THE PENSION LAW WORKS IN FAVOR OF FISCAL SURPLUS

In March 2024 the government modified, through the Emergency Necessity Decree (DNU) 274/24, the pension index formula. It was stipulated that from April, pension assets will be adjusted monthly according to the inflation rate of 2 months before. This means that pensions will no longer recover the loss in real terms suffered from 2017 to 2023 which was in the order of 35%. In addition, for January 2024, the DNU set an adjustment of 12.5% when inflation for that month was 20.6%.

The Congress –with votes from the opposition and those allied to the government– passed a law respecting the government’s new index formula, but stipulating that all pensions must be adjusted by the shortfall to reach January’s 20.6% inflation, i.e. 7.2%. In addition, it established that the minimum benefit will have a guarantee equivalent to the Total Basic Basket (CBT) or poverty line and that once a year pensions will be adjusted by 50% of the real salary growth, if the real salary has grown. President Milei got angry and said he will veto this law because it threatens the fiscal balance.

Is the law against fiscal balance? Based on data from the Social Security Secretariat, the following estimates can be made:

• The 2% increase in all pensions implies an increase in pension spending in the order of 0.32% of GDP.
• The CBT guarantee implies an increase of approximately 0.08% of GDP.
• The government is discretionally granting a $70,000 bonus to those who receive the lowest salaries, which represents an expense of approximately 7% of the GDP.

These data show that the application of the law passed in Congress represents an increase in pension expenses of approximately 0.4% of the GDP. At the same time, the government has been paying discretionally the bonus with a cost of 0.7% of the GDP. This implies that, by redesigning the bonus, it is possible to compensate the increases of the law. In other words, it is possible to apply the law without unbalancing the public finances.

The current minimum pension is AR$225 thousand and the bonus is AR$70 thousand, totaling AR$295 thousand. The bonus is granted indiscriminately to all retirees and pensioners, contributory and non-contributory, who receive less than AR$295 thousand. Many retirees and pensioners receive the bonus having other sources of income, whether social security, labor, family or from active income. These retirees and pensioners do not live only on the retirement or minimum pension. This provides an opportunity to save resources by increasing equity. For this, the bonus should be focused on those elderly beneficiaries whose only source of income is their pension benefit and stop paying it to beneficiaries who are not in a situation of economic vulnerability.

In the short term, with proper implementation, the law can be neutral for public finances. The most important thing is that in the long term, the law has a very positive impact on the sustainability of the fiscal balance. First, because the formula validated by law is legally more robust than the precariousness that underlies a DNU. Secondly, because it validates the loss in the real value of pension expenditure that occurred between 2017 and 2023. It is a structural drop of more than one-third in pension spending that contributes decisively to the ordering of public finances.

It is very commendable that the government has adopted fiscal balance as a non-negotiable goal. It is also very commendable that it has imposed on Congress the rule that projects must contemplate their financing. This emphasis probably explains the immediate and emphatic negative reaction of the president against the congressional bill. However, with a more objective evaluation, solid evidence appears regarding the convenience of enacting the law. Not only because in the short term the increase in public spending can be avoided with a correct implementation. But also because in the long term, it allows to get out of the legal precariousness of the DNU and consolidate a structural reduction of pension spending. This is an essential step to meet the goals outlined in the May Act to reduce total public spending to 25% of GDP and to guarantee a sustainable fiscal balance over time.