Identifier
Created
Classification
Origin
04PANAMA1883
2004-07-23 14:42:00
UNCLASSIFIED
Embassy Panama
Cable title:  

PANAMA'S PENDING SOCIAL SECURITY CRISIS: A

Tags:  ECON EFIN ELAB PM ECONOMIC AFFAIRS 
pdf how-to read a cable
This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 03 PANAMA 001883 

SIPDIS


TREASURY FOR JJENKINS
USDOC4332/ITA/MAC/WH/OLAC/MGAISFORD


E.O. 12958: N/A
TAGS: ECON EFIN ELAB PM ECONOMIC AFFAIRS
SUBJECT: PANAMA'S PENDING SOCIAL SECURITY CRISIS: A
CHALLENGE FOR THE INCOMING TORRIJOS ADMINISTRATION

UNCLAS SECTION 01 OF 03 PANAMA 001883

SIPDIS


TREASURY FOR JJENKINS
USDOC4332/ITA/MAC/WH/OLAC/MGAISFORD


E.O. 12958: N/A
TAGS: ECON EFIN ELAB PM ECONOMIC AFFAIRS
SUBJECT: PANAMA'S PENDING SOCIAL SECURITY CRISIS: A
CHALLENGE FOR THE INCOMING TORRIJOS ADMINISTRATION


1. Summary. Reforming Panama's actuarially bankrupt social
security fund (CSS),which provides pensions, medical
services, and workers' compensation to over 60 percent of
Panama's population, will be one of the biggest and earliest
challenges to face the incoming Torrijos administration.
Plagued by increasing claims and decreasing contributions,
the system has had to rely heavily upon its reserves, leaving
three of its four programs with large deficits. Without
reforms to the system, CSS's second largest program,
Maternity and Health Services, will exhaust its reserves in
three years and CSS's largest program, Disability, Old Age,
and Death (IVM),will be bankrupt in an estimated 8-10 years.
Most of the major problems stem from current entitlements.
For example, men can retire at 62 years and women at 57 years
after only 15 years of contributions. Consequently, a
Panamanian man who retires will conservatively cost the
program over two times what he contributed and a woman
approximately four times what she contributed. The incoming
Torrijos' administration, set to enter office on Sept. 1, has
pledged to fix the CSS but its success will require
considerable political will and capital. Indeed, this is a
hot-button issue that strikes a populist chord in virtually
every sector of Panamanian society. End summary.


--------------
An Overview of the System
--------------



2. The Caja de Seguro Social (CSS),Panama's social security
system, is composed of four programs: (1) the Disability, Old
Age, and Death (IVM) program provides pensions to Panamanians
who contribute a percentage of their salary for at least 15
years as well as to disabled Panamanians; (2) Maternity and
Health services program provides general medical care to
Panamanians that register for the system; (3) Professional
Risks program provides medical care and pensions for workers
injured while on the job; and (4) Administrative program
manages the entire system. These programs encompass
approximately two million people, or two-thirds of Panama's
estimated 3.1 million (2003) population. In 2003, 69.8
percent of Panama's total population were members of the

CSS's healthcare system. Of these, 779,000 were active or
retired contributors to the CSS and 1.2 million were
dependents (i.e., spouses and children of contributors to
CSS). Also in 2003, 60.7 percent of Panama's economically
active population of 1.25 million were members of the IVM
program. Panama's largest public entity, the CSS comprises
20 percent of Panama's total budget and has an annual budget
of approximately USD 1.3 billion. It employs 24,000 people;
slightly less than half (approximately 10,000) of its workers
are doctors, nurses, and technical assistants needed to staff
CSS hospitals and clinics.



