The pension system reform is a reversal for the neoliberal model
The privatization of El Salvador’s pension system in 1996
was an emblematic event in the consolidation of neoliberalism here.
The FMLN government’s proposed reform will reduce the earnings of the PFAs,
one of the country’s most lucrative businesses of all time.
It is the second major initiative the two FMLN governments have taken
against the neoliberal model and, most importantly, will be a people’s victory.
If everything was paid, and the pensioner’s card opened all doors, getting old would be real progress, a good ending, a finish with a kiss, sang Joan Manuel Serrat.
One duty of all societies is to provide the right conditions for its elderly to have decent living conditions. This is what pensions systems are all about. Or at least are supposed to be. Pensions are a basic right for those in the formal private sector who spend their life working to accumulate the wealth of others for their bosses, or for those employed in the public sector supposedly at the service of society. In El Salvador pensions currently serve the owners of the companies known as Pension Fund Administrators (PFAs) far more than those who use them to save money for their old age.
By last year the debate about the need to reform the country’s pension system had acquired greater relevance, given the exceedingly greedy behavior of the PFAs since their creation. This year the governing FMLN launched a proposal to “promote equity and financial sustainability in the social security system in a framework of fiscal viability.” Fully appreciating that objective and its urgency requires a look at the history of El Salvador’s pension system, and particularly that of the PFAs.
Backdrop to social security
The origins of El Salvador’s social security system date back to 1911 and the decreeing of the Labort Accidents Law, the first law that could be considered an antecedent. This happened during the brief administration of President Manuel Enrique Araujo, who was macheted to death two years later for supporting mild reforms for workers and opposing the US Marine invasion of Nicaragua in 1912. It was basically created to give governmental sector administrative workers economic security in case of unexpected mishaps on the job. Overseeing compliance was the responsibility of mayors and judges.
In 1930, President Pío Romero Bosque, whose government gave the people another brief respite between the 14 years of the Quiñones Meléndez dynasty and the installation of the dictatorship of General Martínez, created the Law of Pensions and Civil Retirements. It was a victory for a flourishing workers’ movement that had grown up after the world crisis and guaranteed a complete salary in case of illness, an additional subsidy for hospital and surgical expenses, medical services to professionals, disability pensions, death-related benefits and life insurance, all paid for out of the national budget, although again only for public administration workers and only in urban areas. Its coverage was marginal: according to the First Population Census, which was also in 1930, 62% of the Salvadoran population was living in rural zones and working in the field, and 95.4% was living in poverty.
The pension system gets under way
The first full-fledged Social Security Law was passed iin 1949, creating the Salvadoran Social Security Institute (ISSS). The law laid the groundwork for medical, hospital and surgical coverage to finally become available in 1954 for common illness, maternity and on-the-job accidents, all under the obligatory Social Security Regime, applicable to all wage workers in the formal private sector. Twenty years later, in 1974, the Disability, Old Age and Death Regime was created to cover these contingencies as well. With that, El Salvador’s pension system finally got off the ground.
The National Public Employee Pension System (INPEP) emerged the following year as an official entity to provide a system for public administration workers. Its role was to manage and invest the funds paid in to cover disability, old age and death of civilian public sector employees.
The Armed Forces: A case apart
The treatment of Armed Forces members was and remains separate. It was governed by the Armed Forces Retirement Law, but due to the burden on the State, these benefits only included retirement and widow’s pensions. The insurrectionary war necessarily changed that, as neither the law nor the Armed Forces’ Mutual Fund was enough to cover the needs of the military once the armed conflict ramped up.
In 1981 the Armed Forces Social Services Institute was created as an autonomous public credit institution with its own resources to provide benefits and social security to members of the Armed Forces. It was in charge of granting pensions for disability, retirement and survival, as well as a retirement fund, joint liability life insurance and burial assistance. To date, the military is the only social sector with its own pension system.
