Oct. 23 (Bloomberg) -- Fourteen years ago, Raul Zimmermann opted to contribute to one of Argentina's new private pension funds because he didn't trust in the state retirement system. Now he's outraged by government plans to seize his savings and take responsibility for paying his monthly benefit.

``The history of the pensions managed by the state is disastrous,'' said Zimmermann, 69, who started drawing a pension two years ago. ``It's not reasonable that they transfer my account without even asking me if I want to.''

On Oct. 21, President Cristina Fernandez de Kirchner announced plans to take over $29 billion of private pension accounts, saying a state-run system would protect retirees from fluctuations in financial markets. Roque Fernandez, an economy minister and central bank president in the 1990s, said the move is a ``confiscation'' of people's savings.

Yesterday, Argentina's benchmark Merval stock index sank as much as 18 percent and dollar bond yields topped 30 percent as the planned takeover of pension funds heightened concern the government is headed for its second default this decade. Argentina hasn't had access to international debt markets since its 2001 default on $95 billion in debt, and demand for domestic bonds has dried up on concern the government is underreporting inflation.

Pension funds seized by the government will become part of the state system, which pays workers a guaranteed pension equal to 1.5 percent of their monthly salary for each year they worked. By contrast, payments under the private system depend on the performance of the stocks and bonds in which the funds invest.

`Gambling by Pensions'

Argentina created the private pension system in 1994 as part of a program to reduce state involvement in the economy and give workers more control of their retirement savings. The move also aimed to increase investments in the local capital markets.

About 3.6 million people make monthly contributions to the private funds, and 450,000 retirees receive payments from their accounts. The funds lost 2.25 percent of their value in the 12 months through September, according to the Web site of the agency that regulates the system.

``Our pensions can't depend on gambling by pension funds,'' said Juan Carbajal, 35, who owns a domestic appliances store. ``Pensions should never have stopped being managed by the state because ultimately the state is the main guarantee.''

Still, abuses by previous governments have created a lack of faith in the state system, said Buenos Aires pollster Ricardo Rouvier. Because of this, Congress will seek guarantees that the funds be properly managed before it approves the president's proposal, he said.

Government Pressure

Seven years ago, as Argentina tried to stave off default, the government pressured pension funds to participate in a series of bond swaps that pushed forward repayment dates. In December 2001, strapped for cash to pay salaries, it ordered the funds to transfer $3.2 billion to state-owned Banco de la Nacion.

In 1991, the government gave pensioners $6 billion of bonds to cover unpaid benefits that had accumulated during the late 1980s. The courts are still considering about 80,000 cases brought by pensioners who claim they haven't received the benefits they were entitled to.

``The advance by the state on the pensions is understandable, reasonable and cautious, taking in mind the global financial context,'' Rouvier said. ``Still, there has to be a clear and solid guarantee on how the funds will be managed by the government.''

Last year, the government gave those who were contributing to the private funds the opportunity to transfer to the state pension system. Even though calculations showed most people would receive more from the state program, just 1.2 million chose to switch, according to the pension regulator.

Borrowing Costs Soar

Argentina's borrowing needs will swell to as much as $14 billion next year from $7 billion in 2008, RBC Capital Markets, a Toronto-based unit of Canada's largest bank, said Oct. 21.

South America's second-largest economy is still struggling to recover from its 2001 default. Holders of about $20 billion of defaulted bonds rejected the government's 2005 proposal to pay 30 cents on the dollar, and Fernandez has said she's considering a new offer.

That record is what draws concern from Roque Fernandez, now a professor at CEMA University in Buenos Aires.

``The measure is aimed at confiscating the $30 billion that were managed by the funds but were owned by the affiliates,'' he said. ``Market reaction shows that there is a high level of concern. This measure has nothing to do with a structural reform for the long term but more a desperation for the cash.''

Not Money Grab

President Fernandez said her proposal isn't a money grab and compared it to the almost $3 trillion governments have pledged to bail out financial institutions around the world after credit markets seized up.

``We are taking this decision in a context where the biggest countries, members of the G8 and others, are taking protective measures for their banks,'' Fernandez said Oct. 21 at a rally in Buenos Aires. ``Instead, we're taking them for our retirees and workers.''

Zimmermann, who still works at a home appliance store to make ends meet, says he's skeptical about the president's promise to use the pension money responsibly.

``Our history shows that, in general, our governments didn't pay back their debts,'' he said.

To contact the reporter on this story: Eliana Raszewski in Buenos Aires eraszewski@bloomberg.net

Last Updated: October 22, 2008 22:13 EDT