforms within the system, but also institutional changes to clearly separate social security from social assistance, both in terms of budget implications and administrative responsibilities.
B. The System
5. Argentina’s social security system is a public only, pay-as-you-go system, that mainly offers two types of benefits: family allowances and pensions (Box 1). Family allowances are granted for dependents and for life events such as pregnancy, birth, and marriage, at amounts that are a function of the recipient’s income, and province of residence. Pensions mostly consist of retirement, old age, invalidity, and survivor benefits. Unemployment insurance exists, but the magnitude of this program is practically nil. The system, administered by the National Social Security Agency (ANSES, Agencia Nacional de Seguridad Social3), is the result of a long process of reforms and experimentations with different structures (including coexistence of a private and a public pillar), culminated in the reforms of 1993 and 2008 (see Box 3 for a brief summary of the system’s history).
6. Since it was last reformed, in 1993 and then 2008, the system underwent three major developments, with contrasting effects on its financial viability. These developments reflect both structural issues of Argentina’s economy (informality, and the presence of pockets of poverty) and the effects of policies introduced to confront them.
Expansion of coverage. Beneficiaries of family allowances quadrupled in ten years, from 3 million in 2005 to 11.3 million in 2015. Most of the increase was contributed by the introduction, in 2011, of a Universal Child Allowance (AUH, Asignación Universal por Hijo) which extended allowances to 3.7 million children from low income households, mostly unemployed or informal sector workers. During 2005–15, pension coverage was extended by over 40 percentage points, to around 87 percent of men and 83 percent of woman above retirement age, one of the highest rate in the region. In particular, two pension moratoria (at end-2008 and in 2014) allowed about 2.9 million people who had reached retirement age, but lacked sufficient years of contributions, to receive a benefit after recognizing a debt for the missing contributions.4 Greater coverage has positively contributed to alleviate poverty among the elderly (UNDP, 2014), and improve social indicators among the poorest (especially AUH, which was instrumented as a conditional cash transfer), but it has also required greater financing (Lustig and Pessino, 2014).
Low participation rates. A high level of informality and frequent interruptions in work careers result in low annual participation rates (Bertranou et al., 2014, Rofman and Apella, 2015, and World Bank, 2008). Since the system was unified in 2008, about half of working age males and only 25 percent of females have been providing social security contributions.
Box 1.Argentina’s Current Pension System
Argentina’s pension system is a defined benefit pay-as-you go system. Among the main features of the system are:
Retirement age: it is 60 for women and 65 for men, with at least 30 year of contributions. While retirement age for men and contribution requirements are in line with OECD average, retirement age for women is 3 years lower, in particular as expected life at age 65 is similar to the OECD average.
Contributions: During their work life, employees contribute 11 percent of their gross earnings (slightly above the OECD average of 8.2 percent), up to a maximum. Employers contribute between 17 and 21 percent of gross earnings, with no maximum.1
Sources: OECD “Pensions at a Glance, 2015” and OECD, IADB, and World Bank “Pensions at a Glance: Latin America and the Caribbean”.
Pension amount: at retirement, beneficiaries are entitled to a basic pension (PBU, Pensión Básica Universal2) and a contribution-related pensions. In 2015, the PBU was roughly equivalent to 26 percent of the national average wage. The contributory pension is calculated as a proportion (1.5 percent times the number of years of contributions, up to 35) of the average wage of the last ten years of work history. In computing this average, past wages are adjusted based on the benefit indexation formula (movilidad). The sum of the contribution-related benefit and the PBU is bound by a minimum and a maximum. In 2015, the minimum was about 54 percent of the national average wage. As a result, the replacement rate (the ratio of the benefit to the last wage earned) is about 72 percent for a person earning an average wage, above the OECD average (53 percent for a person earning the average wage).
Pension indexation: after retirement, all benefits (including the PBU, the minimum, and the maximum) are adjusted based on the formula de movilidad (see Box 2)
Pension replacement rate for a male earning the average wage
Sources: OECD “Pensons at a Glance,2015” and OECD, IADB, and World Bank “Pension sat a Glance: Latin America and the Caribbean”.
As of end-2015, 5.3 million people received at least one form of pension, of these about 4.8 million were retirees (data ANSES). Women account for about 50 percent of non-retirement pensioners and 65 percent of all retirees, reflecting earlier retirement, longer life expectancy, and greater coverage under the moratoria. Overall, the system covers 87 percent of men and 83 percent of women above their respective retirement age, including those who entered the system under the moratoria regime; excluding them, the coverage ratio would be 62 percent for men and 20 percent for women. In terms of distribution, about half of beneficiaries received the minimum pension, and less than 5 percent the maximum. At the same time, about 9.4 million people contributed to the system, or about 36 percent of the working age population.1/ Employees and employers contribute another 3 and 6 percent respectively for health insurance.2/ Although it is called “universal” this basic pension only accrues to people who meet the age and contributions criteria.
