Wonky Muse
Wonky Muse

February 5, 2005

The Argentinian Meltdown

According to a November, 2000 article from the conservative think thank Cato Institute, the partial privatization in Argentina introduced by then President Carlos Menem in 1994 ran into problems because they should have gone to full privatization in the first place:

This move serves as a warning to those would only partially privatize the U.S. Social Security system: when a government-run system is left running alongside personal retirement accounts, political manipulation and loss of fiscal discipline can easily occur. The best long-term solution is to move as quickly as possible to full privatization, where workers can invest all of their payroll taxes in personal accounts.

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Many Social Security reformers in the U.S. propose establishing personal accounts investing just a small portion of the current 12.4 percent payroll tax. While a courageous step in the right direction, these small accounts would leave the current pay-as-you-go system permanently running alongside. These small accounts are politically easier to establish because they require smaller amounts of savings. But for that very reason, the long-term benefits of smaller personal account plans pale in comparison to those of full privatization.

Let me get this straight. It was partial privatization that caused Argentina to fall further into debt because it deprived the government of tax revenue and the solution to this problem is to privatize all the way? How convenient; exacerbate the problem then propose your desired solution which caused the problem in the first place!

Argentina did go into full privatization in 2000, essentially abolishing their social security system. And how's that workin' for them? According to the Center for Economic Policy and Research, not very welll:

While the decision to peg its currency to the dollar would have created problems in any case, the decision to privatize Social Security made Argentina's situation more precarious. The reason is simple—Social Security privatization deprived the government of a large amount of tax revenue. Payroll taxes that had gone to the government to support the old pay-as-you-go Social Security system were instead diverted to private accounts. As a result, the government lost an amount of revenue that has been estimated at 1.0 percent of annual GDP (the equivalent of $100 billion a year in the United States)...

Argentina's government had to borrow to make up for this lost revenue. Argentina was forced to pay a very high interest rate on its new debt...

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The irony of this action is that Argentina's decision to privatize Social Security in 1994 helped to touch off a financial crisis, which ultimately forced much more draconian cuts in Social Security than ever would have been contemplated in 1994. While no one could have foreseen the exact path of subsequent events in 1994, it should have been obvious that the additional deficits created by the privatization of Social Security would lead to serious pressures on the budget.



posted at 11:55 PM by Wonky Muse

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Wonky Muse is the other Filipino American female political blogger. The sane, liberal one.


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