Report No: AUS0002742 The Argentine pension system, its successes and challenges Ignacio Apella1 Abstract: The objectives of this paper are to identify the strengths and vulnerabilities of the Argentine pension system and to discuss some policy options aimed at promoting an informed public debate. Over the last two decades, the Argentine pension system has made extraordinary progress in extending coverage--now reaching to nearly one hundred percent of the elderly--by expanding its non-contributory scheme and establishing automatic benefit adjustment mechanisms and increasing the replacement rate. Nonetheless, important challenges remain which may require public policy interventions in the near future. Some challenges are relevant in the short term, relating to coverage and equity of the system, while others are important in the longer term associated with the financial sustainability of the system in the context of population aging. The non-contributory benefits to reduce the coverage gap did not consider the labor history of workers and their past partial contributions, generating a horizontal inequality problem. Additionally, the coexistence of different pension schemes is a source of inequity within the national system, where provincial schemes and special and differential regimes coexist, each with its own rules and different generosity of benefits. The achievements of the pension system in terms of coverage and adequacy have impacted costs. In 2020, public spending on pensions reached almost 12 percent of GDP, similar to that of developed countries where population aging is considerably higher. In this context, policy options presented in this paper seek to redefine the objectives of the system, seeking greater equity and sustainability. Based on this premise, the document explores the benefits of redesigning the system using a two- pillar model, i.e. a universal and basic benefit related to the protection against the risk of ending up in a situation of poverty plus a contributory scheme, proportional to the contribution made by workers during their employment history. Addressing the coverage issue by incorporating this dimension would not only improve equity of contributions and benefits, but also generate incentives to extend the working life of older adults. At the same time, a strategy that harmonizes rules across different schemes, eliminates inequities and management issues, and focuses on the beneficiary —and not on the benefit— as the center of the system, would bring the model closer to a more equitable and sustainable system. . Social Protection and Jobs Keywords: Argentina, Pension System. JEL codes: H55, H75, J10 1Senior Economist for Social Protection and Labor Global Practice, World Bank. The author wishes to thank Juan Martín Moreno, Julian Folgar, Montserrat Pallares-Miralles and Luciana Garcia for their valuable comments and contribution in the preparation of this paper. Special thanks to Jordan Schwartz, Pablo Gottret and María Eugenia Bonilla-Chacin for their support work agenda. Contact iapella@worldbank.org The World Bank The Argentine pension system, its successes and challenges . © 2022 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Introduction The pension system in Argentina is the main recipient of public resources. This explains spending values of around 12% of GDP, equivalent to 25% of consolidated public spending; that is, taking into account public spending by the national government, subnational jurisdictions, and municipalities. 2 The magnitude of such spending is a source of concern to different sectors of the political and academic circles, due to both its current level and its impact on fiscal accounts within a context of tough restrictions, as well as in terms of medium and long-term perspectives. This high level of spending relates to a much-extended coverage (it practically reaches out to cover the totality of adults over the age of 65 who receive pension benefits), while the average value of the benefits they receive is also significant. Discussions on pension policy involve three dimensions: coverage (that is, the number of individuals receiving benefits), adequacy of benefits, and fiscal and economic sustainability. Given that it is impossible to optimize these three dimensions simultaneously, the policy challenge is to seek agreements in balancing these three dimensions, and once this balance is attained to ensure their sustainability over time. Concerns about and interventions on some of these three dimensions were evident at different points in history. In the first place, during the late 80s the difficulty related to financial/actuarial sustainability. After implementing a structural reform in the early 90s, which implied the incorporation of a capitalization pillar and stricter conditions of access3, difficulties in financing --associated to transition costs-- became the main concern in the short to medium term. To cope with such transition costs, new taxes and a 15% of the co-participation revenues were incorporated on provincial jurisdictions. Secondly, stricter eligibility terms had an impact on system coverage. During the first decade of the 21st century, once the macroeconomy was more stable after the economic crisis that resulted in the failure of the convertibility plan in 2002 and following a growth period fostered by a boom in commodity prices, the focus of attention shifted to the system’s gap in coverage. To