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Cablegate: Pension Reform Update: Will Cooler Heads Prevail?

VZCZCXRO8129
RR RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #2830/01 2351429
ZNR UUUUU ZZH
R 231429Z AUG 07
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 2969
INFO RUCNRAQ/IRAQ COLLECTIVE

UNCLAS SECTION 01 OF 02 BAGHDAD 002830

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN PGOV IZ
SUBJECT: PENSION REFORM UPDATE: WILL COOLER HEADS PREVAIL?

REF: A. BAGHDAD 2402
B. BAGHDAD 2528
C. BAGHDAD 2500
D. BAGHDAD 2604

1. (SBU) Begin Summary: The future of pension benefits for
Iraqi retirees remains in doubt as debate on the first
amendment to the Unified Retirement Law (#27/2006) will not
resume until the Council of Representatives (CoR) reconvenes
in September following its summer recess. The Pension Reform
Steering Committee (PRSC) led by Ministry of Finance (MoF)
officials has met on several occasions and has prepared a
presentation on adjusting the pension benefit levels for
existing retirees that will be briefed to the Council of
Ministers (CoM) in the near future. CoR members have
expressed concern that existing retirees' benefits will be
substantially less than the benefits of those opting to
retire after the legislation goes into effect. Enacting
pension reform that will not cripple Iraq's fiscal solvency
is crucial for many obvious reasons, first among them to
assuage the IMF SBA requirement that the total expenditures
for pensions not exceed 5.5 percent of GDP. With the
extension of the SBA through December announced in early
August, the sense of urgency has waned; however, the passage
of sensible pension reform, satisfying internal political
demands without jeopardizing fiscal stability, represents an
important test in governance for Iraq. End Summary.

----------------------------------------
Background of the Unified Retirement Law
----------------------------------------

2. (SBU) The Unified Retirement Law was published in January
2006, but the CoM decided to postpone indefinitely its
enactment because they considered it incomplete and faulty.
In its original form, the law did not include a minimum age
for retirement, only 15 years of service. An oversight in the
law would permit only those employees in office as of the
date of publication (17 January 2006) with 15 years of
service to enter into retirement. Without an amendment to
mitigate this unintended consequence, employees who may have
met the minimum years of service requirement, but were not in
office as of the date of publication, would never be eligible
to receive a pension under the provisions of the law. Most
controversially, the law did not make explicit retirement
provisions for large segments of the population such as
reinstated former political dissidents and former employees
of dismantled entities (primarily state owned enterprises).

3. (U) In late August 2006, the Pension Reform Steering
Committee (PRSC) met with IMF and World Bank officials in
Amman and agreed on a series of revisions to the Unified
Retirement Law. The group addressed several of the
outstanding problematic provisions with the overarching goal
of ensuring the long term fiscal solvency for Iraq.
Additionally, the group considered pension systems in
neighboring countries to provide context. The amendment
includes the following key provisions: a minimum age of 50
for retirement, compulsory retirement at 63 with a possible
three-year extension, minimum pension amounts, redefining
disability and survivor pensions to comport with
international standards, and an annual inflation-based
adjustment.

----------------------------------
No Unequal Treatment Under the Law
----------------------------------

4. (SBU) The first amendment, with provisions as agreed by
the IMF and WB, to the Unified Retirement Law had its second
reading on 3 July 2007 at the CoR, sparking acrimonious
debate. The most politically charged issue was the
arbitrarily discriminatory treatment of pensioners who
retired prior to the publication date of the law. Debate in
the CoR focused on the discrepancies between new pensioners
and existing pensioners who retired under the old system,
because new retirees stand to earn more lucrative pensions
under the terms of the amendment. Several CoR members called
for another amendment to make retroactive any benefits
calculation to the pensioners who entered into retirement
prior to the 17 January 2006 publication of the law.
According to the MPs, this measure would ensure equality of
pensions for all retired Iraqis.

---------------------------------------
Proposed Solution: Marginal Inequality?
---------------------------------------

5. (U) Following the amendment's second reading, the PRSC was
tasked to prepare a white paper outlining the fiscal effects
associated with adjusting upward the minimum pension payments
for existing retirees, as some CoR members demanded. (Note:

BAGHDAD 00002830 002 OF 002


The IMF and WB stated unequivocally that recalculating
benefits for existing pensioners to match those proposed for
new retirees according to the new system for calculating
benefits would not be possible because of the fiscal strain
such a provision would incur. The PRSC has consistently
advised the CoR that any change in benefits calculations
should not constitute a disproportionate burden on the
federal budget. End Note). The paper was first presented on
the morning of 30 July 2007 (the CoR's final session prior to
the August recess) to the CoR Finance Committee, which in
turn presented it to the plenary later that same day.
According to a USAID contractor in attendance for the
presentation, the CoR agreed to the PRSC proposal.

6. (SBU) The MoF and CoM are responsible for implementing the
legislation. However, the CoR Finance Committee, claiming
they could not trust the executive branch, insisted that the
PRSC make the presentations on the proposed modifications to
the CoR so that the amendment to the law would explicitly
reflect the CoR's consensus. The PRSC is scheduled to give
the same presentation on the new methodology to the Council
of Ministers in August. If it meets with the CoM's approval
(though not required for passage in the CoR), the amendment
to the Unified Retirement Law should achieve passage without
further delay.

----------------
A Need for Haste
----------------

7. (U) The published Unified Retirement Law mandates the
creation of a State Pension Fund, a theoretically
self-sustaining fund (with contributions from the state and
employees) from which retirees will be paid. All pensioners
currently are paid from the Federal Budget and not from the
State Pension fund because of the CoM's decision to suspend
indefinitely the enactment of the law. However, the creation
of the State Pension fund will not be possible until the
amendment is passed because establishing the fund would
implicitly validate the law. Moreover, the Federal Budget law
that was passed for 2007 mandates the establishment of the
State Pension fund during the 2007 fiscal year (which ends at
the conclusion of the current calendar year).


8. (SBU) The principal concern for the IMF and WB is that
total pension expenditures, in whatever form, not exceed 5.5
percent of GDP. The amendment's proposed changes in its
current form satisfy this requirement. On August 2, the IMF
announced the extension through December of the Stand-By
Arrangement (SBA) for Iraq based partially on assurances that
the CoR would pass sensible pension reform.

-------
Comment
-------

9. (SBU) Begin Comment: We will continue to report on the
status of this legislation as it winds its way back through
the CoR upon its return from August recess. Based upon our
conversations with members of both the legislative and
executive branches (see reftels), parties with vested
interests recognize the need to weigh carefully political
considerations and fiscal concerns. The new proposals by the
PRSC specifically address the CoR's concern that all retirees
who fall into similar categories receive as close to the same
benefits as possible. It will be telling to see how the GOI
passes this test of governance and illustrative of its
development to date. End Comment.


CROCKER

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