3. The CSS ended 2003 with a deficit of USD 67,196,177, an
increase of over 300 percent from its 2002 deficit. (Note:
In 2002, the CSS had a deficit of USD 18,554,363. End note.)
The only program not currently in the red is the
administrative program; it finished 2003 with a surplus of
USD 5,748,309, a slight decrease from its 2002 surplus of
approximately USD 8.5 million. IVM's deficit increased by
USD 34,271,779 in 2003 to end at USD 43,693,090. The
Maternity and Health Services' program ended at USD
25,791,134, up slightly from its 2002 deficit of 23,516,657.
The Professional Risks' program had entered into its first
deficit in 2003, to end the year with a loss of USD
3,460,262. At the end of December 2003, the CSS conducted an
actuarial valuation of the institutional reserves for the IVM
and Professional Risks programs. The IVM had an actuarial
deficit of USD 2.78 billion whereas the Professional Risks
program had an actuarial surplus of USD 94.54 million.


--------------
What Went Wrong
--------------



4. The first indications of an impending financial crisis in
the CSS were in 1980; this was a direct result of the 1975
political decision to lower the retirement age to 55 for men
and 50 for women. Created in 1941, the CSS's original
retirement age for both men and women was 60 years of age;
the average life expectancy was 64 years in Panama at that
time. By 1975, life expectancy had risen to 69 years. Faced
with economic challenges because of increased demands to its
system in 1980, GOP officials implemented a plan that used
the money intended for Panamanian workers as the second
payment of the required 13-month bonus and used this money to
fund projects designed to add revenue to the IVM.
Consequently, Panamanian workers were paid only two-thirds of
their mandated 13-month bonus. This measure was repealed in

1983. In 1990, the CSS Board of Directors announced an
actuarial deficit of USD 800 million, with the system
possibly collapsing in 1996. Partial measures, including
increasing the retirement age (62 years for men; 57 years for
women) and eliminating anticipated retirements (those by
nurses or teachers who may retire after 20 years of service,
regardless of age),were passed in 1991 and have helped to
extend the life of the system but only by a few years. The
GOP does contribute to the CSS but only through an annual set
transfer of USD 50 million (or 0.4 percent of GDP); the
government does not finance the CSS's below-the-line deficit.
The CSS finances its deficit through a reduction in its
reserves.



5. The IVM problems present the biggest concern for most
Panamanians as it is their only source of retirement income.
In 2002, program outflows increased by USD 30.5 million while
contributions increased by only USD 5.1 million. This breach
continues to widen significantly. These increasing demands
are a result of three factors: (1) a higher life expectancy;
(2) insufficient contributions to CSS; and (3) limited
interest earned on the program's reserves. Increased medical
technology and access to medical facilities have caused the
average life expectancy to rise to the current 72 years of
age for men and 77 years of age for women in Panama.
Panamanian law stipulates the retirement age for men to be 62
years of age and women to be 57 years of age. The system has
not addressed this increase in demand; by law, Panamanians
are required only to contribute to the CSS for 15 years in
order to receive a pension. Pensions are not
inflation-adjusted. Consequently, retirees are absorbing
more money than they have contributed to the CSS. For
example, if a man who makes a USD 500 monthly salary
contributes to the CSS for 15 years, he will have given the
system a total of USD 13,763. He is entitled to received 60
percent of his salary, or USD 300 a month from CSS. Using a
conservative calculation of 7.5 percent interest and 72 years
of age life expectancy, he will receive approximately USD
49,763 in benefits, costing the CSS USD 36,000. A woman with
the same salary and payment rate will cost the CSS USD
58,237. Finally, Panamanian law requires IVM reserves to be
placed in the Banco Nacional rather than faster growing (and
arguably more speculative) funds. These sizable reserves
earn less than 2 percent in annual interest. While the IVM
program maintains the largest deficit, CSS Director of
Finances, Benigno Amaya, maintains its reserves and
contributions can keep it operational for the next 8-10
years.



6. The CSS's healthcare programs are in severe financial and
organizational crisis. Both the Maternity and Health
Services and Professional Risks' programs are plagued by
inefficient appointment systems, deficient and low quality
patient service, and lack of medical supplies. The Maternity
and Health Services program's reserves of USD 75 million may
only be sufficient for the next three years. Experts also
argue that CSS and Ministry of Health (MOH) healthcare
efforts are duplicative because both maintain separate
healthcare facilities and offer general heathcare services to
the public.



