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Cablegate: Turkey: Government Presents Revised Social

VZCZCXRO7933
RR RUEHKW RUEHPOD RUEHRN
DE RUEHAK #0591/01 0882130
ZNR UUUUU ZZH
R 282130Z MAR 08
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 5734
INFO RUCNMUC/EU CANDIDATE STATES COLLECTIVE
RUEHSS/OECD POSTS COLLECTIVE
RUEHDA/AMCONSUL ADANA 2818
RUEHIT/AMCONSUL ISTANBUL 4059
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEHAAA/NSC WASHDC

UNCLAS SECTION 01 OF 02 ANKARA 000591

SIPDIS

SENSITIVE
SIPDIS

EEB FOR A/S SULLIVAN

E.O. 12958: N/A
TAGS: ECON EFIN TU
SUBJECT: TURKEY: GOVERNMENT PRESENTS REVISED SOCIAL
SECURITY REFORM IN PARLIAMENT

ANKARA 00000591 001.2 OF 002


1. (SBU) Summary: After reaching an agreement with most
unions on March 25, the GOT presented a revised Social
Security Reform law directly to the parliament floor on March
27. The revised bill raises the number of "premium days" a
worker would need to work before being eligible for a pension
from the current 7,000 to 7,200, down substantially from the
previous draft's 9,000 days. The new accrual formula for
workers now in the system will be 3% for the first 10 years
of work and 2% thereafter, and 2% per year for new entrants.
Most importantly, the bill maintains the retirement age at 65
for all workers, with a 20 year transition period. While
passage is not guaranteed, bringing the amended bill directly
to the floor indicates that the GOT will impose party
discipline to finally pass this long-awaited reform. Local
experts indicated that the GOT preserved the great majority
of fiscal benefits by holding firm on the retirement age, and
that the days worked is largely irrelevant so long as workers
can't retire until age 65. Turkey has a demographic window
until 2030 in which to reap substantial fiscal benefits from
this reform. The social security deficit in 2007 exceeded
USD 20 billion, or 4% of GDP. This year, it is expected to
reach USD 28 billion and, without reform, to consume 17% of
GDP in 2050. If passed, this bill is projected to keep the
deficit approximately the same in lira terms for the next ten
years, and then reduce it steadily over the following 20
years, a dramatic difference. End summary.

2. (SBU) Unions staged a successful a two-hour work slowdown
on March 14 in protest of the draft Social Security Reform
law, and threatened a general strike if the law was passed.
In response, Labor Minister Celik negotiated with union
leaders last week on revisions to the bill. After reaching
an agreement with most unions on March 25 (some continue to
object to the bill), the GOT presented the revised Social
Security Reform law to the parliament on March 27. The bill
will be debated in six parts, with the government making the
amendments agreed with labor on the floor.

3. (SBU) The revised bill raises the number of "premium days"
a worker would need to work before being eligible for a
pension from the current 7,000 to 7,200. That is down
considerably from the 9,000 days in the previous draft. The
bill also changes the accrual/replacement rate formula.
Under current law, workers accrue 3.5% of salary towards a
pension each year for the first 10 years, 2% per year for the
second 10 years, and 1.5% per year thereafter. The new
formula for workers now in the system is 3% for the first 10
years of work, and 2% thereafter, and 2% per year for new
workers entering the labor force. The previous draft had a
flat 2% accrual rate for all workers. The bill maintains
the retirement age at 65 for all workers, with a 20 year
transition period. The current retirement age is 60 for men
and 58 for women for new entrants, with a varying rate for
current employees.

4. (SBU) We spoke with former Social Security Administrator
Tuncay Teksoz, who was pleased with the outcome. He said
that the fiscal benefits to the government are essentially
unaffected by the lowering of the premium days, so long as
the retirement age stays at 65. He said the accrual rate
would cause only a minor reduction in the fiscal benefits,
since the reform is expected to provide its major benefits in
2030-40, when all workers will be at 2%. He emphasized that
analysis of the fiscal benefits is being conducted using 2003
data on the labor market. From 2003 to 2008, however, the
number of formal sector workers increased by nearly 30%, from
6.5 million to 8.5 million workers, as agricultural labor
decreased and service and industrial employment increased.
This means that the actual fiscal benefits will be greater
than currently projected. Teksoz also noted that even with
current Civil Service employees excluded from the revised
social security system (a result of a 2007 constitutional
court decision), over time, new Civil Service hires would be
included, amplifying the fiscal benefits of the reform and
consolidating all employees into a single, lower cost system.


5. (SBU) IMF Deputy Resident Representative Davide Lombardo
agreed that the reduction in premium days was not material,
and that retaining the retirment age was essential. He was
less certain, however, about the benign fiscal effect of the
change in the accrual rate formula, particularly in the

ANKARA 00000591 002.2 OF 002


short-medium term. The IMF is awaiting a World Bank
re-evaluation of fiscal projections using the new formula.

6. (SBU) Comment: While we cannot yet say that the GOT has
finally passed a meaningful social security reform, the GOT
has maneuvered very well in getting labor buy-in and getting
this bill to the floor of the Parliament without giving up
the great majority of fiscal benefits. By sending it
directly to the floor, the GOT is signaling it intends to
invoke party discipline and finally pass this long-awaited,
much-needed reform. Turkey has a demographic window until
2030 in which to reap substantial fiscal benefits from social
security reform. The social security deficit in 2007
exceeded USD 20 billion, or 4% of GDP. This year, it is
expected to reach USD 28 billion and, without reform, to
consume 17% of GDP in 2050. Using the 2003 data that Teksoz
said understates the fiscal effect, this bill is projected to
keep the deficit approximately the same in lira terms for the
next ten years, and then reduce it steadily over the
following 20 years, a dramatic difference. End comment.

Visit Ankara's Classified Web Site at
http://www.intelink.sgov.gov/wiki/Portal:Turk ey

WILSON

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