tackle this issue, two semi-contributory benefits programs were introduced, the moratorias previsionales (social security moratorium): the first one was adopted in 2005 (Act Nº 24476 and Executive Decree N°1454/05) and the second in 2014 (Act N°26970), further extended in 2019; later on, in 2016 the Pensión Universal para el Adulto Mayor – (PUAM [Universal Pension for the Elderly])4 was created and, finally, in 2021 a program recognizing contributions for care services was implemented. After reaching out to cover almost one hundred percent of the passive population, financial sustainability becomes once again the eye of the storm and triggers reform-centered debates and discussions. As the system shifted to a scheme that combined contributory and non-contributory sources of funding and benefits, this implied a higher level of spending, exacting a heavy toll on the financial sustainability during the second decade of the 21 st century. The Sistema Integrado Previsional Argentino (SIPA [Argentine Integrated Social Security System]) is the main component in the Argentine pension system; it is a scheme resulting from a complex combination of rules and regulations that have accumulated over the years. Subsequent reforms throughout its history have led to a situation that sees the coexistence of beneficiaries retired from 2 Ministry of Finance (https://www.argentina.gob.ar/hacienda/politicaeconomica/macroeconomica/gastopublicoconsolidado) 3 The retirement age for women was increased by 5 years, going from 55 to 60, and for men from 60 to 65. Total years of contribution also increased by 5 years, going from 20 to 30 years. 4 For further details see Rofman and Apella (2014) and Bertín (2019) -3- The World Bank The Argentine pension system, its successes and challenges different special pension regimes (cajas previsionales) that existed up until the 80s; the Sistema Integrado de Jubilaciones y Pensiones (SIJP [Integrated Retirement and Pensions System]), a multi-pillar system with individual capitalization created in 1994; the special social security moratorium regime adopted in 2005 and extended in 2014 and 2019; the SIPA, created in 2008 and the Universal Pension for the Elderly (PUAM), created in 2016. The complexity stemming from this multiplicity of reforms, together with non-compliance (or partial compliance) with the constitutional provisions that established the mobility of pensions (that is, they must be adjusted periodically), has resulted in a system that is highly involved in judicial proceedings, as most beneficiaries have, at some point, filed legal actions on the grounds that their pension benefits had been altered. Accordingly, a considerable degree of uncertainty was generated, which affected both beneficiaries and system managers. Given the current configuration and future demographic trends, the Argentine pension system faces two major obstacles relative to equity and sustainability in the medium to long-terms. On the one hand, there are difficulties in terms of allocation efficiency and vertical equity that result in a pay-as- you-go system that is very generous and subsequently puts pressure on actuarial and fiscal balance. On the other hand, population aging calls for a declining trend of the pension support ratio—which measures the ratio between active contributors to the system and beneficiaries; this, inevitably, leads to reconsidering the Bismarckian spirit and the urgent need to design new Beveridge-like transfer schemes with complementary non-contributory pillars.5 The purpose of this study is to contribute to an informed debate on public policy relative to income protection schemes for the older adults in Argentina. In particular, this report analyzes and discusses some ideas that help reflect on short-term public policy tools to improve efficiency and equity, and also on the concept of a pension system in the context of population aging in the long term, by taking into consideration some reform options that typically come up in public debate. 2. Characterization and diagnosis of the pension system Argentina has made extraordinary progress in extending coverage to the elderly by expanding its non- contributory programs and establishing automatic adjustment mechanisms. Halfway through the 2000s, a few measures were introduced to make the pension system universal. Though this allowed expanding coverage to almost one hundred percent of the elderly, some equity issues persist, and they need to be pointed out. In terms of adequacy, a pension indexation mechanism has been implemented that allows updating the value of benefits periodically, thus avoiding significant losses in actual value due to inflation. This generated benefits that exceeded the average of several other countries in the region. However, a serious long-term equity and sustainability issue prevails. On the one hand, this is connected to the intra-system heterogeneity where various differential regimes coexist, each featuring very different replacement rates and formulas to calculate benefits. On the other hand, the number of benefits granted to each older adult is, in many cases, more than one. This situation makes the pension system a very generous scheme and its main objective becomes blurred. Finally, in a population aging 5 A Bismarckian system refers to a contributory social security scheme that replaces the worker’s labor income upon retirement, whereas a Beveridge system is