Right-wing Opposition Forces El Salvador into Default, as Unions Propose End to Privatized Pension System to Resolve Fiscal Crisis
On Friday, April 7, the government of El Salvador went into default on debt payments to the country’s privatized pension fund after the right-wing Nationalist Republican Alliance (ARENA) party blocked the approval of financing to cover payments. Within several days, all three of the major credit rating agencies – Fitch Group, Standard and Poor’s, and Moody’s – had downgraded El Salvador’s investment rating, which typically makes it harder for country’s to access international loans, raises the interest rates on the loans they can access, and could discourage private investment in the country. While the government eventually scrapped together the necessary funds to temporarily resolve the problem, structural problems remain.
El Salvador’s precarious financial situation is longstanding; in fact, exactly eleven years prior to Friday’s default, on April 7, 2006, then-Minister of Finance Guillermo Lopez Suarez offered his resignation to then-president Tony Saca of the ARENA party because he felt the government was not willing to address the country’s “tight financial straits,” according to a U.S. Embassy cable about a meeting with Lopez Suarez that was published by Wikileaks. The cable reports that Lopez Suarez disclosed that the government almost could not cover public sector employees’ salaries in April 2006.
All of the reasons that Lopez Suarez gave for the dire financial situation eleven years ago continue to this day: tax evasion by the country’s wealthiest individuals and biggest businesses; the unsustainable, partially privatized pension system; and the country’s system for subsidizing basic services like electricity, water, and propane cooking gas.
Since the leftist Farabundo Martí National Liberation Front (FMLN) party wrested the nation’s presidency from the extreme-right ARENA party in 2009, every attempt to address these structural problems has been met with opposition from the ARENA party, the think tanks and associations that represent El Salvador’s economic elite, the Supreme Court and the business oligarchs. Efforts by the FMLN to incentivize payment of back taxes and to implement a new more equitable tax structure (El Salvador is one of two countries in the Americas that has no income tax) have been shot down by the right wing aligned Constitutional Chamber of the Supreme Court as unconstitutional.
Perhaps the largest factor dragging down the country´s finances is the pension system which, partially privatized in 1998, requires the government to pay out benefits to past pensioners while younger workers´ contribute to private, for-profit financial institutions called AFPs. Year by year government debt caused by the pension system has continued to increase exponentially; an issue which has been continuously exploited by the right wing. The crisis facing the pension system is unfortunately the typical result of neoliberal economic policies; public institutions are starved of funding, and then subsequent calls are made for further privatizations in order to rescue them.
Faced with possible default, credit downgrades and an insolvent pension system the right wing has coalesced around a plan put forward by the right-wing business association ANEP to further privatize the pension system. Unions and social movements have rejected the plan as a total giveaway to private industry. Liduvina Escobar, Secretary General of the Union Federation CONFUERSA, said “This proposal only looks out for the interests of the AFPs, just as it has been since they began administering the public pension funds… we want the pension to be rescued from private hands.” The government has presented a proposal that would reign in the AFPs, but leave in place a combination public-private pension system.
Unions and social movement organizations have mobilized continuously in rejection of the private AFPs, and while they are supportive of the government proposal, they have put forward their own proposal which goes further in taking back public control over the country´s pension system. They have called for a solution that both address the structural problems that have led to the country´s financial crisis, but also provide real security for Salvadoran workers and retirees. Santos García, Secretary General of the Union Federation CSTS, stated that “It is urgent and necessary to create solutions to this problem, one which was created by the right wing of this county. We know that a few days ago the right wing party accompanied the proposal of a pension reform, but it is more of the same. They continue looking at pensions as a business. The pensions cannot be viewed as a business. They should be seen as a responsibility to bring social security to Salvadorans. With the current system, all we get is that the millionaire owners of the AFPs continue to enrich themselves.”
The fight for a just pension system is ongoing, as are the country´s fiscal problems. While the Legislative Assembly continues to debate the various pension reform proposals, the government is faced with upcoming pension payments due in October, raising the specter of further defaults.