The 1983 Constitution capped the system’s consolidation, institutionalizing social security, with Article 50 establishing it as an obligatory public service that must be provided by one or more mutually coordinated institutions to guarantee a social protection policy. Nonetheless, establishing pensions as a public service in the Constitution went against the continent’s economic trends at the time. A decade earlier neoliberalism had gotten its first trial in Chile and would soon reach the Central American isthmus.
Reasons to clean up the system
As time went on the arguments for cleaning up El Salvador’s pension system had become increasingly compelling. The bureaucracy was excessive; the pension amounts were being arbitrarily established and coverage was minimal as only 24% of the population had fixed jobs in the formal system. In addition, the watchdog institution hardly monitored the system’s institutions at all, allowing officials to do whatever they wanted. This led to widespread corruption that sucked the finances out of the institutions involved.
In July 1995 an arrest warrant was issued for ISSS Director Romeo Majano Araujo and four other executives of the institution. Fourteen audits by the Accounting Court confirmed that they had committed fraud in the purchase of life insurance policies, “paid” phantom businesses for supposed medicines and outright stolen 21 million colóns (US$2.4 million). Majano Araujo fled the country and the case against the others was dismissed years later after a highly questioned trial.
Four proposals, none
Once the war ended, a debate about reforming the pension system was put on the table, resulting in four proposals. The first came from Robert J. Myers, former chief actuary of the US Social Security Administration, who suggested not totally restructuring the ISSS and INPEP, but making some changes: increasing retirement age, increasing the quotas paid by both workers and employers, and eliminating the state contribution.
The second proposal was presented by the Social Security Workers’ Union. They suggested a series of modifications that included expanding the coverage, a thirteenth month Christmas bonus payment for all pensioners and efficient utilization of the technical reserves.
The ISSS general management itself proposed incorporating a five-year plan for expanding the coverage, separating the health and pensions programs and diversifying the investments better.
For its part, INPEP’s general management suggested making the pension system a mixed program, with complementary selective and substitutable public and private programs.
The overriding neoliberal discourse of those years, however, insisted that the State is congenitally incapable of administering pensions. Even though the system had six contributors for every pensioner and technical reserves valued at US$338 million, the newspaper headlines repeated again and again that the pension system was bankrupt and would have to be privatized. The ISSS corruption scandal in 1995 only fed into that argument.
How the SAP Law
came into being
Today’s pension system was inaugurated on December 20, 1996, with the passage of the Pension Savings System Law, known as the SAP Law. It started functioning in April 1998 as part of the second wave of neoliberal privatizations. Then-President Alfredo Cristiani, who would later become the owner of the most powerful PFA, had already sold off all the national banks, the export operations of the National Coffee Institute (INCAFE) and of its sugar counterpart (INAZUCAR), the oil importer PETROCEL, the Hotel Presidente and some outside consultancies of the Salvadoran Social Security Institute. It fell to his successor, Armando Calderón Sol, to sell off the sugar refineries and the office previously run by the Vice Ministry of Transport where people paid for drivers’ licenses and vehicle license plates. The biggest sales of that wave, however, were the National Telecommunications Administration (ANTEL), electricity distribution and the pension system.
Three days prior to the passage of the SAP Law, it was sent through the Treasury and Special Budget Commission for its findings. While the bill was given a favorable ruling with six votes in favor, two of those votes were signed by members of the Assembly’s Board of Directors who weren’t on the commission. Another was simply signed “Quinteros,” saying he had “signed for” the National Republican Alliance (ARENA) representative in Santa Ana, Juan Duch Martínez, when the only legislator with the surname Quinteros at the time was the alternate from La Libertad, José Mauricio Quinteros Cubías, who also had no role in that commission.
If the questionable signatures weren’t enough to prevent the bill being sent on to the legislative plenary, the second problem should have been: in a commission of 13 legislators, 7 favorable signatures are required to find in favor of a bill, not 6. More than 150 suits were filed against the SAP Law in August 1998 because of these and other irregularities, but all were quashed.
