Greece and Argentina both introduced radical pension reforms following the financial crisis. Drawing on recent research, Marina Angelaki and Leandro Carrera argue that while both countries lacked access to international financial markets and had unsustainable pension systems, the reforms have been short-sighted, ultimately undermining the adequacy and sustainability of pensions. A future overhaul of their systems looks unavoidable.

Latin American countries have shared with those of southern Europe a common policy legacy of Bismarckian welfare states where benefits are related to working-age earnings. In the pension field, both Argentina and Greece introduced occupational-based schemes at the beginning of the twentieth century. Yet, in the 1990s they took different paths in their attempt to put their public finances in order: Argentina adopted a structural reform entailing the introduction of a private pillar on top of its public ‘pay as you go’ system, whereas reforms of the Greek (monopillar) system were limited to cost-containment and revenue raising measures.

Despite the different reform paths, on the eve of the 2008 crisis both systems were faced with significant sustainability and adequacy challenges. In the case of Argentina, approximately half of the system’s revenues came from ad hoc taxes and government transfers, while a significant number of workers had an insufficient number of contribution years to qualify for a full pension from the public pillar and low levels of savings in the private pillar, leading to an inadequate level of income retirement. For example, it was estimated that in 2002, 30 per cent of the elderly living in rural areas were below the poverty line. In the case of Greece, despite pension expenditure being close to the EU-average, the risk of poverty for those over 65 years old stood in 2009 at 21.4 per cent. Furthermore, pension expenditure was projected to increase from 12.4 per cent of GDP in 2009 to 24.1 by 2060 according to EU projections.

Argentina’s pension reforms

Against this background, the global financial crisis impacted on their pension systems in an unexpected way. The expansionist macroeconomic policies of the Kirchner government in Argentina proved unsustainable leading to a fall in the government budget balance surplus to 1.1 per cent of GDP, less than one-third of its 3.7 peak in 2007. As the global crisis further exacerbated the economy’s weakness and the country’s inability to access international financial markets due to the incomplete restructuring of its debt in 2005, the renationalisation of the pension system was seen as an option for reducing public debt obligations, while improving budget balances.

The government justified this decision as a measure that would protect private savings from the effects of the crisis, even though the decline in the value of pension fund assets reflected investors’ concerns over the government’s macroeconomic policy. This move also fitted with the government’s return to the idea of the state as the main provider of retirement income, which was in line with the general macroeconomic policy of more state intervention in the economy. Thus, the 2008 reform allowed the government to seize the assets from private fund administrators that amounted to about 9.5 per cent of GDP.

Credit: László Toth / European Parliament (CC BY-NC-ND 2.0)

Yet, the speed with which the reform was passed is an indication that not enough thought was given to how the reform would impact the future sustainability of the system, as also evidenced by the absence of actuarial estimates on the impact of the reform. Estimates provided by private analysts at the time of the reform showed that the new system could experience a deficit of between 1.7 and 4.1 percent of GDP already by 2030, reaching over 5 percent by 2050.

The concerns about the sustainability of the system have been the focus of the new centre-right administration in power since 2015. In 2017, the government stated that the uprating of pension benefits, which was the result of applying a generous formula that combined the percentage increases in average wages and resources of the social security administration, was financially unsustainable. The government thus presented a reform project to change the uprating formula to one that combines the percentage increase in prices (70%) and wages (30%). After much resistance in Congress, the reform was enacted in December 2017. Yet further litigation in respect of the new uprating mechanism is expected.

The Greek pension system after the crisis

In the case of Greece, the government announcement in 2009 of the misreporting of earlier fiscal data led to the downgrading of the country’s credit rating and an eventual inability to access financial markets. The bailout agreement signed with the European Commission, European Central Bank and the International Monetary Fund in 2010 included a series of measures, pension reform being one them, which would ensure the country’s fiscal sustainability.

The pension reforms adopted in the context of the crisis entailed the transition to a system consisting of a basic pension and a proportional one based on lifetime earnings and the replacement of the defined benefit system of auxiliary funds with a notional defined contribution one. This transition has been accompanied by drastic cuts in both current (by about 40 to 50 per cent for certain income brackets) and future pension benefits.

As in the case of Argentina, reform was justified as a measure that would contribute in restoring the country’s fiscal sustainability and as the only solution for a country in a state of emergency and with no time available. The significant retrenchment introduced did not prevent the introduction of further measures. The Syriza government that took office in 2015 introduced a reform entailing (among others) a new formula for the calculation of pension benefits, the introduction of an upper ceiling to newly awarded pensions and increased contributions for the self-employed. The new law results in – yet again – significant cuts to pension benefits, with those with a high number of contributions expected to face bigger cuts compared to those with a lower number of contributions, an element that has been heavily criticised.

Short-term economic goals over long-term sustainability

Despite the differences in the content of the reforms adopted in the two countries (shaped by the existing structure of their pension systems) both Argentina and Greece have subordinated pension reform to short-term economic goals. This was done to bypass isolation from international financial markets and thus access needed funds in the case of Argentina and to show reform readiness in the case of Greece through the adoption of measures improving the country’s fiscal situation.

Yet, by using pension reform as a “quick fix” for pressing economic concerns, not enough consideration has been given to current and future adequacy and sustainability issues, thus putting the sound-footing of both reforms into question. The introduction of further reform rounds in both countries highlights the inability of the previous reforms to provide a long-term solution to the systems’ challenges. As pension reform remains high on the agenda of countries around the world, the experiences of Argentina and Greece highlight the perils of using quick fix reforms that do not necessarily address long-term sustainability issues.

This article draws on an accompanying study, which can be read here.

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Note: This article gives the views of the authors, not the position of EUROPP – European Politics and Policy or the London School of Economics.


About the authors

Marina Angelaki – Panteion University of Social and Political Science
Marina Angelaki teaches European and global social policy at Panteion University of Social and Political Science. Her research interests focus on comparative social policy, pension reforms with particular focus in Southern Europe.

Leandro N Carrera – LSE
Leandro N Carrera is a Research Associate at the London School of Economics Public Policy Group. He also works at the UK Pensions Regulator advising on pension policy reform. His research interests focus on comparative social policy, pension policy, and public administration. He is the co-author of Growing the Productivity of Government Services (Edward Elgar, 2013) with Patrick Dunleavy. He has also published on pension reform and public sector performance.

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