US embassy cable - 04AMMAN6441

UNCLAS SECTION 01 OF 03 AMMAN 006441 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR DEMOPULOS 
 
E.O. 12958: N/A 
TAGS: EINV, ECON, KPRV, PINR, JO 
SUBJECT: SOCIAL SECURITY CHAIR WANTS TO SOLVE "PENSION 
CRISIS" EARLY 
 
REF: A. 2003 AMMAN 793 
 
     B. 2003 AMMAN 6945 
 
1.  (SBU) SUMMARY: The sustainability of the national pension 
fund is a source of concern to Social Security Corporation 
(SSC) chairman Khalid Al-Wazani - but he has a plan to 
address these problems.  There is progress on the SSC,s 
proposed buyout of the stake held by the Arab Potash Company 
in Jordan Bromine.  Nevertheless, the continuous expansion of 
SSC investments in Jordan may partially counter the positive 
trend of a GOJ withdrawal from an activist role in the 
economy.  END SUMMARY. 
 
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THE SSC AND WAZANI 
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2.  (SBU) The SSC, founded in 1978 and requiring 
contributions since that time from all private companies 
employing five or more people, has recently seen its scope 
expand dramatically with the addition of coverage of all 
civil government employees to the system in 1995 and the 
addition of all Jordanian Armed forces (JAF) employees in 
2003.  The Corporation now holds the assets of 1.3 million 
beneficiaries and participants, around a quarter of Jordan,s 
total population and its entire labor force.  The SSC is 
close-mouthed about the amount of funds under its purview, 
but it takes 16.5 percent of each worker,s pay (11.5 percent 
from the employer and 5 percent from the employee), giving it 
a great deal of clout in the Jordanian market. 
 
3.  (SBU) This clout is wielded by a 14-person Board of 
Directors, which has final approval authority over all 
investment recommendations made by the SSC,s investment 
side, the statutorily separated Social Security Investment 
Commission (except for recommendations that the Corporation 
invest outside Jordan, which must be approved by the full 
Jordanian Cabinet).  The Board is chaired by the Minister of 
Labor, and Wazani serves as Vice Chairman; the remainder of 
the seats are equally divided between employers (represented 
by members drawn from the Chambers of Commerce and Industry), 
employees (represented by labor organization members), and 
government (represented by the secretaries general of four 
ministries).  Wazani also acts as Vice Chairman of the Board 
of the Social Security Investment Commission (SSIC). 
 
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MAKING THE SYSTEM SUSTAINABLE 
----------------------------- 
 
4.  (SBU) Wazani is clearly enjoying his new job, exulting 
over the high pay and the influence that the position wields. 
 In early July, however, he told that he was concerned by a 
problem familiar to pension managers elsewhere: the 
demographic transition.  In Jordan, Wazani says, this 
transition is a long way from seriously affecting the SSC. 
An actuarial study recently commissioned by the Corporation 
found that the "zero point," at which contributions and 
interest revenues equal pension payouts, will not come until 
2051.  Nevertheless, Wazani feels that now is the time to act 
to delay the "zero point" for as long as possible.  He sees 
several gaping holes in the system that he feels should be 
eliminated in order to make the financing of the system more 
sustainable. 
 
5.  (SBU) The most pressing problem, as Wazani sees it, is 
the attractiveness of early retirement.  Jordanians are 
currently allowed to retire at 45 and draw around 70 percent 
of the benefits that they would receive were they to work to 
Jordan,s full retirement age of 60.  They are then taking 
their skills and moving to the Gulf, while continuing to draw 
their pensions because they are not on employment rolls in 
Jordan.  The perverse incentives created by this system, 
Wazani argues, thereby drain Jordan both of financial and 
human capital.  Wazani therefore proposes two changes: first, 
that the early retirement age be raised to 50, and second, 
that the penalty in terms of pension benefits for early 
retirement be much steeper. 
 
6.  (SBU) A second loophole that Wazani feels he should close 
is the SSC rule indexing benefits to a participant,s final 
salary, regardless of his/her contributions throughout 
his/her previous life.  This rule, Wazani said, has led 
companies to begin giving raises to their employees 
immediately before retirement in order to inflate their 
pension benefits. 
7.  (SBU) Making these proposals into reality will require 
parliamentary approval; Wazani is confident that he will be 
able to push them through.  He believes that as long as he is 
able to paint the proposals as necessary protections for the 
children of today,s SSC participants and beneficiaries, they 
will be assured passage. 
 