In its justification section, the SAP Law argued that the change “was due to the fact that at the moment the distribution system was financially unviable, both in its structure and in its design, and neither administrative adjustments nor increased contribution rates and/or reduced benefits could sustain it, as it only generated distortions in the labor market and would be unable to avoid the future deterioration inherent to the system.” Based on these lies, the population became convinced it was necessary to privatize pensions into the hands of pension fund administrators.
Five PFAs began to operate under the SAP Law: Confía, Previsión, Porvenir, Máxima and Profutura. Confía, which belonged to former President Alfredo Cristiani and his Cuscatlán Group, promptly took the lead as the strongest one. Previsión belonged to the Simán family and its group, while Porvenir was a mix of national capital (the Zablah Touché and García Prieto families) and Chilean capital (Provida Internacional). Máxima belonged to the Banco Group, with the Belismelis family and Profuturo was created with capital from Jorge Zedán, Armando Bukele and Ricardo Perdomo.
The PFAs attracted huge sums
In their first 100 days of operations, these five PFAs had already created a fund of 54.5 million colons from the contributions of 350,000 worker affiliates and their employers. In one year of functioning, Confía alone had earnings of US$1.1 million, which has never dropped below that level.
What made the insured workers love the PFAs was the idea of individual capitalization. The propaganda convinced them that the system was more secure for them individually because their money wasn’t mixed with that of the other contributors. Each would put in money from his/her pocket and no one would be responsible for anyone else. Upon retirement age, the affiliate would receive the savings personally accumulated up to then via the monthly payments.
The fact is that the system has only helped increase the inequality. With exceptions, it has generated high earnings for the PFA companies while the redistribution capacity of the public shared distribution systems has been lost. It has exacerbated gender inequalities as well because generally speaking women contribute for fewer years and receive lower wages. But in a society that preaches individualism when, how and wherever it can, the tune of individual capitalization bewitched thousands and thousands of Salvadorans.
Other things that changed
In addition to switching from a shared responsibility regime to an individual one, the move to privatization also made the retirement requisites tougher. Although retirement age remained at 55 for women and 60 for men, the number of years of work required to be able to retire was raised from 15 to 25. In other words, one no longer only had to reach retirement age or fulfill the number of years of work to be able to retire; now one had to do both. As a result, only 38% of those who had paid in at some point met the requirements to retire with a pension.
The move to an individual regime also meant that receiving a pension for the rest of one’s life was a thing of the past. Each pensioner only received as much money as had been put into his/her individual fund and when that ran out, it was all over. In the shared distribution system, all contributions from employees and employers went into a common fund and the system was able to pay pensioners with the contributions of the system’s incoming and continuing affiliates.
Privatization also worsened the pension calculation. Previously a regulatory base salary was established by averaging one’s salaries for the three years before retiring. With the privatization, the pension amount was based on the average salary of the past ten years. Generally a person’s salary increases with seniority, experience and increases for inflation, making it statistically more favorable to workers to base the calculation on the three most recent years, as those earnings are likely to be the highest.
Meanwhile the PFAs earn millions
The greatest change, however, was the introduction of the income generation mechanism for the PFAs, which wasn’t based just on the interest earned by the money being held, or even the interest charged for loans made to the government, because they are both earned by the pension money itself, not the companies. The PFA’s profits came from charging commissions, which made them one of the few risk-free companies, since as long as businesses continued to exist and hire workers the contributions were a sure thing. In their first years the SAP Law ensured the PFAs a 21% commission on the quotas a worker paid in. After a decade, then-President Mauricio Funes lowered the rate to 17%. The PFAs use part of that commission to cover their administrative expenses, and the rest is divided as follows: part pays for insuring the funds with a private insurer and the other part is profit.
The companies are duty-bound to insure the funds. But that same insurance is the key to a circular business. Confía, owned by the Cristiani family and the Cuscatlán Group, contracted the services of the Asesuiza or Sisavida insurance companies, both of which they also own. The owners of Porvenir, Máxima and Previsión also had their own insurance companies, so what they all paid out as PFAs they pulled in as insurance companies.
