SOCIAL SECURITY CHAIR WANTS TO SOLVE "PENSION

UNCLAS SECTION 01 OF 03 AMMAN 006441 SIPDIS SENSITIVE TREASURY FOR DEMOPULOS E.O. 12958: N/A TAGS: EINV ECON KPRV PINR JO SUBJECT: SOCIAL SECURITY CHAIR WANTS TO SOLVE "PENSION CRISIS" EARLY REF: A. 2003 AMMAN 793 ¶B. 2003 AMMAN 6945 ¶1. (SBU) SUMMARY: The sustainability of the national pension fund is a source of concern to Social Security Corporation (SSC) chairman Khalid Al-Wazani - but he has a plan to address these problems. There is progress on the SSC,s proposed buyout of the stake held by the Arab Potash Company in Jordan Bromine. Nevertheless, the continuous expansion of SSC investments in Jordan may partially counter the positive trend of a GOJ withdrawal from an activist role in the economy. END SUMMARY. -------------- THE SSC AND WAZANI -------------- ¶2. (SBU) The SSC, founded in 1978 and requiring contributions since that time from all private companies employing five or more people, has recently seen its scope expand dramatically with the addition of coverage of all civil government employees to the system in 1995 and the addition of all Jordanian Armed forces (JAF) employees in ¶2003. The Corporation now holds the assets of 1.3 million beneficiaries and participants, around a quarter of Jordan,s total population and its entire labor force. The SSC is close-mouthed about the amount of funds under its purview, but it takes 16.5 percent of each worker,s pay (11.5 percent from the employer and 5 percent from the employee),giving it a great deal of clout in the Jordanian market. ¶3. (SBU) This clout is wielded by a 14-person Board of Directors, which has final approval authority over all investment recommendations made by the SSC,s investment side, the statutorily separated Social Security Investment Commission (except for recommendations that the Corporation invest outside Jordan, which must be approved by the full Jordanian Cabinet). The Board is chaired by the Minister of Labor, and Wazani serves as Vice Chairman; the remainder of the seats are equally divided between employers (represented by members drawn from the Chambers of Commerce and Industry), employees (represented by labor organization members),and government (represented by the secretaries general of four ministries). Wazani also acts as Vice Chairman of the Board of the Social Security Investment Commission (SSIC). -------------- MAKING THE SYSTEM SUSTAINABLE -------------- ¶4. (SBU) Wazani is clearly enjoying his new job, exulting over the high pay and the influence that the position wields. In early July, however, he told that he was concerned by a problem familiar to pension managers elsewhere: the demographic transition. In Jordan, Wazani says, this transition is a long way from seriously affecting the SSC. An actuarial study recently commissioned by the Corporation found that the "zero point," at which contributions and interest revenues equal pension payouts, will not come until ¶2051. Nevertheless, Wazani feels that now is the time to act to delay the "zero point" for as long as possible. He sees several gaping holes in the system that he feels should be eliminated in order to make the financing of the system more sustainable. ¶5. (SBU) The most pressing problem, as Wazani sees it, is the attractiveness of early retirement. Jordanians are currently allowed to retire at 45 and draw around 70 percent of the benefits that they would receive were they to work to Jordan,s full retirement age of 60. They are then taking their skills and moving to the Gulf, while continuing to draw their pensions because they are not on employment rolls in Jordan. The perverse incentives created by this system, Wazani argues, thereby drain Jordan both of financial and human capital. Wazani therefore proposes two changes: first, that the early retirement age be raised to 50, and second, that the penalty in terms of pension benefits for early retirement be much steeper. ¶6. (SBU) A second loophole that Wazani feels he should close is the SSC rule indexing benefits to a participant,s final salary, regardless of his/her contributions throughout his/her previous life. This rule, Wazani said, has led companies to begin giving raises to their employees immediately before retirement in order to inflate their pension benefits. ¶7. (SBU) Making these proposals into reality will require parliamentary approval; Wazani is confident that he will be able to push them through. He believes that as long as he is able to paint the proposals as necessary protections for the children of today,s SSC participants and beneficiaries, they will be assured passage. -------------- INVESTING PHILOSOPHY -------------- ¶8. (SBU) While he says that he believes that the SSC should be able to invest monies overseas without any higher approval if it wishes to do so, Wazani prefers to invest in