40% OF PENSIONS ARE PAID WITH TAXES

In response to successive court decisions from 2009 onwards a new pension adjustment rule was introduced raising the value of pensions according to the evolution of salaries and the collection of taxes specifically assigned to financing the pension system. This methodology emphasizes the balance between income and expenses but it links the pension adjustment to the evolution of tax collection assigned to finance the pension system. Thus the value of retirements sensitively tied to changes in the taxes allocated to the pension system.

An alternative scheme for pension adjustments is to prioritize the protection of the purchasing power using the inflation rate as a reference. This is the rule used in most pension systems around the world and now contemplated by the legislative bill setting a combination of inflation rate (70%) and wage increases (30%).

In order to evaluate the relevance of the proposed change, it is useful to analyze the sources of financing of the pension system. According to data from the Ministries of Finance and Labor, it can be seen that:

• In 2017, 6.8 million retirement benefits will have been paid per month, which will have demanded more than 40% of the total national public expenditure.
• 60% will be financed with contributions on salaries.
• The remaining 40% will be financed with taxes assigned to the pension system and transfers from the federal state treasury.

The data indicates that the pension system is far from being sustainable only with salary contributions. Not only it needs the supplementation of taxes but, since it is not enough, the federal state treasury has to provide further aid. One of the factors that put the strains on the system is the growing pressure from the provinces questioning the constitutionality of using co-participable taxes to finance it. The most advanced case, but not the only one, is the Court ruling that provides for the suspension of the allocation of 15% of the co-participable mass to social security.

Faced with these disturbances, the current pension adjustment rule is unsustainable. Proof of this is that the first change in the rule was introduced through a decree signed by the previous national government. Since the Court ruled the suspension of the 15% of co-participable taxes derivation to the social security system, this decree established –in a decision of a government that was days from leaving office– that the loss of income will not be taken into account for the calculation of pension adjustment. Although the new government repealed that decree, a great inconsistency remains between a judicial rule of taxes distribution and a pension adjustment scheme based on taxes.

The Fiscal Consensus signed between the federal government and the provinces has among its main objectives to resolve this conflict. To meet the goal, it establishes, in a consensual manner, new rules for the distribution of taxes, ending court judgments that question that distribution and the provinces’ commitment not to initiate new controversies until a new rule of federal co-participation is signed. This new tax distribution scheme is the one that imposes the need to revise the pension adjustment rule.

The new formula means progress towards a better pension system ordering, but it does not solve its deep financial crisis. In addition of an update of the system to the demographic dynamics, it is crucial to review many decisions made irresponsibly in recent years. Among the most important are the 3.6 million retirements without contributions distributed regardless the level of pre-existing income; the accumulation of trials for denying pension adjustment between 2002 and 2008; the creation of a large number of special schemes that make retiring at age 65 more the exception than the rule; the appropriation of pension savings to use them arbitrarily; and the massive appointments of employees in the ANSES together with a severe institutional deterioration.