The Cabinet Council met on December 4 to receive a 40-page report on the nation’s social security system, an alliance of labor and leftist groups called for a December 14 march against cutbacks in benefits, business leaders are warning that they haven’t been properly consulted and won’t accept higher payments and Social Security Fund (CSS, or Seguro) director René Luciani is warning that he’ll recommend that the government do what needs to be done regardless of the political pressures. For a veteran observer of Panamanian politics, there’s nothing odd about any of that.
But it might seem strange to those who don’t know the peculiarities of our political culture and who don’t know what has gone before, given that neither the contents of the report that the cabinet received nor the Torrijos administration’s plan to address what most admit is a problem have been made public.
The CSS is actually an institution with several different funds. The two biggest are the retirement and disability pension fund and the program that runs the public health care system for those who are insured. (The Ministry of Health runs a parallel public health care system, which includes, among others, such facilities as Santo Tomas Hospital and the adjoining Children’s Hospital, and the National Oncological Institute that now occupies part of the old Gorgas hospital complex.)
Vast swathes of the Panamanian population, most notably almost everybody in the indigenous comarcas and increasingly those who live in the informal urban economy, have little or nothing to do with Seguro Social, either as payers of its withholding taxes or recipients of its benefits. Since an economic downturn that began in mid-1998 and bottomed out in 2002, with only a slow recovery since, there has been a marked increase in the underground economy that pays no taxes or social security withholding, as people who once had regular jobs now sell things in the street or work out of their homes. This informalization of the economy has manifested itself first and foremost as a decline in the Social Security Fund’s revenues, but increasingly over time it is and will be also reflected on the other side of the ledger in lower benefit entitlements.
For a long time, under governments of many stripes, Seguro has been a cash cow.
The flagrantly criminal milking tends to happen most often in the health care field, with many cases of outright theft, rigged purchasing and contracting that drives costs up, and payroll abuses that range from doctors who don’t put in all the hours for which they are being paid to phantom employees whose paychecks end up in administrators’ pockets. This is not to say that there are no controls, but for decades these kinds of stories have been popping up in the news from time to time, with sufficient frequency that it must be concluded that part of Seguro's problem stems from adverse phenomena in the overall Panamanian culture.
The “legal” but probably more debilitating milking has been mostly at the expense of the retirement fund, against which successive governments have repeatedly borrowed, usually by selling the fund minimal interest bonds. In recent years, the social security system itself has dipped into retirement reserves to subsidize the health care system.
Various economists, institutions and other analysts --- each with his, her or its own biases --- have looked at the situation and there is a general consensus that if nothing is done and the system goes on behaving the way it has, in less than 10 years there will be a problem meeting the nation’s public pension obligations. At the moment, when one looks at the pension fund’s present reserves and future obligations, there is a deficit of about $3 billion if it is assumed that present income trends and benefit levels continue.
Understand, however, that there is wide disagreement about just how bad the situation is and that there are ideological forces skewing most of the so-called objective analyses.
For example, international lenders are dominated by political and economic dogma coming from the United States and tend to have a one-size-fits-all remedy for all things, which is popularly known as privatization. The Panamanian corporate mainstream media have interlocking directorates with the national banking and insurance industries, which in turn have since the middle of the Moscoso administration been advocating the retirement fund’s management by combinations of themselves. The left is well represented in academia and that influence is apparent in the analyses coming out of the universities.
Possibly the crudest arguments are the graphic depictions of the situation that are shown in the nation’s most respectable daily newspapers, La Prensa and El Panama America. They show a constantly escalating deficit, with no end in sight --- by beginning in 1998 or 1999, extrapolating hard times indefinitely into the future and carefully selecting which data to illustrate. The likely effects of the economy recovering its health and the experiences of past ups and downs in the business cycle are thus ignored in these depictions.
But even the left, which took to the streets in protest marches, public sector strikes and rioting last year when the business faction on the Seguro Social board of directors was pushing a “three pillars” pension privatization plan and the leftist economics professor Dr. Juan Jované was fired as the top CSS administrator, implicitly admits that there’s a problem. As an alternative to the business sector’s proposals, last year labor representatives proposed that the current deficit and longer-term problems with CSS be resolved by cracking down on fraud, waste and abuse in the system, smarter and more profitable investment of the fund’s reserves and transferring the remaining real estate assets in the former Canal Zone to Seguro.
The most serious and least partial analyses indicate that, despite some significant short term problems in other areas, Seguro’s severe long-term structural shortfall is with the retirement pension fund.
There are political constraints. In the campaign leading up to the May elections every political party except for supermarket baron and former CSS director Ricardo Martinelli’s Cambio Democratico promised not to privatize Seguro. Semantic games about the meaning of “privatization” can always be played, but anything that much resembles the transfer of CSS assets to the private financial sector --- either in the form of ownership or as the right to manage them --- would likely set off a political crisis that would be difficult to control. Moreover, this country’s economic and political elites have their own ideas about what to do with remains of the former Canal Zone and virtually none of these ideas include paying full market value for the real estate, to the CSS or anyone else.
That narrows the options to cutting benefits, raising contributions or a combination of these. Even then, increases in withholding will have the effect of driving marginal businesses into bankruptcy or the informal economy, so if the increase is big enough, the immediate effect would be lower rather than higher CSS revenues. And if benefits are slashed deeply enough, patients no longer eligible for care at Seguro hospitals would start showing up at Ministry of Health facilities, old timers without pensions would start looking to the Ministry of Housing to give them someplace better than a cardboard box on the sidewalk to sleep and so on, so that the CSS saving would be offset by greater expenses to other parts of the government.
Within those narrowed parameters, therefore, the government is likely to act. Most frequently mentioned are an increase in the retirement age, new ways of calculating pension benefits that on the whole reduce them, and small raises in the payments that businesses and workers must make to the CSS. Any of these measures, alone or in combination with others, will spark protests from somebody.
And thus the nation awaits Martín Torrijos’s first major economic decision as president, and very likely the end of his administration’s honeymoon with public opinion.
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