AFJP: Private Pensions No More
The story behind the biggest private pension heist in Argentina's history
Welcome Avatar! Throughout history whenever there’s a shortage of state funds, Argentina’s political elite has never been reluctant to confiscate or “nationalize” assets under the guise of “doing it for the people”. The story of this private pension heist is no different. It explains a lot about the credibility issues Argentina has amongst savers, and why most opt to keep their savings under the mattress, or, better yet, offshore.
The Heist
Back in 2008, Argentine president Cristina Fernández de Kirchner, signed a bill bill that eliminates the private pension system (AFJP). With the stroke of her pen, suddenly all private savings in the pension funds belonged to the State.
All funds deposited in companies Private companies called Retirement and Pension Fund Administrators (AFJP) would be managed by the state system, Anses. The announcement took the breath away from a society that has already suffered enormously due to the loss of value of its savings and that was wondering what the point of nationalization is and where its money would go.
And more money was desperately needed in a time that the soy prices were declining and the Argentine state was beginning to struggle to keep up its deficit spending without access to international creditors.
Autist note: if you read my previous articles around this period (both presidencies of Cristina Kirchner (2007-2015), you will notice a clear pattern of confiscation, theft, corruption and nationalizations, in the administration’s lingo all for “el pueblo” (the people), but in reality due to a sever lack of access to credit, mainly due to the unresolved bond holdouts. More about this story here:
Cristina Fernández de Kirchner alluded to the lack of solidarity of private funds and a certain "avoidance" of taxes in some companies, but did not give any data to support her statements. Her signature was enough to rake in decades of private savings and use them in whatever way the administration saw fit.
In 2008 with the credit crisis, Argentine bonds were trading a lot lower and the due to the collapse of the public account, many of the AFJP funds were trading below 50 percent of what they were worth just a year before.
Suddenly, the Kirchner government thought that those funds should be bailed out by confiscating them.
Here you can see the true “math meme” logic: the public debt was trading at a fierce discount versus the year before, and so the private pension funds were in danger since they had a 60% exposure to public bonds. And like a snake eating its own tail, the argument was that the State could solve it by nationalizing the funds, lol.
Those in Favor
The AFJP fund was initially created in 1993 during the Menem government, under the name of the Pension Solidarity Law, a reference to the insolvency of the public system and the impossibility for the State to guarantee pensions to retirees.
However, supporters in favor of the nationalization said that the AFJP defunded the State, aggravated the fiscal deficit and subsequent external debt, besides obtaining exorbitant commissions.
If you read closely, all these “reasons” basically come boil to Argentina’s main problem: eternal fiscal deficit spending — the root cause which the current government is trying to solve. The “exorbitant” commissions for managing the funds were something private pensioners had agreed to, and why should the State be able to decide what if fair or unfair if both parties are in agreement?
Another argument made by the supporters of confiscating the funds was that 60 percent of the retirement contributions of the AFJP were invested in local government bonds anyways, so in their view 60% of the retirement risk was already nationalized.
The Loot
Since the confiscation happened without any transparency, there are only estimates of how big the loot was that suddenly propped up the State coffers.
The consensus is that this retiree rug pull resulted in an additional $13-15 billion pesos a year in collection and about $100 billion pesos in managed funds.
Keep in mind that the peso was valued at $3.18 to the dollar back then, so $4-5 billion USD/year and $30+ billion USD under management: roughly an additional central bank for the government to play with, which had international reserves hovering around 40-46 billion USD in 2008.
Did it help Retirees?
Have a guess. Most of the populist “para el pueblo” measures end up working against that same people, and the nationalization of the AFJP funds is another great example of that tradition.
For a while after the nationalization, there was a slight increase, but currently retirees are almost back to the crisis levels of 2001.
After the nationalization of the AFJP, the pension benefits systematically deteriorated, and the transition effort made in the 90s was completely annulled.
The problem of an aging population was reinstated on the public coffers and an unprecedented opportunity for the development of a domestic capital market was wasted.
The state distribution system in Argentina is, in fact, one of the most deficient according to the Global Pension Index 2023 created by the Mercer Institute, in which information is computed on a total of 43 selected countries.
The institute's latest measurement concluded that the Argentine system ranked in the last spot out of the 43 surveyed… ¡Viva Perón!
Consequences
Of course the citizens who faithfully contributed to the private pension fund in order to have a better pension at the day they stopped working, were the main victims in this story.
While these retirees lost their savings and were now forced to receive a State pension, a big chunk of their AFJP savings were being used to hand out pensions to retirees who never contributed anything, or in other social programs that would secure more votes for Kirchnerism in future elections.
This was all done under the Social Justice doctrine, which is basically a euphemism for buying votes and creating government positions for friends and family.
The main lesson coming out of the AFJP robbery was one that Argentines who trusted the system had to learn the hard way: you can never blindly trust funds that are managed by a third party, much less if these are managed in a jurisdiction where expropriations run rampant like Argentina.
The Corralito in 2001 was the first lesson, where private savings where rug pulled, pesified and suddenly worth 1/3 of the original dollar deposit. The AFJP in 2008 was a second, and this is why by now, many who have the ability to save for a rainy day will either stash dollars under their mattress, or move their savings offshore.
New private AFJP on the horizon with Milei?
During the presidential campaign, the only candidate who openly expressed himself in favor of allowing employees to save in a private system for their future retirement was Javier Milei.
However, according to Milei the creation of a new private pension option is a second generation reform, so this would either happen in a second term or under another government.
The plan is to wait for economic growth before doing so, in order to make sure it doesn’t have a negative impact on current retirees.
Since freedom exists, in any case the transfer from one system to another should be kept permanently open.
See you in the Jungle, anon!