Box 2.The Indexation Formula (La Fórmula de Movilidad)
Starting in March 2009, all benefits (pensions, but also family allowances) are adjusted twice a year according to an indexation formula, which links the rate of increase in benefits to the rate of increase of ANSES’ resources per disbursed pension benefit. Benefits disbursed under the moratoria regimes are not included. The formula determines the rate of increase (d) as the lower of two rates: (i) the simple average of the rate of increase in ANSES’ tax revenues per disbursed pension benefit (rb) and the rate of increase of open ended employees’ wages (w) (specifically, the Remuneración Imponible Promedio de los Trabajadores Estables, RIPTE); and (ii) the rate of increases in ANSES’ total revenue per disbursed benefit (trb) times a coefficient. Total revenue includes tax revenues plus social security contributions. Transfers from the Treasury are excluded from the formula. By law, the formula cannot result in a decrease in benefits.
Although designed to link benefits to available resources, the fact that the formula incorporates the percentage change in revenues per pension benefit carries some distortions:
The formula infuses pro-cyclicality to social security spending. Everything else equal, a faster increase in ANSES’ tax revenue during an economic boom conduces to a greater increase in benefits. Reversely, sluggish tax revenue during an economic contraction conduces to a slower increase in benefits.
Benefits depend on pension coverage. Everything else equal, an increase (decrease) in coverage leads to a lower (greater) increase in benefits. For example, simulation indicates that, in 2015, had coverage of contributory pension been 1 percentage point greater (smaller) than it was, the increase in benefits would have been 0.8 percentage point smaller (greater). If unaddressed, this could potentially undo the savings of any reform that directly or indirectly affects coverage.
The formula causes benefits to grow above inflation. Since 2009, benefits grew, on average, 2.7 percentage points a year above inflation, and over 6 percentage points above inflation in 3 single years. This bias arises because, over the long-run, all the ingredients of the formula tend to grow at a rate that is equal to inflation plus the difference between the growth of labor productivity and the growth in the stock of retirees. Wages (especially those of stable workers) can be expected to growth as the sum of inflation and labor productivity. ANSES’ tax revenue, assuming a constant ratio to GDP, can be expected to grow at a rate roughly equal to the sum of inflation and potential GDP growth, which, in turn, corresponds to productivity growth (population projections indicates that working age population will not grow in the long-run). As a result, as far as labor productivity grows above the rate of growth of the population older than retirement age (1.3 percent in the long-run), benefits would grow above inflation.
Box 3.History of Argentina’s Social Security System
Argentina’s social security system is one of the oldest in the world. Its origins date back to the turn of the 18th century, as private and public funds for separate work categories emerged. An extensive public social security system was instituted in 1944, and funds for family allowances were created in the late ‘50s. Beginning in the late ‘60s and early ‘70s, the system underwent several reforms aimed at reducing fragmentation and expanding coverage, including of family allowances. During the ‘80s and early ‘90s, a decline in real wage growth, a reduction in the number of contributors (as informality picked up), and a tilt in population age put growing pressures on the finances of the system (Rofman and Apella, 2012).
The 1993 reform aimed at correcting emerging imbalances. The reform introduced a two-tier system, with a public and a private pillar (law 24241). The first tier, participation to which was compulsory for all workers, offered a universal flat benefit to all retirees (PBU, Pensión Básica Universal), financed by employers’ contributions. The second tier, offering a contribution based pension, consisted of two alternative schemes. Employees had to decide whether to contribute to a federal, pay-as-you-go, defined benefit system administered by the National Social Security Administration (ANSES, Administración Nacional de Seguridad Social), or to private, funded, defined contribution schemes. Parametric reforms were also introduced, including an increase in both the retirement age and the number of annual contributions necessary to receive a pension. In addition, the breadth and coverage of family allowances was expanded in 1996.
