Argentina: A glimpse on Social Security
Pensions schemes in Argentina were created by the end of the XIX century but were limited to certain sectors of the Argentine society with a lot of influence at that time, like the Armed Forces, teachers and public employees. As the XX century went by, new plans were established for different groups of employees, and by around 1950 an integrated Social Security System was created, based on a pay as you go scheme, administered by the State, covering public and private employees and independent workers.
In 1994, following trends in Latin America that began in Chile in 1980, a new system was created, coexisting a defined contribution scheme and a pay as you go one, where the contributors decided which system to choose. This brought a tremendous structural change in Social Security. However, after just 15 years of its inception, in 2009, the Government eliminated the defined contribution system, leaving just the pay as you go one.
The evolution of the average pension benefits within the Social Security System in the past 50 years can be seen in the following graphs:
The first chart reflects the average monthly pensions expressed in constant AR$ as of February 2021, which is a way to adjust all amounts paid through all the period by the Consumer Price Index. The second chart reflects the same average monthly pensions in AR$ as of February 2021, but converted to the present exchange rate 1 US$= 93 AR$.
As we can see, the maximum value for the 50 year period was in 1975 (US$ 590 per month), the minimum value for the period was in 1989 (US$ 212 per month) and the current amount is around US$ 369 per month.
It is important to note that the amount of the pensions fluctuate all the time because it is the Government that decides which is the periodical increase, based on the inflation rate and other parameters. Therefore, pension increases are not equal to the inflation increase, with the consequence that in time, the benefits may lose its purchasing power, as we could see in the graphs.
Pension Social Security today and its replacement ratio.
The initial pension benefit is calculated at the moment a person retires. Once determined, it is later adjusted by an index determined by the Government.
The initial monthly benefit formula has a fixed amount (AR$ 9,410.50 as of March 2021) plus 1.5% for each year of service calculated over the final 10 year salary average, with a maximum pension of AR$ 128,426.37 as of March 2021.The fixed amounts, the benefit cap and the pensions are adjusted on a quarterly basis.
The following are the replacement ratios for different final 10-year salary averages:
As we can see, the replacement ratio for the initial pensions diminishes very steeply as the final last 10-year salary average increases. While the replacement ratio for a monthly salary of AR$ 60,000 is 61%, the replacement ratio for a monthly salary of AR$ 500,000 is 28%. Therefore, the need for a supplementary pension benefit is very desirable among top employees.
The fact that the initial pension benefits are periodically adjusted by the Government is a very important issue because the index used may differ from the cost of living index. For example, in the increases granted in the past year:
|Quarter of increase||Increase in pensions||Inflation|
In the 3rd quarter of 2020, increases in pensions were higher than the increase in the cost of living, but in the reminder quarters it was the way around. In the last year, the increases in pensions accumulated 29%, while inflation was 38%. Therefore, in the past year pensions lost 7% of their purchasing power.
The current pension Social Security is based on a pay as you go scheme administered by the State which provides a level of benefit somehow appropriated for low level employees, but very insufficient for top employees.
Also, once an employee retires the level of the pension is determined and then increased in the future by the Government through an index that does not reflects exactly the cost of living index. Therefore, the benefit may lose its purchasing power in the future. This issue happened several times in the past.
Therefore, supplemental pension plans for top employees are very appreciated. However, for several reasons, that benefit is not currently very prevalent in the Argentine marketplace.