From
Marcellus Garriga
Professor and researcher at the Faculty of Economics of the UNLP
In these days I was listening to a service on the radio “Cadena Ser” of Oviedo-Spain with the journalist Michael Reid, currently visiting professor at the London School of Economics, who was carrying out some Reflections that may interest Argentina. Reid has lived in Spain for many years and has just published the book “Spain: The Trials and Triumphs of Modern European Country”. Asked by a journalist about the situation in Spain, he underlined that “one of the problems is that public spending discriminates against younger people: there is a generation gap”. He used the pension reform proposed by the Spanish government as an example: “it commits greater expenditure to the payment of better pensions, but without adequately establishing the income to finance it. In these conditions, what is done is to create a liability for future workers who they have to finance the payments they commit today. The system is unfair and unfair to today’s young people.”
This view is in line with the work of Dieter Helm (2010), economist and professor at the University of Oxford, in his classic article “Rethinking The Economics Border of the State”. Helm points out that while the world will continue to expand in the future, with new opportunities through advances in science and human effort, the idea that the future will be better is in doubt: “the intergenerational pact has been broken”. “The environment is deteriorating, jeopardizing the next generations, basic public goods (health, education, justice and security) are deteriorating, investments in infrastructure are depreciating, pension systems are in financial crisis, poverty is increase and inequality in income distribution has repercussions on intergenerational relationships equity and the growth of public debt jeopardizes future tax revenues”.
The situation in Argentina
AS part of state failure and economic disorganization in general, the situation in Argentina seems to correspond to this description: “the intergenerational pact has been broken”. The pension system is also a good example illustrating the situation. A pension reform has just been approved which grants a new moratorium to 800,000 people who have not paid enough contributions to retire. It establishes a retirement debt payment schedule for people who have reached retirement age — women aged 60 and over and men aged 65 and over — but have not reached 30 years of contributions. With this law they will have the possibility to regularize their pension debt. This moratorium commits higher pension expenses in the future due to an amount equivalent to the assumption of approximately USD 12,000 million in debt.
On whom does this debt fall? Certainly increase the tax burden on younger people by discouraging access to the formal labor marketwhich in turn would further deteriorate the pension system.
In this context, what should be the expectations of the younger population?
A survey conducted last year in the fourth year of Economics at the Faculty of Economics of the UNLP can offer some indications. Although the results are biased, as the sample size is small and not representative, however, can be an example of the expectations of young people. The consultation was aimed at expressing the willingness to pay pension contributions before starting a new job. The question was whether, given the opportunity to start a new job, would you prefer a higher salary and not pay pension contributions for the future?
The answer is in the infographic: 62.5% of students indicate that they prefer a higher salary rather than paying pension contributions. to exist two possible explanations for this answer: i) young people have a strong preference for the present and, therefore, value a higher salary today over a promise of future payment (retirement), or ii) younger people understand that there is no relationship between social security contributions they pay, and their expected future income (retirement), are treated as an extra tax. There is no relationship between pension contributions and future benefits, so they prefer not to contribute.
What the students say in class to justify this answer is this distrust the public system. Who will guarantee them a pension in 35 years? But that said, some may say that this small, isolated survey is irrelevant, which it is. However, the evolution of the same question over time can be useful for interpreting some facts: it does five years ago only 30% answered that they would not pay contributions vs. 62.5% in the year 2022. The perception of deterioration and distrust in the regime is evident.
This aspect is fundamental, because a pay-as-you-go pension system, like the one in force in Argentina, cares about it it implied an intergenerational pact, where today’s assets finance today’s liabilities and today’s assets expect tomorrow’s assets to help sustain their liabilities. If that implicit agreement is broken, the pension system becomes unsustainable.
In a broader vision of the Argentine public sector, it is observed a set of aspects that reveal how the intergenerational pact has been weakened: i) In the political debate the idea prevails that the only thing that matters is to increase current consumption, many times to the detriment of permanent consumption (which is the relevant indicator in terms of population well-being); ii) expenditure on basic goods and services, health, education, security, justice, increased from 73% of total public expenditure in 1961 to 52% in 2016 and, as a counterpart, increased transfers from 27% to 47% over the same period (grants, social plans, retirements, etc.). We have moved from public expenditure focused on the provision of public goods that increase human capital to one in which transfers are more relevant. iii) the strong lag of prices and public tariffs encourages current consumption and discourages investments: iv) the deterioration of physical infrastructure is evident, the depreciation of physical capital is not reflected in the public accounts, it is not accounted for in the measurement of GDP; v) lack of environmental protection policies: water care, excessive consumption of fossil fuels, gas, electricity and fuels (aggravated by distorted prices), lack of control of industrial waste, absence of a complete separate collection program, among others ; saw) poverty and inequality have increased significantly. Poverty has doubled since the beginning of the democratic restoration (20%) to the year 2022 (40%), seriously compromising people’s quality of life, the future development of human capital and intergenerational equity; vii) the increase in debt puts public finances at risk going forward.
When the concern of those who govern is focused only on short-term policies, the pact with the next generations is weakened. The idea that the future will be better is being challenged. In this context, it is not surprising that given the priority of the short term and the “discrimination of public spending against the youngest”, as Michael Reid points out, risky anti-establishment proposals, with strong support from the younger population. The great challenge is to redesign the state towards a more efficient state, one that provides quality public services at affordable prices and, ultimately, that recomposes the intergenerational pact that makes a nation sustainable.
Source: Clarin