Since privatization, the PFAs have earned approximately US$253 million and the insurance companies have managed approximately US$500 million. Confía’s earnings total US$133 million and those of Crecer, a merger of Previsión, Máxima and Porvenir in 2000, US$119 million. They have recovered their initial capital 8.8 times over at an annual earning rate of 59%.
The PFAs that merged into Crecer are under the umbrella of the international pensions division of BBVA, a transnational financial corporation based in Spain, still with participation by the Simán and Baldochi Dueñas families. The insurance company for Crecer’s business is now Centroamericana, owned by the Simán family. It began with 52% of the pension market in El Salvador and capital equivalent to US$177 million. Confía was left in second place, with 45% of the market and a capital wealth equivalent to US$154 million. It is the only PFA duopoly in all of Latin America.
Sales and resales
Over the years the PFAs changed hands several times, but the most important change occurred in 2007-2008, when the banks were also sold to transnational financiers. Crecer’s majority stockholder is now the PFA Cesantía Protección S.A., with 99.99% of the shares. The other owners are five Colombians and four Salvadorans, including Mauricio Interiano, a current aspirant to the presidency of ARENA’s National Executive Committee.
Confía’s majority stockholder is the Corporación de Inversiones Atlántida, with 75% of the shares. Various companies own the rest: Bryngold Company, Inmobilaria Loma Linda, Médica Salvadoreña, Kendo Investment and Kaponi Assets, among other institutions and individuals, with shares ranging from just over 6% to as little as 0.0594%. In November 2015, the National Registry Center’s Public Information Access Unit received a request to reveal all the owners of Confía’s partner companies. The ruling was positive, but the Commerce Registry Division later explained that “the current partners cannot be determined in light of the fact that the law neither empowers nor obliges the commerce registry to keep a record of them. The record of stockholders, by the very nature of corporations, is ‘anonymous’ and they keep it that way in their books.”
A skewed transition design rendered
the public system unsustainable
The design of the transition to the PFAs also skewed the system, leaving existing pensioners and older workers near retirement age in the state institutions. Of the affiliated contributors, men over 55 and women over 50 had to stay in the public distribution system, while men between 36 and 55 and women between 36 and 50 had the choice of moving to the individual capitalization system or staying in the distribution regime. The majority opted for the private system, seduced by promises of greater income and the illusions of receiving higher pensions with greater security. The competition among the PFAs also included gifts such as thermoses, t-shirts and coffee cups.
People under 36 and those just entering the labor market had to join the new system. The contributions made to the old system by affiliates who were moved to the PFAs were recognized through Transfer Certificates (CTs).
As a result of the transition, barely one person in the public system was paying in for every 10 people retiring, whereas in the private system it was the reverse: 10 people paying in for every person retiring. Money also left the public system for the private one through the CTs, obliging the State to indebt itself to continue paying pensions to all those who had either decided or had no other choice than to retire with the public system.
The public institutions thus fell into crisis as the private companies were merrily consolidating their new accumulation system. By the end of the Francisco Flores administration (1999-2004), only 3% of the contributions were flowing into INPEP and ISSS, which were saddled with 105,000 pensioners and only 24,000 active contributors, or one contributor for every four retired people. This generated a gap in these institutions’ finances that the Flores government couldn’t close. There was simply no money to pay the pensioners in the public system. Flores was the first to issue bonds to resolve the payment insolvency for the pensioners. And who bought those bonds? Directly or indirectly, they ended up in the hands of the PFAs, which bought them with the contributors’ money.
The situation from 2005 to 2015
That’s when the pension trusteeship came on the scene. By 2005, when Antonio Saca took office, the State’s bond debt was already over US$1.232 billion. He continued selling bonds, but now only part of the income went to pay the INPEP and ISSS pensions, as the other part had to pay the accumulated debt with the PFAs.
In that context, ARENA and National Concertation Party Legislative Assembly representatives voted to bring in a trusteeship that made payment of the loans the PFAs had given the government obligatory.
