Reply #35: Consider Argentina as well

[PA Democrat]

The Role of Social Security Privatization in Argentina's Economic Crisis

By Dean Baker and Mark Weisbrot <1>

April 16, 2002


In July of 1994, with the strong support of the World Bank, Argentina partially privatized its Social Security system.<2> In December of last year, Argentina finally removed its currency from its peg with the dollar, and halted payments on its debt, after four years of recession. These moves came in response to a situation that had clearly become untenable. The nation was paying ever higher interest rates to finance a debt that was continually growing, due to the country's extraordinary interest burden.<3> By December it was clear that there was no way out of this vicious circle without both a devaluation of the currency and some reduction of the interest burden. Argentina is currently negotiating with the IMF to allow for a resumption of normal credit relations, but regardless of the outcome of these negotiations, it is generally expected that Argentina will see a further large decline in its GDP.

While the decision to peg its currency to the dollar would have created problems in any case, the decision to privatize Social Security made Argentina's situation more precarious. The reason is simple—Social Security privatization deprived the government of a large amount of tax revenue. Payroll taxes that had gone to the government to support the old pay-as-you-go Social Security system were instead diverted to private accounts. As a result, the government lost an amount of revenue that has been estimated at 1.0 percent of annual GDP (the equivalent of $100 billion a year in the United States) (International Monetary Fund, 1998, p 9).

Argentina's government had to borrow to make up for this lost revenue.<4> Argentina was forced to pay a very high interest rate on its new debt, as a result of a series of external events beginning with the US Federal Reserve's interest rate hikes in February of 1994, and the series of emerging market financial crises (Mexico, East Asia, Russia, Brazil) that followed. Therefore, the borrowing that was needed to finance Social Security privatization came at a very high cost. This cost quickly grew, as higher debt led to higher interest payments. Table 1 shows the impact that Social Security privatization had on Argentina's deficits and debt in the years from 1994 to 2001. These calculations assume that no offsetting adjustments were made to Argentina's budget to compensate for these deficits. As can be seen, the deficits created by the lost Social Security tax revenue and resulting interest payments grew rapidly, so that by 2001 they were nearly equal to 3.0 percent of GDP.

http://www.cepr.net/argentina_and_ss_privatization.htm