The new system started soon to confront challenges. First, participation into private funds quickly reached over 70 percent of total contributors (Piffano et. al., 2009, CIFRA, 2009). Combined with a reduction in employers’ social security tax rate, this caused a rapid reduction in contributions to the public pillar. From 5 percent of GDP in 1995, these declined to less than 3 in 2000. Second, in 1994, in the context of a reform of fiscal federalism, ten provinces transferred their public pension schemes to the federal system. As a result, pension spending did not decrease as anticipated, and actually stayed flat at 5.6 percent of GDP. Finally, as more years of contributions were required for eligibility, career intermittences and labor informality caused the coverage of old-aged people to decline, especially among women (Rofman, 2003).
At end-2008, the funded schemes were permanently eliminated, their assets consolidated into a public pension fund (FGS, Fondo de Garantía de Sostenibilidad), and their beneficiaries and contributors integrated into the federal pension system (SIPA, Sistema Integrado Previsional Argentino). The parameters established in 1993 were kept unchanged.
Extension of ANSES’ mandate from social security to social assistance. Since 2010, ANSES has been tasked with the administration and financing of other social programs outside the core of social security.5 Besides stretching ANSES’ role as social security administrator, this can create conflicts between its different objectives. For example, as one of the objectives of the public pension fund (FGS, Fondo de Garantia y Sustenibilidad) is to support socio-economic development, ANSES has been using the FGS to finance the program PRO.CRE.AR (mortgages under this program constituted 5 percent of total FGS’ assets in June 2016). This double mandate could create conflicts between ANSES’ objectives of allocating FGS portfolio to secure its long-run return and the objectives of fulfilling the program target and coverage.
7. As a result of these developments, the gap between social security spending and contributions has been increasing. After declining to 1.3 percent of GPD in 2010, the excess of social security spending over social security contributions reached 2.8 percent of GDP in 2015, on account of two trends:
Robust spending increases. Spending on pensions and family allowances increased from 3.7 percent of GDP in 2005, to 8.5 in 2015. Family allowances contributed about 0.8 percentage point to this increase, almost entirely on account of the expansion of coverage. Spending on pensions instead explains most of the increase, as they went up from 3.4 percent of GDP in 2005 to 7.4 in 2015. The absorption of benefits previously granted by private pension funds explains less than 10 percent of this increase, while the expansion of beneficiaries under the moratorium regimes explains about 70 percent.-6
Sluggish social security contributions. The jump in contributions resulting from the unification of the pension system (from 2.1 percent of GDP in 2005, to 3.7 in 2008, and 5.1, on average, during 2009–11) initially helped reduce the excess of social security spending over contributions, but since 2011 social security taxes were not buoyant enough to keep up with the rise in spending.
8. So far, the social security “deficit” has been masked by ANSES’s overall cash surplus. ANSES has been able to fund the social security deficit as well as spending on other social assistance programs thanks to non-contributory earmarked revenues (about 2.4 percent of GDP in 2015), the 15 percent share of the provincial and federal revenue pool (1.6 percent of GDP in 2015), and the interest and dividends earned on the assets of the FGS (0.9 percent of GDP in 2015). As a result, ANSES’ overall cash balance reached 1 percent of GDP in 2015.
9. Looking ahead, Argentina’s social security system faces important challenges, which may considerably strain the federal budget.
Repayment of pension debt. In June 2016, Congress approved the “Re-conciliation law” which, in compliance with past sentences of the Supreme Court, recognizes a debt to current retiree derived from the incorrect calculations of initial benefits and the improper application of the indexation mechanism (see Box 2 for a description of the indexation mechanism). The authorities estimate this debt at about 0.8 percent of 2017 GDP, and are planning to fund it by disposing FGS assets. Moreover, by reinstating indexation retroactively, the law effectively introduces a 40 percent adjustment (on average) to potentially 2.3 million retirees, for an annual cost of about 0.7 percent of GDP during the medium term (based on authorities’ estimates).
The introduction of a universal pension for old age. The “Re-conciliation law” introduces an old-age pension equivalent to 80 percent of the minimum pension to all people 65 and older who cannot access a contributory pension. By the Reconciliation law, this pension, which effectively mimics the moratoria regime, will be funded with general tax revenues.
Figure 1.Argentina: Social Security Coverage, Benefits, and Spending
A shift of revenues to provinces. With the 15 percent of the tax revenue pool gradually returning to provinces in accordance to a sentence by the Supreme Court, ANSES will lose about 1.6 percent of GDP in revenues by 2020—the equivalent of about 70 percent of its (non-contributory) revenues. By law, the Treasury will compensate ANSES for this loss.
Population aging. The old-age dependency ratio (the share of population 60 and older to working age population) is expected to double in the next 50 years, reaching 52 percent.