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INVESTING PHILOSOPHY 
-------------------- 
 
8.  (SBU) While he says that he believes that the SSC should 
be able to invest monies overseas without any higher approval 
if it wishes to do so, Wazani prefers to invest in Jordan. 
This inclination should reinforce the expanding SSC profile 
in Jordan,s economy, an already existing trend that has seen 
the SSC gain large positions in virtually all of Jordan,s 
major corporations and developments.  The SSC has stakes of 
between 10 and 30 percent in almost all if Jordan,s major 
banks, 30 and 60 percent in Jordan,s two major publishing 
companies, and major stakes in Jordan Telecom (JT), Arab 
Potash Company (APC), Jordan Petroleum Refinery Company, 
Jordan Phosphate Mining Company, and other pillars of the 
Jordanian economy (many of which, as in the cases of JT and 
APC, had recently been privatized themselves by the GOJ). 
The SSC is also the owner of hotel properties throughout 
Jordan (though the SSIC seems decidedly unenthusiastic about 
these properties - septel). 
 
9.  (SBU)  Wazani gave the SSC,s actions in the case of 
Jordan Gulf Bank as a model of the stabilizing role that he 
believes the Corporation should play in the market.  The 
bank, which took very heavy losses in the Shemaileh scandal 
(Reftel A), had been in limbo for over a year, as the GOJ 
tried to decide what to do with it.  According to Wazani, the 
fund managers felt that the bank was solid, apart from a few 
bad managers.  The Board therefore took the decision to give 
a fresh infusion of capital into the bank, increasing its 
stake in the bank to 25 percent.  This step reassured the 
other investors, causing them to come back in and increasing 
the value of the bank, and SSC,s stake in it, by 50 percent. 
 
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PROGRESS ON JORDAN BROMINE 
-------------------------- 
 
10.  (SBU) Wazani says that the SSC is looking very seriously 
at purchase of APC,s 50 percent stake in Jordan Bromine, an 
action requested by the joint venture,s other partner, 
U.S.-based Albemarle Company (Reftel B).  He says, however, 
that the price he has been quoted by the APC is far too high 
- around twice the amount of APC,s investment to date in the 
company.  He has been in contact with Min. Halaiqa on the 
issue and had sent out initial feelers to APC General Manager 
Issa Ayyoub. 
 
11.  (SBU) (NOTE: ECON followed up this issue in meetings 
with Dr. Mohammed Adeinat, the Chairman of the Board of the 
SSIC, and Hatem Al-Shahed, the SSIC CEO.  Shahed noted that 
the SSIC had deliberately refrained from approaching the APC, 
instead waiting on the APC to contact the SSIC in order to 
gain an advantage in price negotiations.  Neither Adeinat nor 
Shahed appeared to be aware of Wazani,s approaches to the 
APC.  Adeinat said that Minister of Trade and Industry Dr. 
Mohammed Halaiqa had mentioned his interest in a buyout two 
months previously, but that Ayyoub had not called Adeinat 
until July 11.  Adeinat estimated that within a month, the 
two sides would finalize an offer, and that the purchase 
could be completed, if approved, within two months.  END 
NOTE.) 
 
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COMMENT 
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12.  (SBU) While the Social Security Corporation appears to 
be fiscally solid for a long time to come, passage of 
Wazani,s proposed reforms will be a positive step for the 
country and the firm.  Such reforms may however be more 
difficult to pass than Wazani seems to believe. 
 
13.  (SBU) We should also view with caution the large and 
increasing role of a quasi-governmental fund in Jordan,s 
economy.  Wazani,s proud story of what was essentially a 
bailout of Jordan Gulf Bank (or, in an example more positive 
to U.S. interests, the fund,s possible future role in Jordan 
Bromine) should serve as a reminder of the extent to which 
the GOJ,s political considerations might affect the SSC,s 
investment policies.  This influence should make the fund,s 
very large stakes in Jordan,s media companies of special 
concern.  One possible cure for the problem may be to permit 
greater international investment by the SSC.  Econoffs have 
heard complaints more than once from Investment Unit 
employees that the SSC is already invested as deeply as is 
prudent in virtually every good investment in Jordan, and as 
funds continue to flow in, the fund is forced to put money 
into more marginal investments instead of diversifying into 
other markets.  Such a trend is good neither for the SSC nor 
for the Jordanian economy as a whole.  Despite his 
protestations to the contrary, Wazani probably understands 
the downside of an exclusively domestic focus for the SSC. 
Post will continue to explore options for constructive 
cooperation with the SSC in pursuit of these goals. 
 
14.  (SBU) (BIO NOTE: Wazani, a former Fulbright recipient, 
has held his current position since the beginning of 2004. 
Prior to this, he held a job as Director-General of Customs 
from November 1999 to June 2001, and acted as Director of the 
Economic and Development Division of the Royal Court (a job 
previously held by current Minister of Planning and 
International Cooperation Bassem Awadallah) from July 2001 
until the beginning of 2004.  END BIO NOTE.) 
HALE