CHICAGO: Since 1989, Argentina has rapidly introduced revolutionary reforms that greatly reduced government regulations and controls. Privatization of its social security system is the most important step during the past couple of years -- I recently went there after a three year absence to speak to a conference on this program. Argentina's experience demonstrates that even under very difficult economic circumstances, a nation can successfully convert from a pay-as-you-go social security (PAYG) system to a competitive private pension plan with individual retirement accounts.
PAYG taxes workers to pay benefits to currently retired persons. The combined social security tax on employees and employers in Argentina had reached 50 percent of wages, a crushing burden. This tax helped discourage companies from hiring additional workers. Private employment has been stagnating and the unemployment rate ballooned to more than 17 percent during the serious depression the past two years induced by the Mexican crisis.
To avoid the high social security taxes and onerous labor market regulations, many workers and companies operate in the illegal underground economy. Argentinean economists estimate that almost half of all workers have either illegal or informal jobs, a staggering percentage.
Since so many workers do not pay social security taxes, the dependency ratio, the number of retired persons per each worker who actually pays social security taxes, has been only a little below one, among highest ratios in the world. This created a vicious circle since high social security taxes in the legal economy shifted workers into the black economy. This forced still higher taxes in the legal economy to finance retirement benefits, which encouraged further shifts into the black economy, and so on.