10. Under current policies and challenges ahead, the social security “deficit” and ANSES’ overall balance would deteriorate significantly over the long run, driven by pensions. We project ANSES balances using a model that incorporates the specific features of Argentina’s pension and family allowance system, projection of population dynamic from the UN Population Survey, and long-run macroeconomic assumptions (see Annex I for more details on the model):
spending on family allowances will slowly decline to 0.5 percent of GDP by 2066, as the share of children to total working populations declines; 7
spending on contributory pensions will reach 8.2 percent of GDP by 2026 and almost 10 percent of GDP by 2066;
spending on old-age pension will have an annual cost of 0.4 percent of GDP, on average, in the medium term, and slightly less than 2 percent of GDP in the long run;
social security contributions will slightly increase to 6.1 percent of GDP by 2026 but decline to 4.7 percent of GDP by 2066, as the growth of the working age populations declines to zero.
In particular, the cumulative increase in the pension “deficit” (the difference between contributory pensions and social security contributions) over the next 50 years is estimated to be large, about 40 percent of 2015 GDP in net present value (NPV) terms (Figure), well above FGS’ financial assets (estimated at 12 percent of GDP in 2016).
C. Reform Proposals
11. Correcting this imbalance would require a reform of Argentina’s current pension system. This may include some of the following measures:
Change in indexation formula. Indexing benefits (and actualizing past wages) only to realized inflation would still allow retirees to preserve the real value of their benefit, but it would reduce the increase in pension spending by about 20 percent of GDP in NPV terms on account of two effects: benefits would increase slower, and initial benefits would be slightly lower.
Higher retirement age for women combined with a change in indexation formula: A gradual increase of retirement age for women from 60 to 65 over ten years combined with a change in the indexation formula (to avoid that the slower pace of increase in disbursed benefits could increase the value of benefits too much—see Box 2) would reduce the increase in the pension deficits to almost zero, in NPV terms. On account of both increasing retirement age and changing indexation, spending would drop and contributions increase.
Lower replacement rate. Reducing the replacement rate for people entering the work force now from 72 to 60 percent of the average wage (for example by reducing the contribution-related benefit from 1.5 to 1.1 percent for each year of service) would yield a cost reduction, in net present value terms, of 7 percent of GDP. If instead the same result was achieved by gradually (over ten years) reducing the minimum pension from 75 to 45 percent of the median wage, this would yield a cost reduction of about 10 percent of GDP.
Increase in participation. Increasing the share of contributors to working age population by 25 percentage points by 2026 (by gradually incorporating a greater number of workers into the formal sector) would reduce the net present value of pension deficits by about 35 percent of GDP.
12. A clear budgetary and administrative separation of social security and social assistance may also need to be considered. This separation would improve the transparency of fiscal accounts and the cost-benefit analysis of single programs, and improve the integration across social policies and programs implemented by other ministries. The provision that the newly instituted old-age pension be financed by the Treasury with tax revenues is a welcome step in this direction. For example, AUH (a non-contributory, non-insurance, type of program), PROG.R.ES.AR, and PRO.CRE.AR could be moved under the responsibility of the Ministry of Social Development, while CONECTAR IGUALDAD could be the responsibility of the Ministry of Education.
BetranouFabioLuisCasanovaMaribelJimenez and MonicaJimenez2014 “Informality and employment quality in Argentina: Country case study on labour market segmentation” ILO Conditions of Work and Employment Series No. 49.
CIFRA2009 “La Evolución del Sistema Previsional Argentino” Documento de Trabajo No. 2.
LustigNora and CarolaPessino2014 “Social Spending and Income Redistribution in Argentina during the 2000s: The Increasing Role of Noncontributory Pensions” Public Finance Review Vol. 42(3).
MECON2015 “Informe Trimestral de Ejecución Físico Financiera, Cuarto Trimestre 2015”
PiffanoHoracio L.P.AgustínLódolaHumbertoSilva and DiegoSánchez2009 “El Sistema Previsional Argentino en una Perspectiva Comparada” Departamento de Economía Facultad de Ciencias Económicas Universidad Nacional de La Plata Proyecto E083.
RofmanRafael2003 “El Sistema Previsional y la Crisis de la Argentina” World Bank Working Document 7/03.
RofmanRafael and IgnacioApella2015 “Argentina” chapter 2 in “Beyond Contributory Pensions Fourteen Experiences with Coverage Expansion in Latin America” edited by Rofman Rafael Ignacio Apella and Evelyn Vezza World Bank.
UNDP2014 “Human Development Report 2014: Sustaining Human Progress, Reducing Vulnerabilities and Building Resilience”.
