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The Argentine pension reform and its relevance for Eastern Europe

Listed author(s):
  • Vittas, Dimitri
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    Argentina reformed its pension system in 1974, when it created an integrated, multipillar public-private pension system. Its old system had suffered from a vicious circle of unrealistic promises, high payroll taxes, widespread evasion, and growing deficits. But the reform program, enacted through the democratic process, suffered from many weaknesses, the most important of which were the continuing wage indexation of pensions and the retention of a public, unfunded, defined benefit component in the second pillar. The Argentine authorities were forced to take corrective measures, first by abolishing indexation with the passage of the Pension Solidarity Law in March, 1995, and then by integrating provincial pension schemes into the national system. The author argues that Argentina has undertaken not one but three major reforms of its pension system since 1993. One lesson of the Argentine experience is that pension reform is diluted as a result of democratic debate. This is less crucial than it appears, because reforming governments can rectify any major shortcomings through subsequent reforms. But it is important that the reform program be basically sound and that it move in the right direction. The author compares the new Argentine system with the systems of Chile and Switzerland. He finds that the main difference between the Argentine and Chilean systems lies in the higher levels of targeted pensions and targeted redistribution in Argentina. This is a political and social choice, but it implies a higher financial cost and thus higher contribution rates. The private component of the second pillar shares most of the strengths and weaknesses of the Chilean model, including high marketing and operating costs. The comparison with the Swiss system shows that Argentina's first pillar is less well designed than Switzerland's. But the funded component of its second pillar is more transparent and potentially more efficient than the Swiss funded pillar. Although it has much higher operating costs, it has achieved much higher investment returns. The relevance of the Argentine pension reform for Eastern Europe derives from the similarities in the problems of their public unfunded systems and the political and social acceptability of retaining a highly redistributive pillar. A balanced reform is politically feasible, while prolonged delays can lead to the collapse of the existing weak and unsustainable systems.

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    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1819.

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    Date of creation: 31 Aug 1997
    Handle: RePEc:wbk:wbrwps:1819
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    1. Vittas, Dimitri & Iglesias, Augusto, 1992. "The rationale and performance of personal pension plans in Chile," Policy Research Working Paper Series 867, The World Bank.
    2. Vittas, Dimitri, 1996. "Private pension funds in Hungary : early performance and regulatory issues," Policy Research Working Paper Series 1638, The World Bank.
    3. Valdes-Prieto, Salvador, 1994. "Administrative charges in pensions in Chile, Malaysia, Zambia, and the United States," Policy Research Working Paper Series 1372, The World Bank.
    4. Olivia Mitchell & Flávio Ataliba F. D. Barreto, 1997. "After Chile, What? Second-Round Social Security Reforms in Latin America," Revista de Analisis Economico – Economic Analysis Review, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines, vol. 12(2), pages 3-36, June.
    5. Palacios, Robert & Rocha, Roberto, 1998. "The Hungarian pension system in transition," Social Protection and Labor Policy and Technical Notes 20048, The World Bank.
    6. Davis, E.P. & DEC, 1993. "The structure, regulation, and performance of pension funds in nine industrial countries," Policy Research Working Paper Series 1229, The World Bank.
    7. Salvador Valdés & Peter Diamond, "undated". "Social Security Reforms in Chile," Documentos de Trabajo 161, Instituto de Economia. Pontificia Universidad Católica de Chile..
    8. Vittas, Dimitri, 1997. "Private pension funds in Argentina's newintegrated pension system," Policy Research Working Paper Series 1820, The World Bank.
    9. Vittas, Dimitri & Michelitsch, Roland, 1995. "Pension funds in Central Europe and Russia : their prospects and potential role in corporate governance," Policy Research Working Paper Series 1459, The World Bank.
    10. Vittas, Dimitri, 1993. "Swiss Chilanpore : the way forward for pension reform?," Policy Research Working Paper Series 1093, The World Bank.
    11. Valdes-Prieto, Salvador & DEC, 1994. "Earnings-related mandatory pensions : concepts for design," Policy Research Working Paper Series 1296, The World Bank.
    12. Arrau, Patricio & Schmidt-Hebbel, Klaus, 1995. "Pensions systems and reform : country experiences and research issues," Policy Research Working Paper Series 1470, The World Bank.
    13. Fox, Louise, 1994. "Old age security in transitional economies," Policy Research Working Paper Series 1257, The World Bank.
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