Non-Contributory pensions account for 80% of the deficit - IDESA

Report Nº: 96417/05/2022

Non-Contributory pensions account for 80% of the deficit

A new extension of the pension moratoriums and a special retirement regime for people with certain diseases are being promoted in Congress. As long as these types of rules continue to have a high political consensus, there is no point in discussing the monetary regime to control inflation and achieve stability.

The economic and political crisis seems to have no way out. This raises expectations about the next government in 2024. Many candidates are aspiring to power and few proposals. The exception is the debate on the monetary regime. Dollarization, convertibility, inflation targets, bi-monetary regime appear, according to the candidate, as “the” instrument to achieve stability. This is a necessary discussion, but it overlooks the fact that, whatever monetary regime is adopted, the result will be a new failure if an integral reorganization of the State is not addressed. That is why it is essential to make explicit and assume that the current disorder is the result of the accumulation of bad public policies sustained for decades by governments of all the political colors.

Two concrete examples were seen this week. The first is that Congress approved, with almost a unanimous agreement, the creation (overlapped with existing benefits that already cover these contingencies) of a non-contributory pension system for low-income people affected by HIV, hepatitis B or C, and tuberculosis, and for those with middle and high incomes will receive a pension, without contributions, at the age of 50. The other initiative was presented in the Senate and proposes to extend the pension moratoriums.

Providing pensions without contributions, without evaluating the costs, has a high political transversal appeal. In this sense, according to data from the Ministry of Economy for the year 2021 it is observed that:

  • There are 3.5 million pensions granted with moratoriums, of which 800 thousand are duplicated with a survivor’s pension.
  • These pensions with moratoriums generate a public expenditure of 2.4% of the GDP.
  • The primary deficit of the National Public Sector amounted to 3.0% of GDP.

These data show that the moratoriums have a fiscal cost equivalent to 80% of the primary fiscal deficit. Continuing to provide contributory pensions without contributions structurally aggravates fiscal insolvency. With this dynamic in public finances, there is no possibility of achieving price stability. The disorder of the State leads to high and permanent fiscal imbalances that prevent a stable economy, regardless of the monetary regime. For this reason, pensions, together with the tax and the State functional planning, are much more important than defining the most appropriate monetary regime.

The social security disorder has its origin in a long accumulation of rules promoted in an improvised and opportunistic manner. The most illustrative example, and the one that has done the most damage, is the moratoriums. This is a mechanism –without precedents in other parts of the world– that allows people to pretend to have worked as self-employed unregistered in order to recognize contributions not made and thus to access a moratorium and obtain a pension. This pension is delivered under the same conditions as for a person who worked and made the corresponding contributions. The first moratorium dates back to the government of Néstor Kirchner, but since then they had a broad and transversal political consensus. The evidence is that they were extended during the government of Mauricio Macri.

In the rest of the world, non-contributory pensions are used to cover the situation of elderly people without contributions. This instrument makes it possible to moderate financial costs and avoid giving the signal that contributing to the pension system does not generate benefits. But the most important point is that moratoriums generate a duplication of benefits when the pension holder or his/her spouse dies, since, as it is a contributory benefit, it generates a pension. Therefore, moratoriums are the main factor that explains the high and growing phenomenon of benefits duplication.

The consensus that sustains bad pension policies is demonstrated by the Universal Old Age Allowance (PUAM). The PUAM has a more appropriate design than the moratoriums because it is not a contributory benefit. This makes it possible to differentiate it from the pension obtained by regular contributions and, most importantly, it does not generate a survivor’s pension, avoiding the duplication of benefits. But since neither moratoriums nor survivors’ pensions were eliminated when the PUAM was created, contributory pensions continue to be granted and duplicated without contributions.


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