We project ANSES balance over the next 50 years based on population projections from the ILO and the UN to determine the mass of potential participants and beneficiaries, macroeconomic assumptions to determine ANSES’ tax revenue and social security contributions, and the current parameters of Argentina’s pension system to determine benefits. We calibrate other ratios (for example, coverage and participation) to past data from ANSES’ social security statistics, MECON’s physical and financial account (Cuenta de Inversión), and INDEC (unemployment, income distribution, and population statistics).
The assumption underlying our long-term pension projections are:
Population dynamic. We use population projections from the ILO and the UN and assume that the end-2015 stock of pensioners will decrease according to current mortality rates. The implied old dependency ratio (the ratio of people 60 and older to those with age 15–59) doubles in 50 years, from 26.3 percent in 2016 to 51.7 percent in 2066.
Macroeconomic assumptions. We assume real GDP growth rate, the GDP deflator, and inflation rate will have converged by 2026 to their long-run levels. We assume that long-run GDP growth is 3.3 percent, inflation and the growth in the GDP deflator 5 percent, and that productivity growth will be 2.3 percent, that is about 70 percent of the real GDP-working age population growth differential. As a result, wages are assumed to growth 7.4 percent over the long run. Finally, we assume a real interest rate growth differential of 2.5 percent.
Programs coverage. We use past data to calibrate the coverage of all family allowances to population below 21, which has remained fairly stable in the past 3 years. For contributory retirement pensions, we assume that coverage for each new future cohort of men and women reaching retirement age will be the same as in 2015, excluding those who received a benefit under the moratoria regimes. We assume that all people above the age of 65 who do not receive a contributory pension will receive the pension for old age.1 Finally, we use past data to calibrate the coverage of other pensions to total population and assume that this will remain at 2015 levels.
Indexation. We compute the indexation formula on our projections of wages, ANSES’ tax and total revenues, and number of beneficiaries.
Pension spending. We calibrate pension benefits on contributors’ average wage. For each cohort, we index wages of the past ten years using the result of the indexation formula. Finally, we assume 30 years of contributions and derive the initial pension benefit. We use the indexation formula to increase 2015 benefits (for current beneficiaries) and future initial benefit (for each new cohort of beneficiaries). To account for the effect of the June 2016 Reconciliation law, we calibrate the 2017 increase in current benefits to the adjustment cost estimated by the authorities (around 60 million pesos); and decrease FGS assets by a total of 83 million pesos over 3 years.2
Social security contributions and tax revenue. We increase social security contributions by the increase of wages and of working age population. We assume that ANSES tax revenue will remain constant in percent of GDP over the long run.
Other assumptions. We assume that the return rate on FGS assets will remain at current level, with a capital gain on FGS assets at about 5 percent in real terms. We assume that the Treasury will fully compensate ANSES for its share of the federal-provincial revenue pool. Finally, we assume that operating costs and the cost of other social assistance program will remain constant in percent of GDP.
Prepared by Paolo Dudine.
This paper focuses only on the part of social security spending directly administered by the National Social Security Agency (ANSES, Agencia Nacional de Seguridad Social). It excludes pensions of the police and military forces (0.5 percent of GDP in 2015) and disability and other non-contributory pensions under the Ministry of Social Development (1.2 percent of GDP in 2015). Including these items, social security spending amounted to 9.2 percent of GDP in 2015, or 45 percent of total federal spending.
In addition to contributory pensions and family allowances, ANSES executes payments for invalidity pensions, and retirement benefits and pensions of armed forces personnel and the police. These however are regulated by and budgeted under the accounts of the Ministry of Social Development, the Ministry of Defense, and Ministry of Security respectively.
The pension received was the minimum pension less a deduction linked to the recognized debt, up to certain limits.
These programs include: PROG.R.ES.AR (2010) which provides financial assistance to young low-income working (or unemployed) students, PRO.CRE.AR (2012) aimed at offering affordable mortgages, and CONECTAR IGUALDAD, (2010) to foster computer literacy in schools and provide laptops to students and teachers.
Unemployment insurance amounted to less than 0.05 percent of GDP per year during 2005–15.
Spending on child allowances is by far the greatest among all family allowances.
However, reflecting the extension of the moratoria regime for women between the age of 60 and 65 until 2019, we assume that during 2016–19 all women above age 60 who do not receive a contributory pension will receive the old-age pension.
The Re-conciliation law establishes that half of past obligations will be paid at settlement. The remainder will be paid in quotas over 3 years, but the amount due would be updated using the pension indexation formula.