Jordan. This inclination should reinforce the expanding SSC profile in Jordan,s economy, an already existing trend that has seen the SSC gain large positions in virtually all of Jordan,s major corporations and developments. The SSC has stakes of between 10 and 30 percent in almost all if Jordan,s major banks, 30 and 60 percent in Jordan,s two major publishing companies, and major stakes in Jordan Telecom (JT),Arab Potash Company (APC),Jordan Petroleum Refinery Company, Jordan Phosphate Mining Company, and other pillars of the Jordanian economy (many of which, as in the cases of JT and APC, had recently been privatized themselves by the GOJ). The SSC is also the owner of hotel properties throughout Jordan (though the SSIC seems decidedly unenthusiastic about these properties - septel). ¶9. (SBU) Wazani gave the SSC,s actions in the case of Jordan Gulf Bank as a model of the stabilizing role that he believes the Corporation should play in the market. The bank, which took very heavy losses in the Shemaileh scandal (Reftel A),had been in limbo for over a year, as the GOJ tried to decide what to do with it. According to Wazani, the fund managers felt that the bank was solid, apart from a few bad managers. The Board therefore took the decision to give a fresh infusion of capital into the bank, increasing its stake in the bank to 25 percent. This step reassured the other investors, causing them to come back in and increasing the value of the bank, and SSC,s stake in it, by 50 percent. -------------- PROGRESS ON JORDAN BROMINE -------------- ¶10. (SBU) Wazani says that the SSC is looking very seriously at purchase of APC,s 50 percent stake in Jordan Bromine, an action requested by the joint venture,s other partner, U.S.-based Albemarle Company (Reftel B). He says, however, that the price he has been quoted by the APC is far too high - around twice the amount of APC,s investment to date in the company. He has been in contact with Min. Halaiqa on the issue and had sent out initial feelers to APC General Manager Issa Ayyoub. ¶11. (SBU) (NOTE: ECON followed up this issue in meetings with Dr. Mohammed Adeinat, the Chairman of the Board of the SSIC, and Hatem Al-Shahed, the SSIC CEO. Shahed noted that the SSIC had deliberately refrained from approaching the APC, instead waiting on the APC to contact the SSIC in order to gain an advantage in price negotiations. Neither Adeinat nor Shahed appeared to be aware of Wazani,s approaches to the APC. Adeinat said that Minister of Trade and Industry Dr. Mohammed Halaiqa had mentioned his interest in a buyout two months previously, but that Ayyoub had not called Adeinat until July 11. Adeinat estimated that within a month, the two sides would finalize an offer, and that the purchase could be completed, if approved, within two months. END NOTE.) -------------- COMMENT -------------- ¶12. (SBU) While the Social Security Corporation appears to be fiscally solid for a long time to come, passage of Wazani,s proposed reforms will be a positive step for the country and the firm. Such reforms may however be more difficult to pass than Wazani seems to believe. ¶13. (SBU) We should also view with caution the large and increasing role of a quasi-governmental fund in Jordan,s economy. Wazani,s proud story of what was essentially a bailout of Jordan Gulf Bank (or, in an example more positive to U.S. interests, the fund,s possible future role in Jordan Bromine) should serve as a reminder of the extent to which the GOJ,s political considerations might affect the SSC,s investment policies. This influence should make the fund,s very large stakes in Jordan,s media companies of special concern. One possible cure for the problem may be to permit greater international investment by the SSC. Econoffs have heard complaints more than once from Investment Unit employees that the SSC is already invested as deeply as is prudent in virtually every good investment in Jordan, and as funds continue to flow in, the fund is forced to put money into more marginal investments instead of diversifying into other markets. Such a trend is good neither for the SSC nor for the Jordanian economy as a whole. Despite his protestations to the contrary, Wazani probably understands the downside of an exclusively domestic focus for the SSC. Post will continue to explore options for constructive cooperation with the SSC in pursuit of these goals. ¶14. (SBU) (BIO NOTE: Wazani, a former Fulbright recipient, has held his current position since the beginning of 2004. Prior to this, he held a job as Director-General of Customs from November 1999 to June 2001, and acted as Director of the Economic and Development Division of the Royal Court (a job previously held by current Minister of Planning and International Cooperation Bassem Awadallah) from July 2001 until the beginning of 2004. END BIO NOTE.) HALE