US embassy cable - 05PANAMA2373

UNCLAS SECTION 01 OF 02 PANAMA 002373 
 
SIPDIS 
 
STATE FOR WHA/CEN - SCHIFFER 
ALSO FOR WHA/EPSC 
COMMERCE FOR ITA/MAC/WH/OLAC - GAISFORD 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, ELAB, PGOV, PREL, PM, ECONOMIC AFFAIRS 
SUBJECT: DIALOGUE FINDS CONSENSUS ON SOCIAL SECURITY REFORM 
 
REF: PANAMA 1352 AND PREVIOUS 
 
1.  (U) THIS MESSAGE IS SENSITIVE BUT UNCLASSIFIED.  PLEASE 
PROTECT ACCORDINGLY. 
 
SUMMARY 
------- 
 
2.  (SBU) According to Second Vice President Ruben 
Arosemena, Panama's National Dialogue on Social Security 
(Caja de Seguridad Social - "CSS") achieved consensus on 
reforms aimed at restoring the financial viability of the 
CSS system.  Second Vice President Ruben Arosemena told ECON 
and POL Chiefs Dec. 2 that the GOP worked to ensure a 
success because "the governability of the country was at 
stake."  The National Assembly will likely approve the 
package before January, as the deal represents a hard-won 
consensus among key business, labor, and civic leaders, as 
well as GOP promises to make CSS self-sustaining - 
eventually.  The CSS Dialogue has strengthened Torrijos' 
political hand, eroded support for top GOP antagonists, such 
as FRENADESSO, and gives the GOP added momentum to pursue 
other key economic goals such as a bilateral Free Trade 
Agreement (FTA) with the U.S. and possibly expansion of the 
Panama Canal.  But the agreement will cost the GOP a lot of 
money.  The price for the accord is a GOP commitment to 
"temporarily" make up a projected $7.2 billion shortfall in 
the CSS retirement account over the next five decades, which 
the already cash-strapped government maintains in can 
handle.  End summary. 
 
National Dialogue Delivers Politically Viable Approach 
--------------------------------------------- ------- 
 
3.  (U) After five months and 89 sessions, Panama's National 
Dialogue on Social Security (Caja de Seguridad Social - 
"CSS") delivered an agreement among GOP, business leaders, 
labor, and civil society on how to reform the existing CSS 
to keep it from going bankrupt.  The Torrijos administration 
convened a 90-day National Dialogue in late June to defuse 
growing public unrest over the GOP's May 2005 passage of Law 
17 on CSS reform (reftel).  At the same time, the GOP 
suspended implementation of Law 17, which would have, inter 
alia: 
 
-- raised retirement ages from 57 to 60 for women and from 
62 to 65 for men; 
-- increased payroll contributions to the CSS from 7.25% to 
9% for employees and from 10.75% to 13.25% for employers; 
and, 
-- raised the minimum period of contributions from 15 years 
to 25 years for eligibility. 
 
4.  (SBU) Negotiations advanced fitfully, forcing the GOP to 
extend the original 90-day deadline.  The leftist-inspired 
"National Front for Defense of Social Security" 
(FRENADESSO), which was one of the main forces behind last 
June's street demonstrations against Law 17, joined the 
Dialogue on July 5 and promptly disrupted its proceedings 
with chants of protest.  FRENADESSO's aggressive tactics and 
unhelpful antics prompted other Dialogue participants to 
accuse them of attempting to sabotage the process. 
Following several weeks of difficult negotiations, 
FRENADESSO and the construction workers' union (SUNTRACS) 
abruptly quit the process on November 8.  This effectively 
cleared the way for the remaining negotiators to announce an 
apparent breakthrough on Nov. 11, with agreement on a mixed 
system (individual accounts combined with CSS payouts).  By 
Nov. 20, the Dialogue concluded with consensus on several 
contentious points, including: 
 
