PANAMA'S IMPENDING SOCIAL SECURITY REFORMS: A

UNCLAS SECTION 01 OF 03 PANAMA 000914

SIPDIS

USDOC4332/ITA/MAC/WH/OLAC/MGAISFORD

E.O. 12958: N/A
TAGS: ECON EFIN ELAB PM LABOR HUMAN RIGHTSPOLMIL
SUBJECT: PANAMA'S IMPENDING SOCIAL SECURITY REFORMS: A
DEFINING MOMENT FOR PRESIDENT TORRIJOS

REF: A. A) 2004 PANAMA 01883

B. B) PANAMA 810

C. C) PANAMA 89


1. (U) This message is sensitive but unclassified; please
protect accordingly.


2. (SBU) Summary and Comment. Actuarially bankrupt, Panama's
Social Security System (CSS),which provides pensions and
medical benefits to the majority of Panamanians, continues to
operate through the use of its reserves. Without major
changes to the system, the pension fund, the largest of the
social security system's programs, will exhaust its reserves
in 2012. While almost all Panamanians agree on the need for
reform, no public consensus has been reached on how to fix
the system. As public debate rages on, the Torrijos
Administration remains mum on its plans, stating only its
intention to fulfill its campaign promise of reform.
Community and civic leaders fear these reforms, regardless of
their content, could spark rioting and civil unrest. Unions
have begun organizing and carrying out protests (peaceful
thus far) against certain reform measures. The impending
reforms to the CSS will be a defining moment for the Torrijos
Administration as they will require political will and
expenditure of political capital. Complicating matters, many
within the Torrijos Administration believe that a successful
referendum on Canal expansion will depend on a broadly
acceptable Social Security reform. End summary and comment.

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The Numbers: How bad is it really?
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3. (U) The Caja de Seguro Social (CSS),Panama's Social
Security System, provides retirement pensions, medical
services, and workers' compensation to approximately
two-thirds of Panama's population through its four programs:
(1) the Disability, Old Age, and Death Program (IVM); (2)
Maternity and Health Services Program; (3) Professional Risks
Program (i.e., Workers' Compensation); and (4) Administrative
Program (i.e., the program that oversees the administration
of the entire system). Plagued by decreasing contributions
and increasing claims in recent years, three of the four
programs (IVM, Maternity and Health Services, and
Professional Risks) routinely show a deficit and have had to
draw on their reserves to cover costs. However, failing new
reforms, reserve funds for the two biggest programs, IVM and
Maternity and Health Services, will be exhausted in 2012 and
2006, respectively. The Administrative Program, the system's
only program operating in the black, will begin to show a
deficit in 2010.


4. (U) Most of the system's 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.
Additionally, the CSS covers not only contributors and
retirees but also their dependents and survivors, who may
include children under the age of 18 (25 if the child is a
student) and parents over the age of 60.


5. (U) The average Panamanian utilizes the IVM program as his
sole source of retirement income and Maternity and Health
Services as his health care program. Accounting for over
half of CSS spending, the IVM program registered an
accumulated actuarial deficit of more than USD 4 billion at
the end of 2004 to fully cover the approximately 145 thousand
current retirees or patients. (Note: Annual spending for
2004 was USD 549 million and the 2004 deficit of the IVM
program was approximately 42 million. End note.) The
program operates on the "pay as you go" assumption that,
within every generation, there will be more younger workers
contributing sufficiently to the program to cover the
pensions of the retired workers. However, as life expectancy
rates continue to rise and thus lengthen pension annuities,
the IVM program has seen an average increase of 4.15 percent
of the number of retirees between 1999 and 2003, but only an
increase of 0.62 percent of the number of contributors to the
system during the same period. The CSS estimates that the
ratio of contributors to each pensioner will fall from 5.16
in 1999 to 3.36 in 2014. (Note: this ratio was 4.49 in 2003.
End note.)


6. (U) Almost 70 percent of Panamanians receive some or all
of their health care needs through the CSS. The Maternity
and Health Services Fund total 2004 spending reached USD 380
million, which resulted in a deficit of USD 22 million and
left a meager USD 43.4 million in its reserve funds. Without
reforms, this fund will be exhausted in 2006, resulting in
the reduction of multiple health programs and personnel.
Currently, over 12,600 people are employed by this program
which operates 15 hospitals, 27 promotional centers and
preventative health programs, and 12 local primary health
centers.


7. (U) The Professional Risks program provides access to
worker compensation benefits to over 600,000 Panamanians.
Annual spending increased from USD 38.3 million to 70.1
million between 1999 and 2004 and projections show the
deficit could reach USD 24 million by 2014. This program
first showed a deficit in 2003 and will exhaust its resources
by 2010.


8. (U) The Administrative program, which provides all
operational support for the system, currently operates "in
the black," and is expected to continue to do so until 2010
when costs are expected to exceed income. Costs of this
program rose to USD 47.5 million in 2004 from 36 million in

1999. The number of workers in this program has increased an
average of 7 percent per year between 1999 and 2003,
resulting in higher salary and benefit costs to the program.

