This record is a partial extract of the original cable. The full text of the original cable is not available.

141236Z Apr 06

UNCLAS SECTION 01 OF 02 ANKARA 002049 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR INTERNATIONAL AFFAIRS - CPLANTIER 
 
E.O. 12958: N/A 
TAGS: EFIN PGOV TU
SUBJECT: THIRD TIME'S A CHARM ON SOCIAL SECURITY REFORM? 
 
REF: ANKARA 1629 AND PREVIOUS 
 
Sensitive but unclassified.  Not for internet distribution. 
 
¶1. (SBU) Summary: After two earlier aborted attempts, the 
Turkish Government seems to be on the verge of passing social 
security reform legislation.  Under an expedited procedure to 
prevent opposition party delaying tactics, a bill merging the 
three social security institutions passed on April 13.  Once 
the second bill -- changing pension formulas and instituting 
universal health insurance -- has passed, the IMF is likely 
to send a mission for its third review.  In spite of the 
Government opting to raise the retirement age only to 65 
rather than raising the age all the way to 68, the IFIs are 
likely to accept the package which is badly needed to 
gradually reduce the social security system's massive 
deficits.  End Summary. 
 
--------------------- 
Third time's a Charm? 
-------------------- 
 
¶2. (SBU) Having pulled back from a severe confrontation with 
the main opposition Republican People's Party (CHP) and the 
labor unions both in June and November 2005, the Government 
now seems to be on the verge of pushing through the social 
security reforms.  There are two separate pieces of 
legislation: the first, which passed April 13, merges the 
three social security institutions.  The other would 
institute universal health insurance and would change the 
parameters by which pensions are calculated.  Both are needed 
to fully implement IFI-agreed reforms and to gradually reduce 
the systems from bleeding red ink. In 2005 the three 
institutions' combined deficit was 23.3 billion lira, or 
about 4.78% of GDP. Arguing for passage of the bill, Labor 
Minister Basesioglu noted that if the current system were 
left in place the deficit is projected to grow to about 10% 
of GDP. 
 
¶3. (SBU) With the bills reported out of the Plan and Budget 
Commission and now before the full parliament, the opposition 
once again seemed poised to engineer the Turkish equivalent 
of a filibuster: asking the maximum number of questions for 
each article under the proposed law. The CHP had successfully 
used this tactic in June and November to bog down 
proceedings.  Rather than making any substantive argument, 
the CHP and smaller opposition party ANAP continue to focus 
on the Government's perceived subservience to the IMF. 
 
¶4. (SBU) At a World Bank-Turkish Treasury conference April 
14, Basesioglu signaled the Government had given up trying to 
work with its critics, fearing the "reform structure" of the 
legislation would be gutted. The Government apparently 
decided the risk of the opposition winning points with 
nationalistic public opinion was worth taking to get to an 
IMF review and to finally pass the reform for its own sake. 
On April 12 GOT resorted to an expedited procedure whereby 
both bills would be considered in chunks of articles, so as 
to reduce the CHP's opportunities to delay.  On April 13, 
with the CHP deputies having walked out, parliament passed 
the bill merging the three institutions.  The crucial bill 
revising the pension formulas and instituting universal 
health insurance are now expected to pass in a week to ten 
days. 
 
------------------------------- 
The Importance of Being Solvent 
------------------------------- 
 
¶5. (SBU) The reforms constitute a watershed for Turkey, 
ranking among the most important economic reforms under the 
AKP government.  Without the social security systems' 
combined deficit, Turkey's public sector would now be in 
surplus, despite its still substantial debt burden and high 
interest payments.  The deficits arose from inefficiencies 
and weak collection of social security premia, but mainly 
from Turkey's uniquely-generous retirement rules: in a 1991 
fit of populism, Prime Minister Suleyman Demirel reduced 
retirement ages to 38 for women and 42 for men.  Despite a 
1999 reform which mandated a phase-in to older retirement 
ages (58 for women, 60 for men), retired people in their 40's 
still abound, and in many cases continue to work while 
drawing on their social security pension. 
 
¶6. (SBU) Several factors played into the timing of the GOT 
making a concerted push: With the IMF program riding on the 
reform, and much discussion among economists about a possible 
sell-off in emerging markets this year, the Government may 
have realized they could not risk further delay, which would 
bring them into election season.  Moreover, the longer the 
GOT waited, the harder the reform will be, since Turkey's 
still-young population is expected to age considerably over 
the coming decades.  Fertility rates have declined markedly 
over the past thirty years and life expectancy is rising.  As 
a result, the share of the elderly in the general population 
is expected to increase from 5.7% now to 14% by 2035, 
eventually rising to 20%.  With its gradual phase-in of 
higher retirement ages and a less generous pension formula, 
the reform will only reduce the deficit by 1% of GDP in ten 
years, but over the long run is projected to reduce the 
overall social security deficit to 1% of GDP (from 4.78% in 
2005). 
 
--------------------------------- 
Erdogan Appeals to Public Opinion 
--------------------------------- 
 
¶7. (SBU) Prime Minister Erdogan personally appealed to AKP 
parliamentarians in a speech April 10.  Without going into 
too much detail, he noted the fiscal necessity of the pension 
reform, while at the same time, dangling the carrot of 
expanded health insurance benefits, including free access to 
medical care for children under 18.  The World Bank economist 
confirmed this had been agreed to by the IFI's: the Bank's 
health experts believe the provision of free medical care to 
children is justified by the costs to the economy of the 
alternative -- poor or nonexistent medical care for children. 
 However, the economist explained that it is not free medical 
care for all children: the measure is designed such that the 
state would pay the insurance premium only for low-income 
people -- above a certain income threshold people have to pay 
their own premia. 
 
------------------------------------- 
IFI's Likely to Swallow GOT Dilutions 
------------------------------------- 
 
¶8. (SBU) According to the World Bank economist, so far the 
IFI's have detected two alterations of the package from what 
had been previously been agreed.  The retirement age will not 
go beyond 65, whereas the plan was to eventually have the 
retirement age reach 68.  The other, less significant change 
is a more generous plan for pensions to widows.  Although the 
World Bank economist said the Bank's experts would do their 
thorough analysis of the legislation only after it passed 
parliament, he gave credit to the Government for finally 
re-energizing the reform effort.  Unless there are major 
deviations from what was agreed earlier, the Bank and Fund 
seem unlikely to insist on amending legislation given the 
political risk the Government has taken in passing the 
reform.  IMF officials have long planned to send a third 
review mission once the legislation is passed, and are still 
expected to do so, probably at the end of April or beginning 
of May. 
 
 
Visit Ankara's Classified Web Site at 
http://www.state.sgov.gov/p/eur/ankara/ 
 
WILSON