-- maintaining retirement ages at 57 for women and 62 for 
men; 
-- set employee payroll contributions at 6.75% in 2007, 
going up gradually to 9.25% in 2013 and employer 
contributions at 2.75% in 2007, rising gradually to 4.25% in 
2013 (Note: substantially less than under Law 17); 
-- gradually raise the minimum period of contributions from 
15 years to 20 years for eligibility; 
-- cover contributors with income less than $500/month 
through a defined-benefits program; contributors with 
incomes greater than $500/month will have individual 
retirement accounts and will help subsidize the defined- 
benefits program; and, 
-- raise caps on maximum pensions from $1,500/month to 
$2,500/month. 
5.  (SBU) Second Vice President Ruben Arosemena, who led the 
GOP's participation in the Dialogue, hailed the Dialogue's 
outcome as a "victory for the government and for the 
country."   He told Emboffs Dec. 2 that the Dialogue has 
boosted the self-esteem of Panamanians, as they were able to 
come together and reach consensus at the negotiating table. 
Convinced that a GOP failure to manage the CSS issue would 
have a negative "cascade effect" on other key initiatives, 
such as possible Panama Canal expansion and a Free Trade 
Agreement (FTA) with the U.S., Arosemena said the GOP was 
intent on making the CSS Dialogue a success because "the 
governability of the country was at stake."  He expects 
President Torrijos will submit a new bill based on the 
Dialogue's outcome to the National Assembly this week.  Most 
expect the Assembly to approve the bill before January with 
little or no substantive changes, given the GOP's hard-won 
consensus among key business and society leaders. 
 
GOP to Pay $7.2 Billion in "Transitional" Costs 
--------------------------------------------- -- 
 
6.  (U) To ensure a successful outcome, President Torrijos 
committed the GOP to putting $75 million/year into the CSS 
starting in 2007, increasing to $100 million/year from 2010 
to 2012, and to $140 million/year from 2013 to 2060.  In 
total, the GOP would put up some $7.2 billion over the next 
five decades to cover the CSS' full transition to a mixed 
system.  As the GOP currently contributes only about $30 
million/year to the CSS (but nothing to the retirement 
program), this is a significant commitment by an already- 
cash-strapped government. 
 
7.  (SBU) Vice President Arosemena expects the GOP will pay 
this CSS tab through general revenues rather than through 
any special mechanism.  He told Emboffs Dec. 2 that the 
Ministry of Economy and Finance (MEF) has assured him that 
the GOP will be able to able to handle this CSS commitment. 
MEF's Director of Public Policy told Econoff Dec. 2 that he 
will recommend cuts in other GOP expenses to cover increased 
CSS payments.  He also expects that any extra GOP deficit 
spending needed to cover this new CSS commitment will be 
balanced by increased CSS contributions the GOP is already 
seeing with Panama's growth in employment.  Some private 
analysts predict the GOP will shoulder its CSS commitment 
through continued strong economic growth, particularly if it 
advances with expansion of the Panama Canal. 
 
Comment: CSS Win Boosts GOP Momentum & Prospects for 2006 
--------------------------------------------- ------------ 
 
8.  (SBU) The Torrijos administration's quick passage of 
fiscal and social security reforms in early 2005 sparked 
intense public backlash, putting the GOP on the defensive 
for much of the year.  Although the GOP's original CSS 
reforms may have been better formulated technically, they 
proved politically unviable.  The original Law 17 was 
formulated to make CSS solvent for 35-40 years.  The result 
of the Dialogue is that CSS will achieve solvency in 50 
years; meanwhile the GOP will foot the bill.  The Dialogue's 
success strengthens Torrijos' hand in putting forward a 
consensus package likely to garner both legislative and, 
more critically, popular support.  The Dialogue also appears 
to have eroded support for top GOP antagonists, such as 
FRENADESSO, as Panamanians came to see them as more 
interested in posturing than problem-solving.  Coming on top 
of Torrijos' regained popularity, a recent drop in 
unemployment, and continued strong economic growth, the 
momentum appears to have swung in the GOP's favor, putting 
it on stronger footing for 2006 as it pursues a bilateral 
FTA with the U.S. and possibly expansion of the Panama 
Canal. 
 
EATON