UNCLAS SECTION 01 OF 02 PANAMA 002373

SIPDIS

STATE FOR WHA/CEN - SCHIFFER
ALSO FOR WHA/EPSC
COMMERCE FOR ITA/MAC/WH/OLAC - GAISFORD

E.O. 12958: N/A
TAGS: ECON EFIN ELAB PGOV PREL PM ECONOMIC AFFAIRS
SUBJECT: DIALOGUE FINDS CONSENSUS ON SOCIAL SECURITY REFORM

REF: PANAMA 1352 AND PREVIOUS


1. (U) THIS MESSAGE IS SENSITIVE BUT UNCLASSIFIED. PLEASE
PROTECT ACCORDINGLY.

SUMMARY
--------------


2. (SBU) According to Second Vice President Ruben
Arosemena, Panama's National Dialogue on Social Security
(Caja de Seguridad Social - "CSS") achieved consensus on
reforms aimed at restoring the financial viability of the
CSS system. Second Vice President Ruben Arosemena told ECON
and POL Chiefs Dec. 2 that the GOP worked to ensure a
success because "the governability of the country was at
stake." The National Assembly will likely approve the
package before January, as the deal represents a hard-won
consensus among key business, labor, and civic leaders, as
well as GOP promises to make CSS self-sustaining -
eventually. The CSS Dialogue has strengthened Torrijos'
political hand, eroded support for top GOP antagonists, such
as FRENADESSO, and gives the GOP added momentum to pursue
other key economic goals such as a bilateral Free Trade
Agreement (FTA) with the U.S. and possibly expansion of the
Panama Canal. But the agreement will cost the GOP a lot of
money. The price for the accord is a GOP commitment to
"temporarily" make up a projected $7.2 billion shortfall in
the CSS retirement account over the next five decades, which
the already cash-strapped government maintains in can
handle. End summary.

National Dialogue Delivers Politically Viable Approach
-------------- --------------


3. (U) After five months and 89 sessions, Panama's National
Dialogue on Social Security (Caja de Seguridad Social -
"CSS") delivered an agreement among GOP, business leaders,
labor, and civil society on how to reform the existing CSS
to keep it from going bankrupt. The Torrijos administration
convened a 90-day National Dialogue in late June to defuse
growing public unrest over the GOP's May 2005 passage of Law
17 on CSS reform (reftel). At the same time, the GOP
suspended implementation of Law 17, which would have, inter
alia:

--

raised retirement ages from 57 to 60 for women and from
62 to 65 for men;
-- increased payroll contributions to the CSS from 7.25% to
9% for employees and from 10.75% to 13.25% for employers;
and,
-- raised the minimum period of contributions from 15 years
to 25 years for eligibility.


4. (SBU) Negotiations advanced fitfully, forcing the GOP to
extend the original 90-day deadline. The leftist-inspired
"National Front for Defense of Social Security"
(FRENADESSO), which was one of the main forces behind last
June's street demonstrations against Law 17, joined the
Dialogue on July 5 and promptly disrupted its proceedings
with chants of protest. FRENADESSO's aggressive tactics and
unhelpful antics prompted other Dialogue participants to
accuse them of attempting to sabotage the process.
Following several weeks of difficult negotiations,
FRENADESSO and the construction workers' union (SUNTRACS)
abruptly quit the process on November 8. This effectively
cleared the way for the remaining negotiators to announce an
apparent breakthrough on Nov. 11, with agreement on a mixed
system (individual accounts combined with CSS payouts). By
Nov. 20, the Dialogue concluded with consensus on several
contentious points, including:

-- maintaining retirement ages at 57 for women and 62 for
men;
-- set employee payroll contributions at 6.75% in 2007,
going up gradually to 9.25% in 2013 and employer
contributions at 2.75% in 2007, rising gradually to 4.25% in
2013 (Note: substantially less than under Law 17);
-- gradually raise the minimum period of contributions from
15 years to 20 years for eligibility;
-- cover contributors with income less than $500/month
through a defined-benefits program; contributors with
incomes greater than $500/month will have individual
retirement accounts and will help subsidize the defined-
benefits program; and,
-- raise caps on maximum pensions from $1,500/month to
$2,500/month.

5. (SBU) Second Vice President Ruben Arosemena, who led the
GOP's participation in the Dialogue, hailed the Dialogue's
outcome as a "victory for the government and for the
country." He told Emboffs Dec. 2 that the Dialogue has
boosted the self-esteem of Panamanians, as they were able to
come together and reach consensus at the negotiating table.
Convinced that a GOP failure to manage the CSS issue would
have a negative "cascade effect" on other key initiatives,
such as possible Panama Canal expansion and a Free Trade
Agreement (FTA) with the U.S., Arosemena said the GOP was
intent on making the CSS Dialogue a success because "the
governability of the country was at stake." He expects
President Torrijos will submit a new bill based on the
Dialogue's outcome to the National Assembly this week. Most
expect the Assembly to approve the bill before January with
little or no substantive changes, given the GOP's hard-won
consensus among key business and society leaders.

GOP to Pay $7.2 Billion in "Transitional" Costs
-------------- --


6. (U) To ensure a successful outcome, President Torrijos
committed the GOP to putting $75 million/year into the CSS
starting in 2007, increasing to $100 million/year from 2010
to 2012, and to $140 million/year from 2013 to 2060. In
total, the GOP would put up some $7.2 billion over the next
five decades to cover the CSS' full transition to a mixed
system. As the GOP currently contributes only about $30
million/year to the CSS (but nothing to the retirement
program), this is a significant commitment by an already-
cash-strapped government.


7. (SBU) Vice President Arosemena expects the GOP will pay
this CSS tab through general revenues rather than through
any special mechanism. He told Emboffs Dec. 2 that the
Ministry of Economy and Finance (MEF) has assured him that
the GOP will be able to able to handle this CSS commitment.
MEF's Director of Public Policy told Econoff Dec. 2 that he
will recommend cuts in other GOP expenses to cover increased
CSS payments. He also expects that any extra GOP deficit
spending needed to cover this new CSS commitment will be
balanced by increased CSS contributions the GOP is already
seeing with Panama's growth in employment. Some private
analysts predict the GOP will shoulder its CSS commitment
through continued strong economic growth, particularly if it
advances with expansion of the Panama Canal.

Comment: CSS Win Boosts GOP Momentum & Prospects for 2006
-------------- --------------


8. (SBU) The Torrijos administration's quick passage of
fiscal and social security reforms in early 2005 sparked
intense public backlash, putting the GOP on the defensive
for much of the year. Although the GOP's original CSS
reforms may have been better formulated technically, they
proved politically unviable. The original Law 17 was
formulated to make CSS solvent for 35-40 years. The result
of the Dialogue is that CSS will achieve solvency in 50
years; meanwhile the GOP will foot the bill. The Dialogue's
success strengthens Torrijos' hand in putting forward a
consensus package likely to garner both legislative and,
more critically, popular support. The Dialogue also appears
to have eroded support for top GOP antagonists, such as
FRENADESSO, as Panamanians came to see them as more
interested in posturing than problem-solving. Coming on top
of Torrijos' regained popularity, a recent drop in
unemployment, and continued strong economic growth, the
momentum appears to have swung in the GOP's favor, putting
it on stronger footing for 2006 as it pursues a bilateral
FTA with the U.S. and possibly expansion of the Panama
Canal.

EATON