7. Lengthy, bureaucratic claims processes and lower pensions
associated with the Professional Risks' program have caused
additional strain on the Maternity and Health Services
program because many workers with minor on-the-job injuries
choose to receive care under this program. In general, these
patients receive faster service through this fund and higher
pensions through the IVM program. The Professional Risks'
program only pays a pension equal to 60 percent of the
affected's salary; typically, people can earn a higher
pension (usually 70 percent) if they contribute more than 15
years to IVM program. As a result, the Professional Risks'
program assumes only 10 percent of all healthcare costs
incurred by the CSS. It encountered its first deficit in
2003 due to increases in material and supply costs as well as
personnel expenses. On average, the Professional Risks'
program registers 17,000 cases annually with the majority
being serious accidents or illnesses, all easily attributed
to on-the-job injuries.



8. Finally, while not technically "in the red," the
Administrative program is confronting a number of challenges:
obsolete processes and systems, inefficient collection
methods, and a seemingly endless payroll. With a workforce
of 24,000 and growing, experts contend the CSS could downsize
its administrative staff without losing productivity;
however, its medical workforce of 10,000 must be maintained
or even augmented to continue to provide adequate care.


--------------
Possible Options
--------------



9. Repairing the CSS will require substantial changes and
compromise amongst the three funding entities: the GOP, the
employers, and the workers. Technically, in order to reform
the system, a proposal must go before the Board of Directors
at the CSS for its approval. Once obtained, the proposal is
presented to the Executive branch (the President and his
cabinet) for its approval. The proposal is then presented to
the Legislative Assembly. This body will change or modify
the CSS law. The modified law is then sent back to the
President for final approval. Once approved, the law enters
into force. However, before this process can begin, a
consensus on how to reform the system must be achieved. In
2001, President Moscoso created "el Dialogo de la Mesa" or a
roundtable working group to assess the CSS's problems and
offer solutions.



10. The Dialogue was composed of members of the CSS, GOP,
political parties, and civil society (including both
employers and labor representatives). Four working groups
were created to correspond to the system's four programs.
Consensus had to be reached before recommendations were put
forth to the GOP. Both the Administrative and Maternity and
Health Services programs were able to reach consensus in some
areas; the Professional Risks and IVM groups made advances
but were unable to achieve consensus on any issue. In
December 2003, the Dialogue presented its findings to the
Legislative Assembly. The Assembly has not yet taken any
steps to implement the group's findings.



11. The Administrative dialogue agreed on the need to
modernize current practices and procedures, automate the
CSS's information system, improve collection methods, and
increase investment returns. These changes would increase
transparency and efficiency within the CSS. The Maternity
and Health Care Services working group recommended a new
national system of health, in coordination with MOH, be
adopted. It also recommended a new model of patient care
should be adopted, including direct doctor-patient
interaction. Finally, this group stated that modernizing and
automating the medical records system would be integral to
ensuring this program's future success.



12. The Professional Risks' working group made advances on
the role of prevention, revisions of benefits, better patient
attention, and improved administration. However, the group
was unable to reach a consensus on the definition of salary
and what benefits, if any, should be included in that
definition. While no consensus was reached, the IVM working
group made advances on the existence of a problem, some
definitions, the use of actuarial tools, and the need to
update the program's database. The major source of
contention among the group's members remained the key issue
of how to finance the deficit.



13. Various proposals to finance the IVM were addressed.
Variables at large in these proposals included: the age of
retirement, the minimum years required to contribute, the
percentage of contribution, the number of years used as a
base to calculate pension, the maximum amount of pensions,
amongst others. Some options include: increasing the
contribution rate, increasing the retirement age, and
investing reserves more aggressively. However, most
proposals lean heavily toward either the employer or the
employee. Neither group has been able to agree on a plan
with shared transition costs.
MCMULLEN