LOWERING INFLATION MEANS THAT THE PENSION SYSTEM MUST BE ORDERED

The Ministry of Economy submitted the 2024 Budget Bill to Congress. The Budget bill contains two interesting dimensions. On the one hand, it makes explicit how the government considers that the public accounts will end in the current year (fiscal year 2023). On the other hand, it makes explicit the projections for the following fiscal year (fiscal year 2024). 

According to the government’s draft, the financial result for 2023 will be a deficit of 4.4% of the GDP in 2023 and will drop to 2.7% of the GDP in 2024. This implies that the national government will keep needing to contract new debt to finance its imbalance between revenues and expenditures plus interest payments. Covering these financing needs is a huge challenge in the context of very low market willingness to lend voluntarily to the State. But what is most disturbing are the inconsistent assumptions on which the projections are based. More realistically, the deficit will turn out to be substantially higher.

The Ministry of Economy projects a reduction in public spending of 1% of GDP by 2024, which would help bring inflation down to 70% per year. What is interesting is to observe what happens to the composition of public spending with these calculations. According to Budget 2024, it is observed that:

• In 2022 pension spending was 7.6% of GDP and inflation was 95% per year.
• In 2023 pension spending is projected to drop to 7.2% of GDP with inflation of 136% per year.
• In 2024, inflation is projected to drop to 70% per annum and in the Ministry of Economy’s calculations, pension spending recovers to 7.6% of GDP.  

These data show that one of the main challenges for the next government, if it wants to lower inflation, is to prevent pension spending from destabilizing public finances. This problem was warned about in previous IDESA reports (https://idesa.org/en/more-is-spent-on-leliq-interest-than-on-pensions/). The calculations of the Ministry of Economy confirm that to lower public spending by 1% of GDP and inflation to 70% per year, it would be necessary to adjust the rest of the budget items by 1.4% of GDP to compensate for the increase in pension spending. To this end, the 2024 Budget proposes an adjustment of 0.8% of GDP in personnel expenses. This is contradictory to the massive increase in the number of public employees in 2023.

An alternative strategy is for the next government to crystallize the pensions’ loss in real value made by the current government, changing the indexing formula. The acceleration of inflation, which began in 2018, produced a drop of 45% in real terms of the average pension and 25% in the minimum pension since it is reinforced with bonuses, comparing December 2017 with November 2023. This is a huge loss in pensions’ real value that shows that the fiscal disaster is much worse than the figures the official draft shows. Manipulating the pension index to keep the pensions’ loss in real value in the future, besides being ethically and socially reprehensible, is fiscally inconsistent since it generates fertile ground for a new wave of pension lawsuits. It must be accepted that manipulating the pension’s index is not a saving, but a transitory relief financed with pension debt (which public accounting does not record as such).

The latter shows that the agenda for the presidential debates is wrong. On the one hand, education is expected to be addressed. Although improving the education system is strategic, it is exclusively the responsibility of the provinces. Therefore, its debate at the level of presidential candidates has little relevance, surely leading to confusion and mere wishful thinking. On the other hand, there is no time for the candidates to explain their proposals on social security, a decisive and crucial issue to normalize the macroeconomy. 

Society demands to lower inflation. This does not legitimize to freeze the loss in real value of pensions accumulated in the last years. The only way to make both objectives compatible is with a comprehensive reorganization of the pension system. This requires innovative ideas and political audacity which, unfortunately, due to an agenda’s design error, will not be addressed in the presidential debates.