connected to the provision of a flat transfer in old age that may (but not necessarily) incorporate funding from general revenues. -4- The World Bank The Argentine pension system, its successes and challenges context, the sustainability of the system is threatened as the active-passive ratio will naturally tend to decrease, thus rendering the contributory nature of the system unfeasible. Figure 1.1 - Pension indifference curves. Benefit generosity ratio, dependency ratio and pension spending as % of GDP (year 2015) 0.90 50 BRA 0.80 45 40 Pension spending as % of GDP 0.70 35 Benefit generosity ratio 0.60 ARG 30 0.50 25 VEN 0.40 PAN 20 NICECU 0.30 MEX URY COLBOL CHI OECD 15 0.20 HND PERCRI 10 PRY 0.10 SLV 5 GTM DOIM - 0 5 15 25 35 45 Older adults dependency ratio Source: Author’s own elaboration based on Rofman and Apella (2020) and United Nations, Population Division. Argentina, together with Brazil and Uruguay, with a less advanced degree of aging compared with developed countries, faces higher spending on pensions than the OECD average, in terms of GDP. Figure 1.1 features the three dimensions that characterize pension systems simultaneously for a group of countries in the region and the average for OECD member countries, through indifference curves (see Annex 1). That is, the total public spending on pensions, represented by the location of the level curve, resulting from the combination of benefit generosity, defined as the product of the replacement rate and coverage and the dependency ratio of the elderly. More precisely, pension level curves break down public spending into pensions in terms of the dependency ratio of the elderly and the benefit generosity rate for the 18 Latin-American counties and the OECD average. On the one hand, Argentina is, after Uruguay, one of the countries facing the highest elderly dependency ratio. The x-axis shows the demographic dependency ratio for older adults, which is defined as the population over the age of 65 compared with the number of those of working age (15 to 64). But the degree of population aging of the country, as in the case of its peers in Latin America, is still below the average recorded in OECD countries. The demographic dependency ratio in Latin America was of only 12 adults of non-working age for every 100 adults of working age; while across OECD nations the value accounted for 30 adults of non-working age for every 100 adults of working age. On the other hand, Argentina and Brazil have the most generous pension systems in the region. The y-axis represents the public policy decision: coverage and level of pension benefits. Both countries, though they face a dependency ratio that is more favorable than that of OECD countries, maintain a -5- The World Bank The Argentine pension system, its successes and challenges level of coverage and replacement rate that is much higher than the average for the other group of countries, and this places them on a level curve that is farther away from the origin, with pension spending being 3.4 percentage points above that of developed countries. These dimensions will be analyzed in more depth in the next part of this section. 2.1 Coverage Given the declining trend in coverage analyzed by different studies (Rofman et al., 2008; Secretaría de Seguridad Social, 2005; among others), in 2005 (with subsequent extensions in 2014, 2016 and 2019), a Moratoria Previsional (Social Security Moratorium) program was implemented, designed as a regime that granted easy payment terms to workers who owed contributions to the pension system. This initiative provided a possibility for any citizen that met minimum age eligibility requirements but not those relative to years of contributions, to declare having a debt corresponding to those years in the self- employed workers’ scheme, and thus be included in a payment scheme that would be rolled out in parallel to the collection of benefits. Likewise, access to pension benefits was extended to the rightful claimants of deceased workers, so that they could receive a survivors’ pension. The moratorium was originally approved by the end of 2005, in the case of periods of contribution prior to 1994. In 2014, a new law allowed for the inclusion of contributions corresponding to the period between 1994 and 2013 in the debt, setting a two-year limit to apply. In 2016, however, (and, once again, in 2019) this period was extended, though only in the case of women. Finally, in 2016 a universal benefit was established, the Universal Pension for the Elderly (PUAM). PUAM ensures older adults over the age of 65 who have no contributory coverage to receive a monthly income equivalent to 80% of the minimum pension received by SIPA beneficiaries. Thus, the income protection system for older adults reached an almost universal coverage, with this expansion targeting the lowest income quintiles (Figure 1.2). Figure 1.2 - Percentage of adults over the age of 65 who receive a pension benefit (years 1992-2018) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Quintil I Quintil V Total Source: Author’s own elaboration based on household surveys EPH, INDEC. -6- The World Bank The Argentine pension system, its successes and challenges Due to this coverage expansion, the country ranks among those with the highest coverage for people over 65 years old (Figure 1.3). Figure 1.3 - Percentage of adults over the age of 65 receiving a pension benefit, by country (year 