VZCZCXRO3003
RR RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHSL #0539/01 2740855
ZNR UUUUU ZZH
R 010855Z OCT 07
FM AMEMBASSY BRATISLAVA
TO RUEHC/SECSTATE WASHDC 1222
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 BRATISLAVA 000539 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN LO PGOV
SUBJECT: NEW SOCIAL INSURANCE LAW: TEMPEST IN A TEA CUP, 
FOR NOW 
 
¶1. (SBU) Summary.  On September 24, Vladimir Meciar (HZDS) 
reached an agreement with Prime Minister Robert Fico (Smer) 
to support an amended social insurance proposal that will be 
submitted (and passed) by Parliament this fall.  The final 
compromise will raise payroll taxes for upper-income earners 
and their employers, but overall changes will have much less 
impact on foreign investors than the original proposal from 
the Ministry of Labor and Social Affairs.  Coalition partners 
were able to find common ground on social insurance reform, 
settling on an agreement that resembled HZDS' original 
proposal after Fico shifted responsibility for serious 
economic policymaking from the social democratic-leaning 
Ministry of Labor to the business-oriented Ministry of 
Finance.  Media coverage of the social insurance debate was 
extensive, with journalists insinuating a serious split 
between HZDS and Smer.  A significant split between parties 
may still happen in the near future, but not due to this 
issue or other substantive policy differences.  End Summary. 
 
New Law and its Effects 
----------------------- 
 
¶2. (SBU) Slovakia's governing coalition approved a new social 
insurance program on September 24 to cover the large (over 1 
billion USD) deficit in the public social insurance (pension) 
fund.  The previous government partially privatizated social 
insurance by allowing earners to invest half their social 
insurance payroll taxes in private accounts.  This move 
proved popular with young professionals but led to a quickly 
growing deficit in the public social insurance fund.  The two 
major provisions of the new legislation are: 
 
- Income taxable for social insurance purposes rises from 
three to four times the average wage, the equivalent of a 
rise from 2,370 USD to 3,160 USD per month.  Social insurance 
payroll taxes remain at 18 percent per year, the majority of 
which (14 percent) are paid by employers. 
- Maximum contributions to private funds will be reduced from 
50 to 33 percent for the next three years in order to 
increase solvency of the public fund.  The 50 percent level 
will be gradually restored over the following three years. 
 
The agreed upon proposal includes several modifications 
demanded by coalition partner Meciar, such as restoring the 
right of workers to simultaneously work and draw a pension. 
This draft also eliminated the original Ministry of Labor 
proposal to make all income taxable for social insurance 
purposes.  With the full support of the governing coalition, 
the proposal will be introduced and passed unamended by 
Parliament in October and will take effect January 1, 2008. 
 
¶3. (SBU) The final proposal raises costs for business by 
lifting the amount of income taxable for social insurance but 
should not significantly hinder the business environment over 
the long-term.  US Steel, the largest American investor in 
Slovakia, estimates that the final proposal will cost them 
approximately 1.6 million USD next year.  US Steel had 
estimated, however, that the original proposal to make all 
income taxable would have cost them over 4 million USD in 
¶2008.  The American Chamber of Commerce was very active in 
its opposition to the original proposal, and it appears that 
AmCham communication with Prime Minister Fico and 
business-friendly elements within Smer influenced the 
revising of the Ministry of Labor's original proposal. 
 
HZDS and Smer 
------------- 
¶4. (SBU) Ironically, after months of public fanfare, the 
final social insurance proposal approved by the governing 
coalition closely mirrors the original social insurance 
quietly drafted at the Ministry of Labor by HZDS State 
Secretary (Deputy Minister) Peter Sika.  Sika explained to 
 
SIPDIS 
Poloff the rough outline of this proposal in April.  Sika's 
proposal never saw the light of day (or media coverage), 
however, since Minister of Labor Viera Tomanova (Smer) 
ordered significant changes based on suggestions from Ivan 
Bernatek, the Smer-appointed director of the social insurance 
fund.  Over the course of the summer, Tomanova's position 
weakened due to scandals involving social insurance taxes 
owed by the NGO where she was working when she was appointed 
to her current position.  The scandal led to the growing 
general impression that Tomanova simply is not up to the job. 
 Fico thinks highly of Tomanova and does not want to show 
weakness in the face of the opposition.  The Prime Minister 
used a fair share of his political capital to defend her, but 
his defense tellingly focused on the person rather than the 
policy. 
 
¶5. (SBU) While maintaining social democratic rhetoric in 
public, by late August Fico had delegated authority to draft 
social insurance legislation to the pro-business Ministry of 
Finance.  Based on the final proposal that emerged on 
 
BRATISLAVA 00000539  002 OF 002 
 
 
September 24, and judging from conversations with relevant 
officials, it is clear that Smer and Fico were working 
closely with HZDS for several weeks.  In a September 18 
meeting with the DCM, Ministry of Finance State Secretary 
Peter Kazimir commented that his ministry was working on a 
"fourth pillar" proposal with increased caps and temporarily 
reduced contributions to private social insurance funds.  The 
initiative issued by Meciar the following week featured the 
same content and phraseology.  The coalition approved the 
complex proposal at its meeting within one hour. 
 
Public Airing of Dirty Laundry 
------------------------------ 
¶6. (SBU) Despite this behind-the-scenes cooperation, Meciar 
was still forced to flex his muscles publicly by asking the 
opposition for help -- according to one source, by walking 
into the opposition club and making his pitch.  Meciar also 
pointedly reminded the Prime Minister, seated in Parliament, 
that he had also once been Prime Minister and was not to be 
trifled with.  One source said that Smer parliamentarians 
openly talk of early elections as a way of getting rid of 
Meciar once and for all, with the possibility of a new 
coalition between SDKU and Smer.  Comment: This seems 
unlikely in the short term but one thing Fico will not 
condone is being seem as anybody's puppet, particularly 
Meciar's.  Tensions could come to a head again when Meciar 
reasserts his desire to have a deputy in the Slovak 
Information Service, which Fico has thus far denied.  End 
Comment. 
 
Media Spin 
---------- 
¶7. (SBU) Media coverage of the social insurance debate, which 
was extensive over the past two months, strongly suggested 
that Smer and HZDS were angrily disagreeing over policy to 
the extent that it could threaten the coalition.  Journalists 
were quick to magnify tensions for three major reasons: 1) 
most journalists dislike Fico and want to see conflict within 
the coalition; 2) Tomanova's bumbling style evokes socialist 
images for many and makes her an easy target; and 3) leading 
opposition figures such as ex-Prime Minister Mikulas Dzurinda 
(SDKU) actively suggested rancor within the coalition. 
(Although an SDKU MP very close to Dzurinda acknowledged to 
us that they knew Meciar and Fico would reach a compromise 
with little real trouble.)  There are long-term tensions 
between the parties due to HZDS' inability to shape 
legislation at the ministerial level and its need to flash 
its veto card in coalition council in order to exert 
influence.  Meciar did little to discourage media speculation 
that the coalition was bickering, since he sees it in his 
interest for HZDS to appear independent.  Ultimately, 
however, media reports of a meaningful fracture within the 
coalition based on policy differences were greatly 
exaggerated -- but a possible fracture based on personality 
differences continues to loom on the horizon. 
VALLEE