By Marcela Valente

[the article, dated Sept. 3, 2001, is reprinted with permission of Inter Press Service]

Pension funds have turned out to be a safe source of high returns for private administrators in Argentina, but the value of workers' pensions has declined, and some economists

Argentina's Administratoras de Fondos de Jubilaciones y Pensiones (AFJPs) were created in 1994 on the initiative of Domingo Cavallo, who was then serving as economy minister in the government of Carlos Menem (1989-1999) and was named to the same post last March by President Fernando de la Rua.

At that time, Cavallo said the AFJPs would lead to an increase in the retirement benefits of future pensioners, free the state from the burden of the social security system, and create a new market of capital for investment in productive areas. But economic analysts say none of that has yet occurred.

The AFJPs receive 11% of the monthly salaries of employees, of which they take nearly one-third in commission. The rest is invested in certificates of deposit, stocks, or public bonds.

The statistics indicate that 88% of wage-earners in Argentina, or around nine million people in this country of 37 million, are affiliated with AFJPs today, although not all of them contribute regularly.

Unemployment, which stands at above 16% of the economically active population (EAP), and the increasing numbers of workers moving into the informal labor market have affected the AFJPs.

But the AFJPs currently administer more than US$25 billion, equivalent to 8% of the country's GDP, and their net earnings totalled US$196 million last year. Meanwhile, the value of the deposits of account-holders has steadily declined.

The resources that the AFJPs receive--US$1.3 billion last year alone--are of such magnitude at this time of crisis that legislators have asked the government to force the private pension-fund administrators to invest in the productive sector or to reduce the commissions they charge, to leave more cash in the hands of workers to boost consumption and help revive the sorely flagging economy.

Only 12% of Argentine workers remain in the state social security system, and the contributions of employers and employees do not suffice to cover the outgoing retirement payments.

The public pensions system entered into crisis in the 1990s, a result of the poor administration of funds and the rise in life expectancy, unemployment, and precarious employment, all of which led to a serious lack of financing and a sharp decline in the value of pensions.

The reform of the pensions system was implemented by Cavallo with great fanfare and promises that everyone would benefit. Although signing up with a private pension-fund administrator was not compulsory, most workers opted for one of the 27 AFJPs that existed in the mid-1990s.

That meant the state stopped receiving the contributions of 88% of wage-earners, although it could not stop paying the pensions drawn on the old system, which meant it had to start tapping tax revenues to cover them. That unbalanced the budget--a problem that has been aggravated by the decline in economic activity during the past three years.

In the end, it has mainly been the banks that have benefitted. Banks own 76% of the 13 remaining private pension-fund administrators.

Labor lawyer Hector Recalde with the Central de Trabajadores Argentinos (CGT), and economist Claudio Lozano with the Asociacion de Trabajadores del Estado (ATE) said the four largest AFJPs form an oligopoly-like structure.

The average commission they charge is 4% of a worker's salary, part of which goes toward flashy publicity campaigns aimed at drawing in new clients.

Lawmakers and the leaders of associations of retirees continue to blame the situation on Cavallo.

Pension-fund contributors, meanwhile, have not only failed to see their capital grow, but have actually lost part of what they have paid in over the past seven years, and they risk losing everything, because most of the investments made by the AFJPs are in Argentine public titles that are steadily losing value.

Last year, pension fund-holders saw negative returns of 5%, while the AFJPs, which charge fixed commissions, regardless of their efficiency and effectiveness, saw net gains of 15% on the US$1.3 billion collected in that period.

Argentina is in the grip of a severe financial crisis, with a more than US$10 billion annual fiscal deficit, a heavy recession that has already dragged on for 38 months, and a foreign debt of US$128 billion--all of which has given rise to investor concern that the country will default on its debt.

If that occurs, the AFJPs will not be able to pay pensions. Nor will the state, the system's ultimate guarantor, be able to keep them out of bankruptcy.

Despite the enormous risks they are running, few workers are fully aware of the state of their pension funds, which is not clearly spelled out in the account statements sent out by the companies.

Proportionately, contributors from the lowest-income sectors pay the most in commissions and have lost the most money since the system went into effect. That is because the commissions charged by the AFJPs are made up of a fixed amount that is the same regardless of the size of the salary, plus a varying percentage. If a contributor has been earning US$480 a month since 1994, the person has deposited US$4,200 in the private pension fund, however, the account statements would read US$3,740, 9% less.

But the decline in the value of workers' contributions is much greater when compared to the returns that could have been obtained if the money had been placed in the financial system.

If the same worker had put the funds contributed to the AFJP in a certificate of deposit at a bank, at an average interest rate of 6% a month, today the person would have US$5,075--36% more.

The contributors who have lost the least are those who earn around US$5,000 a month. In their cases, the capital that has built up over seven years has remained practically stable--as if they had put it in a safe or under their mattress.

Even worse is the situation of self-employed workers who must make sure they find work to keep up with their payments. Classified as companies by the system, the category of independent workers includes artists, plumbers, electricians, and a range of professionals and other vocations.

For example, an independent worker who bills US$750 a month will have US$240 of that retained, because they are obligated to contribute 5% of their income toward health insurance for retirees, 16% in taxes, and 11% to their AFJP.

But of the US$85 paid into the AFJP, only US$58 will be credited to their account. The rest will be taken in commission. Thus, if an independent worker is fortunate enough to have work and to be able to make the contributions every month, the person will have paid out nearly US$18,000 since 1994, while accumulating only US$5,000 in the pension fund.

And if, within a year of their death, pension fund- holders have failed to make their payments for more than two months in a row, their families will not receive any pension at all.

So the AFJPs continue to grow like an oasis in a desert, with the owners lining their pockets while workers see the value of their contributions decline. Meanwhile, the country continues its desperate search for foreign credit to keep it from default.