US embassy cable - 04PANAMA1883

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