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The GOP: Its Strategy and Concerns
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9. (SBU) Entering office on September 1, 2004, President
Martin Torrijos outlined an ambitious agenda of zero
corruption, fiscal reform, social security reform, and canal
expansion. In February 2005, the Torrijos Administration
followed through on fiscal reform, enacting legislation that
tightened government spending and increased taxation (Reftel
C). While not popular, these reforms were passed and
implemented quickly without much civil backlash, as some had
feared. However, the Torrijos Administration faces a steep
uphill battle to win public approval of the upcoming social
security reforms. Long-known to be an actuarial time bomb,
the CSS nonetheless is the sole source of retirement income
for many Panamanians and, until now, has been the proudest
achievement of Panamanian public policy. Its reform,
necessary in lieu of collapse, has sparked a volatile public
debate over how to fix the system. Complicating matters, the
GOP believes a successful CSS reform is essential to a
successful canal expansion referendum.


10. (SBU) Recent media reports indicate the CSS draft reforms
could be announced later this month. However, Torrijos and
his advisors have been tight-lipped about the reform's
timeline and components. Many supporters fear this lack of
dialogue is unnecessarily intensifying public debate, by
giving credence to the criticism that the GOP has plans to
privatize the CSS. Some GOP members fear that opportunistic
unions will cause mass protests and rioting. This fear is
not ungrounded as some labor unions have already begun
peaceful protests against potential CSS measures (i.e.,
raising the retirement age, increasing contribution level,
among others). Heightening the tension is the memory of
September 2003's mass, violent protests over the firing of
union-backed CSS director Juan Jovane.


11. (SBU) Widely believed to be leading the Torrijos
Administration's CSS reform plans are Rene Luciani, Director
General of the CSS, Minister of Health (MOH) Camilo Alleyne,
and Minister of Economy and Finance (MEF) Ricaurte "Catin"
Vasquez. Experienced and highly regarded in their respected
fields, none of the three are seasoned political operatives.
Some PRD supporters fear this lack of political experience
will hurt the reform process as the trio is too focused on
"crunching the numbers" rather than planning for the
inevitable damage control. Luciani, appointed by President
Torrijos for a 5-year term as CSS's Director General, is a
former Vice Minister of Planning and Economic Policy (now a
part of the Ministry of Economy and Finance and CLICAC
(Panama's Fair Competition Authority) Commissioner.


12. (SBU) Rumors of the proposed reforms abound and only a
select few have seen the draft bill. PRD legislator and
government-employee labor leader Leandro Avila, told EmbOff
that "reforms are needed, but the GOP is not even counting on
us to campaign in favor of them. They (GOP) do not keep us
(i.e., the legislators) posted." Dr. Carlos Abadia, a
prominent civic leader and former Vice Minister of Health,
believes that the bill proposes, interalia, increasing the
retirement age, contribution years, and monthly payments by
the employers and employees.

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The People's Voice: Unions and Civic Leaders Speak Out
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13. (SBU) Panama's sometimes violent unions (Reftel B) are
becoming increasingly vocal within the debate over social
security reform. Most major labor organizations support the
"Popular Movement" 25-point reform proposal, which favors
transferring state-owned property and businesses to the CSS
(i.e., canal stock, former canal properties),increasing
social security taxes and compliance, and taxing
"representational funds" (which were taxed for the first time
in the recent fiscal reforms). (Note: Representational funds
form a substantial portion of many professional government
and public sector workers' salaries and are used to cover
meals, events, and conferences. End note.) While Labor
Minister Rivera asserted GOP property would not make a dent
in the CSS problem, he told EmbOff that the union call to
increase compliance within Panama's burgeoning informal
sector was valid.


14. (SBU) While Panama's major union umbrella organization,
CONATO (National Council of Organized Workers),signed onto
and continues to support the "Popular Movement" reform
proposals, its members are split over protest tactics and
have already held separate demonstrations. Most CONATO
members, aligned with and/or financially supported by the
ruling PRD, are willing to "play ball" and follow a script of
peaceful protest, negotiation, and concession.


15. (SBU) On the other hand, CONATO member CONUSI
(Confederation of Independent Labor Unions) takes the lead of
its largest member, SUNTRACS (Sole National Union for
Construction and Related Industry),a well-organized,
financially and politically-independent Marxist union, which
has been at the center of past violent protest (Reftel B).
CONUSI Secretary General Gabriel Castillo told EmbOff that it
will use protests, marches, and, if necessary, street
closures and a general strike to push its proposals.
SUNTRACS Secretary General Genaro Lopez is also pushing a
referendum on the GOP's soon-to-be-announced proposal, a
demand that may equate to a rejection of any proposal.


16. (SBU) Comment. The bottom-line for most unions and the
general populace may be preventing an extension of the
retirement age. In a country where many workers still begin
manual labor in their teens, retirement after more than 35
years of physical labor at age 62 (for men or 57 for women)
may seem to them not only justified, but medically necessary.
Regardless of which reforms are implemented, there is a
sector within Panamanian civil society that will fight
against the changes. What is not clear, however, is the
level of violence, if any, that will be employed by the
protesters. A senior GOP official told the Ambassador that
the proposed reforms are not as severe as the unions are
bracing for. End comment.
WATT