business & economy

With polls showing that most Panamanians don’t know the contents, the Torrijos administration’s revised package of reforms to the Social Security Fund (CSS) has been moving rapidly through the National Assembly toward passage. As thise article was written on December 18, the law had passed first reading before the legislature's Labor Committee and was headed to second reading before the full assembly the following week. These moves have been accompanied by small-scale protests by leftist groups and part of the labor movement, while those labor leaders who supported the changes remain mostly silent and the government insists that the plan is not its work but that of a “national dialogue” which was, however, rigged by the government. The previous reform package, Law 17, was so unpopular that it sparked a month-long strike, accompanied by large demonstrations, student riots and attacks on protesters by police and activists of the ruling PRD-Partido Popular alliance. Many of the more inflammatory changes in Law 17 were modified in the current proposal.

The legislation that’s on its way toward approval raises the number of months that one needs to pay into the CSS to qualify for a pension from the current 180 (15 years) to 240 (20 years), whereas Law 17 would have raised it to 300 months. Also scrapped was Law 17’s increase in the retirement age. The current proposal also gives an increase in benefits to current retirees that Law 17 did not.

However, these concessions in the retirement fund were in part paid for by cutbacks in disability benefits and the maternity fund. A young worker who has been on the job for less than three years and it totally disabled from an accident at work, for example, will have to spend the rest of his or her life begging because he or she will not qualify for a disability pension. (There is a theoretical right to sue the employer for damages if one can prove fault and if the judge is not bribed by the boss, but in the vast majority of cases such rights have been proven to be illusory in Panama.) According to the generally conservative El Panama America, the reforms as sent to the legislature would bankrupt Seguro’s maternity fund sometime next year, a charge that CSS director René Luciani did not deny.

However, Luciani and the Torrijos administration said that adjustments would have to be made to the details agreed by the dialogue participants and some changes have been made. The government’s plan was released as a 64-page tabloid supplement to the daily newspapers released as the proposal went to the assembly, and in committee hearing several dozen more changes were made. But after the changes, Panameñista deputy José Blandón argued, the Maternity Fund would still be in trouble by 2010.

Before the text sent by the administration to the legislature was released, FRENADESO, the umbrella group of labor unions, leftist groups and community organizations that called the strike against Law 17, estimated that the proposal approved by the dialogue would be a six-year fix for the retirement fund. Blandón said that the plan was at best a 20-year fix. Luciani hotly denied those claims, asserting that in the “two pillar” mixed system that the Torrijos administration favors the basic fund for the first $500 of monthly income --- the only fund for most Panamanian workers --- the fix would last for 15 years, and for the individual accounts for income in excess of $500 per month it would last for 60 years.

However, the administration’s calculations are based upon the payment of subsidies amounting to more than $7 billion through the year 2060, only a relatively small portion of which would be due during the Torrijos presidency. Some of these subsidies would be by means of an earmarking of revenues from alcohol and tobacco taxes and fees charged for fiber optic cables --- money that now goes to the general fund and would probably have to be made up by future budget cuts or tax increases --- but there is also a requirement of an annual government subsidy of $20.5 million during the Torrijos administration, to quadruple to $100 million the year after he leaves office and go up to $140 million per year three years later. The law makes no mention of how these latter subsidies would be financed. While Luciani’s numbers extend these payments into the future at face value, FRENADESO’s estimates are based on the presumption that the subsidy provisions are illusory promises in the form of unfunded mandates that future administrations would be unable to sustain.

Both employee payroll deductions and employer contributions to the CSS will be raised, from 6.75 to 9.25 percent and 2.75 percent to 4.25 percent respectively. However, unlike in Law 17 self-employed individuals over 35 years of age would not be required to pay into the fund. Also exempted will be self-employed people with incomes of less that $800 per month, but such persons can voluntarily participate in the system under regulations to be issued later.

All young people who start to pay into the CSS after the law goes into effect will be subject to the “two pillars” common fund plus individual accounts system, and by the time they retire their benefits will be on the average substantially less than that of current retirees.

Although worker and employers will be making sacrifices, the former through higher payroll deductions and lower benefits and the latter through higher taxes, certain business sectors will do well indeed under the revised reforms. Virtually all of the $1 billion or so in the retirement fund will be made available for investment in Panama’s largest public banks and in companies that trade shares or sell bonds via the Bolsa Nacional de Valores. As far as FRENADESO is concerned this amounts to the wholesale privatization of the retirement fund and a gross violation of the “no privatization” pledge that Martín Torrijos was making this time last year. However, the government and spokespeople for the small group of businesses and families that stand to benefit argue that this isn’t privatization because investment decisions will be made by the CSS board of directors.

The law doesn’t require the fund’s investment in the private sector, but does limit its holdings in government bonds to 25 percent of the total. The fund can be invested in state-owned financial institutions as well as in “qualified” Panamanian private banks, of which there are two. Up to one-quarter of the fund can be deposited in foreign banks, but only those licensed by Panama’s Banking Superintendent. Up to 15 percent of the fund can be invested in stocks or other commercial paper, but only in companies sanctioned by the Bolsa de Valores and rated as investment grade by some unspecified international rating service.

Should a future government come to power investments in the private sector could be withdrawn to the extent that they are collectable. (Although the prospect of a leftist government in Panama does seem remote at this time, bear in mind that although it’s run by millionaires largely for the benefit of millionaires, the PRD is an affiliate of the Socialist International.)

One of the long-standing objections to the old system of investing the retirement fund is that successive governments would dip into it by selling bonds at lower than market rates, and that the interest rates that the Banco Nacional de Panama paid on its deposits were less than those paid to someone who would walk in off the street and buy a certificate of deposit. The proposal before the legislature would require that state-owned financial institutions pay rates not lower than those prevailing in the local financial markets. However, by varying definitions and creating special accounts without exact equivalents under those definitions; or by a monopolistic arrangement with the few eligible private banks; this stipulation might be circumvented.

The private investment of the Social Security Fund for which business representatives successfully fought during the dialogue was criticized in hearings before the legislature’s Labor Committee by the Banking Association of Panama. That group objects to such restrictions on which banks qualify for CSS deposits in order to let some of its smaller member institutions to get a piece of the action.

The CSS reforms and all other legislation now pending must be approved by the National Assembly before midnight on December 31 or die. It will be approved by that deadline, then signed by the president. It’s traditional that during the holidays --- especially on Christmas Eve and New Year’s Eve --- the legislators attach special interest amendments to proposed laws when few people are looking.

Thus we may not know the full score until sometime in January when the final version of the law is published in the Gaceta Oficial. The version sent by the Cabinet Council to the National Assembly, which at the time that this article was written had been amended 43 times, is available on the El Panama America website. A more current version has not been published.