For Export

Argentina Spreads The Wealth

By INVESTOR'S BUSINESS DAILY | Posted Thursday, October 23, 2008 4:20 PM PT

Socialism: With Congress eyeing 401(k)s and Barack Obama decrying "corporate greed," it might pay to look at Argentina's pension nationalization.

The country's mediagenic socialist president, Cristina Fernandez de Kirchner, announced Tuesday the state would "protect" private pensions from "policies of plunder" by proposing to hand them over to the government.

Praising her own scheme, she claimed Argentina would "set an example" for global financial crisis management by pulling $29.5 billion out of the private sector, and making it public.

As aghast as Argentines are about this, Americans should be too, because a Democratic supermajority in Congress would have similar ideas about nationalizing 401(k)s.

In Argentina, the socialization of savings represents a major dismantling of 14 years of privatization and individual rights, reforms that decisively ended Argentina's dark years of hyperinflation and dictatorship.

Starting in 1994, Argentinians could choose to save for retirement with the state or through a private account that let them make investment decisions based on their retirement needs.

Although it tried to accomplish what Chile's private retirement accounts did, it wasn't as well-designed. Fees were 30%. The government rigidly dictated what assets could be held in the accounts. But millions of Argentinians chose them anyway, because it gave them ownership.

Private accounts could be transferred to heirs and included life insurance policies. By contrast, the public savings option had none of these benefits and no one knows whether, assuming nationalization passes in Congress, private savers would be compensated for these lost assets and rights.

But, under the ruse of "protecting" Argentines from their own decisions, everyone will soon be forced into an involuntary pay-as-you-go program, like U.S. Social Security. Not only will the private assets be managed by bureaucrats, pension-holders will be paid what the government dictates.

With commodity prices falling sharply, the Argentine treasury strained for revenue, and the population aging, it's unlikely to be more than the $200 a month pensioners currently are paid. In fact, it's likely to be much less.

The assets are likely to be spent by government — not invested. It will save the government about $3.2 billion in interest payments since the government won't pay interest on $16 billion of government bonds in pension assets that it would own.

The Argentine Congress says it will ensure that assets are used for the pensions, but with money fungible and Argentine fiscal transparency weak, it's an easily skirted requirement.

Yet U.S. Democrats in Congress are mulling like-minded moves to scrap 401(k)s and transfer them into government-managed "guaranteed retirement accounts" with a 3% return, according to James Pethokoukis of U.S. News & World Report (full disclosure: Pethokoukis is a former IBD reporter).

Before they charge ahead, they should look at what happened since Argentina's announcement: Its stock market lost 23% of its value in two days, for a 57% loss since January. The losses spread to other markets in Brazil, South Africa and Spain.

Markets don't like expropriation of private property — including savings. And this takes away a key source of private capital. Moreover, one quarter of private pension assets were by law invested in Argentine stocks, making up about a quarter of the bourse's value. So the seizure of pensions amounts to government ownership across the entire private sector.

"It's a stealth nationalization of every single business in the country," explained Diana Mondino, an Argentinian economist at Universidad del CEMA in Buenos Aires. "Will (the government) influence those companies? I would think so — anyone who owns 25% of a company will have a lot to say about how it's run."

Growth will suffer, and Moody's already warns it "undermines the government's already weak policy credibility."

Right now, markets see the pension grab as a sign of governmental insolvency following a 40% surge in spending this year in socialist redistribution schemes, and amid a political climate of blaming businesses.

"We believe that the actual motivation of the reform is to capture the flows of the private pension funds to cover the government's financing needs in the context of a severe credit crunch," said analyst Pablo Morra at Goldman Sachs Monday.

Because Argentina defaulted on $95 billion of sovereign debt in 2001, blaming its bondholders then unsatisfactorily settling its arrears, it's pretty well priced itself out of global capital markets. With $16 billion in bonds maturing in 2009 and 2010, and no new revenue in sight, the government seems to want that private pool of pension cash — $4.2 billion in contributions a year — to pay its bills and carry on as usual.

Nationalization may pay the bills now, but it poisons prospects for growth. For that reason, Argentina's sovereign bonds now trade at 25 cents to the dollar and yield 30%.

With no growth, another default becomes more likely after the pension move. The market is acting accordingly.

Yet Congress resists reforming the U.S. public pension system as its liabilities pile up as baby boomers start to retire.

If the next president sees private corporations as the class enemy and taxpaying as "patriotic," and Congress continues to look at private 401(k) assets as a public piggy bank, there's little doubt the same mess in Argentina could happen here, too. It's worth thinking about.