In a recent vote, Uruguayans decided against a proposition that would have nationalized private pensions. It’s a good thing they did.
A few weeks ago, Uruguay—a country known for its political and economic stability in an otherwise usually turbulent South America—held what many considered to be one of the world’s most boring and uneventful presidential elections. But on the same day, Uruguayans also went to the polls to decide on a proposition that raised some eyebrows both at home and abroad: the nationalization of private social security, along with the lowering of the retirement age from 65 to 60 and the establishment of a minimum pension equivalent to the national minimum salary. The proposition was ultimately rejected, as a majority could not be reached. However, 39 percent of Uruguayans still voted in its favor, and its mere existence was a major cause for concern to investors.
It is no surprise that the exchange rate and country risk indicators showed volatility before the election. After all, the nationalization of social security implied the end of private pension schemes, with the effective confiscation of hundreds of thousands of private savings accounts to follow, capital flight, and significantly lower levels of investment. Up to USD 1.5 billion in additional spending was also estimated, in a country of just over 3 million.
Nationalizing pensions is not a new idea in South America. In 2008, then-President Cristina Kirchner ended private pension funds in Argentina, with the government confiscating them to put the money into the state pension fund. The cash was immediately used to enact payments to millions who had never made any savings within the previous system. This state pension fund expanded the retiree base and compromised public spending in the years that followed, leading up to the inflationary crisis of 2023. Ending private pension schemes meant that people who had saved for retirement were denied their money, as the new “solidarity-based” system pooled all savings together. This resulted in countless judicial proceedings, with many complainants dying before they could be compensated by the courts. Nationalizing private pension funds was not just economically damaging—it was also profoundly unjust.
On the other hand, a good example of the benefits of having private pension schemes in the region is found in Chile. Under the system created by José Piñera in the 1980s, individualized savings accounts surpassed USD 200 billion in 2018, with funds providing exactly the service they were designed to, and even surpassed expectations. In fact, despite repeated attempts by the left to dismantle the system, a recent audit requested by the current leftist administration has recommended not to nationalize private social security out of concerns that a legal monopoly by the state would be detrimental to pensioners. Just like in Argentina.
Economic history is full of examples where monopolies granted by governments fail to serve consumers by charging them artificially high prices, something that is entirely predictable if one considers the reasoning of Austrian economists like Murray Rothbard.
State-run social security, though, is particularly bad: the system is akin to a Ponzi scheme, as Cato’s Romina Boccia has recently put it. When in charge of social security, governments hand out generous payments to everyone as soon as the system is set in motion, but these do not come out of individualized accounts and instead come out of a common pool that is always shrinking as population growth slows and life expectancy rises. Indeed, in a world of diminishing fertility rates, social security is not financially sustainable, as there are not enough new workers to fund the pensions of the elderly—even less so if the retirement age is lowered, a provision that the Uruguayan proposal also included.
In Uruguay, all candidates from the current center-right administration spoke publicly against the reform, as well as three former presidents and even the head of the left-wing coalition, which is in opposition. It was only the unions which supported it. Still, the proposal gathered 39 percent of the vote, which is a warning sign of the appeal that destructive economic policies can have when people are promised everything at the cost of nothing. Uruguayan bonds may have shown a drastic improvement after the proposition failed and confidence was restored, but the risk had nonetheless been there.
Fortunately, Uruguayans ultimately understood the dangers of ending private pension schemes in favor of a state-run social security monopoly, and perhaps also the deep injustice that lies behind such a measure. But the topic should have never been on the ballot to begin with. It must still be repeated, then, that there is no such thing as a free lunch. Or a free pension, in this case.
Additional Reading:
Uruguay: Welfare State Gone Wild by Henry Hazlitt
Ramon Diaz and the Spread of Liberal Ideas in Uruguay by Luisa Peirano