2018) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Costa Rica Uruguay Chile Trinidad y Tobago Belize Paraguay Estados Unidos Perú Grenada Barbados Noruega República Dominicana El Salvador Nicaragua Dominica Saint Kitts and Nevis Venezuela Ucrania Ecuador Brasil Canadá Honduras Santa Lucia Bolivia Guatemala India Panamá Antigua y Barbuda Jamaica Bahamas Rusia Aruba Colombia Guyana México Argentina Luxemburgo Reino Unido España Tailandia Saint Vincent Haiti Source: World Social Protection Report 2017-2019 - International Labour Organization. The expansion of non-contributory benefits led to the reduction of horizontal inequity issues that were generated in the past. In this sense, the contributory scheme was funded, not only with contributions from workers’ wages, but also with resources coming from general revenues, which generated a situation of inequality as people with no coverage were funding the benefits of those covered by the pension system. When coverage was expanded, many individuals who were funding the system through payment of their taxes became eligible to receive a pension benefit. However, the attempts to correct the coverage issue did not take into account the labor record of workers and their past partial contributions. The low coverage of the contributory scheme originates in the setting of an eligibility condition based on a minimum number of years of contributions (in this case, thirty years). However, the labor history files of most workers include periods of informality, unemployment or lack of activity (sometimes for very long periods), so in many cases they are not eligible to receive benefits. A low average coverage may derive from a segmented population, with a group of workers that contribute frequently and another group that does not contribute, or due to the fact that many workers contribute only during a certain part of their labor history. In the first scenario, those workers that are contributing to the pension system are expected to receive a contributory pension, while the other group is excluded. Conversely, in the second case, there may be a considerable number of workers (more workers than those excluded in the first example) that do not meet the eligibility requirement and, therefore, do not have coverage despite having recorded some periods of contribution. Accordingly, it is not only the average number of contributors to the system that matters, but the frequency of transitions between the contributory and non-contributory status of workers. This opens -7- The World Bank The Argentine pension system, its successes and challenges the way not only to a pension assistance initiative -through a non-contributory pension funded by general revenues- but also to examine the level of rigidity that complying with a certain number of periods of contribution implies. In fact, the density of workers’ contributions in Argentina is not homogeneous and, far from showing a bimodal distribution, it shows quite a uniform distribution. Figure 1.4 shows an approximation to the problem described.6 This was based on information provided by the Muestra Longitudinal del Empleo Registrado (Registered Employment Longitudinal Sample) prepared by the Ministry of Labor and Social Security, that includes longitudinal information on a sample of wage earners from the private sector regarding their contributions to the social security system between January 1996 and December 2015. Figure 1.4 - Distribution of total contribution density, men and women (years 1996-2015). Source: Author’s own elaboration based on Labor Histories Database, Ministry of Labor and Social Security. Though, in average, workers only contribute to 34% of their total labor records, this average value hides a very significant heterogeneity. The left side of the distribution concentrates 50% of the total workers who have contributed less than 25% throughout the whole window considered. Additionally, on the right margin, 2.7% of the workers observed in the sample were able to reach 100% of contributions (Table 1.1). However, the distribution of the working population does not end with these two groups. On the contrary, the remaining 46.9% of workers show a contribution density ranging between 25 and 99%, and all of them receive equal treatment from the standards that regulate both the contributory and the non-contributory pension systems. The problem is that a considerable number of workers have contributed different amounts throughout their labor history, yet they do not reach the minimum threshold required. Even though the universal pension benefit corrects the coverage gap by protecting those who do not meet the eligibility requirements, this evidence suggests a need to treat workers differently, according to the efforts made during labor life in order to improve coverage equity, as those individuals who were excluded because 6 These results must not be considered final but only approximate, as this database does not contemplate the totality of the working population. In particular, it excludes public sector wage earners and self-employed workers. -8- The World Bank The Argentine pension system, its successes and challenges they did not meet minimum requirements have nevertheless funded—though partially—the system with their past partial contributions. Table 1.1 - Contribution densities according to characteristics (years 1996-2015) % of workers with contribution density (d) Characteristics Average d<25% 25%