By the end of last year the six-month-old government of Salvador Sánchez Cerén owed approximately US$4.2 billion for these loans, 30% of the country’s fiscal debt. With 10,000 people still contributing to ISSS and INPEP and 670,000 in the PFAs, INPEP and ISSS were paying pensions to 98,000 people, while the private system was paying them to 60,000.
“Cut the PFA’s wings”
It was clear to the new government that this situation was untenable and had to be rethought. The essence of its proposal is to move from a private system to a mixed one in which the State becomes the principal actor again. “The PFA’s wings have to be clipped so they won’t be so voracious,” explained Eugenio Chicas, the government’s Communications Secretary. Approval of the reform will allow for the creation of two funds: one under the shared liability regime and the other keeping the same logic as the current model.
All SAP affiliates and incoming workers who earn a monthly salary equal to or less than two minimum wages, currently the equivalent of $504 a month, will contribute exclusively to the first fund, which will function with a shared distribution regime and a lifelong pension. It will be run by a new national pension institute although the proposal will permit it to subcontract its administration, a detail that has not escaped the notice of those seeking measures that clash more with neoliberalism. Some 80% of the contributions are expected to come into this system.
The second fund will follow the current logic of individual capitalization and will be directly administered by the PFAs. All employees who earn more than the value of two minimum wages will contribute to both funds. For example, if a worker earns $1,000 he/she will pay 13% of the first $504 into the shared distribution system and 13% of the remaining $496 into the capitalization system. When these workers retire, they will have access to both funds: the first one for life and the second one until their balance runs out.
What will the reform change?
The reform’s most important change is that it will make the public fund self-sustaining. It will have enough contributors to be able to pay the pensions of those leaving the labor market. The famous trusteeship will cease having any role and become history.
The demise of the trusteeship will benefit the population in general and those who pay in to the system. As the major taxpayer contributing to the national budget, the population will benefit because the public debt will be gradually reduced by 30%. Currently the unfinanced portion of the pension payments is US$632 million, or $5 million more than the health budget. By making the system more self-financing, the reform will slowly release more funds to invest in social portfolios.
Those who pay in to the system will benefit because right now it is their own savings, not the PFAs’ profits, that help pay the pensions in the public system. In 2015 the interest the trusteeship charged was an issue of debate and of a resolution by the Supreme Court’s Constitutional Bench. This was because the interest rate paid by the government under an international standard called the LIBOR rate, adopted in the trusteeship legislation approved by ARENA and the PCN in 2006, is very low, which affects the profitability of the pensions. In the existing system, the contributors cannot earn anything. The options are either to affect the profitability of their pensions or affect the country’s budget, sustained by those same people with their taxes.
Another gain for the workers is that the commissions will drop by 2.4% for the individual capitalization fund and by 7.6% for the joint distribution fund. This will be possible because the State fund will not have to pay private insurance companies.
“The theft of the century,”
screams a fear campaign
The Right’s reaction to this project was immediate. On February 3, just before its presentation, the four largest daily newspapers shared an identical banner headline: “The theft of the century.”
The “news” underneath recalled major tragedies of the past and warned that the pension system reform was a new government assault on the people. For the first time in many years it was a case of “false front pages” in the newspapers. A “false front” is when a newspaper carries two lead pages. The top one in this case was a kind of paid ad presented as news, a campaign by the National Private Enterprise Association (ANEP) aimed at creating panic among the population.
That was followed by publicity spots, interview programs in which rightwing analysts accused the government of acting in bad faith, and demonstrations by rightwing unions charging that President Sánchez Cerén is trying to steal their pensions. Thousands upon thousands of flyers against the project were distributed in the city center.
Sánchez Cerén called the ANEP campaign “malicious and fear-mongering.” In one of his very few uses of a sharp tone he called ANEP President Jorge Daboub a “media terrorist.” The FMLN filed suit in the Public Ministry demanding that the origin of the funds for the costly “theft of the century” campaign be revealed. Legislator Rolando Mata explained that “this investigation is fundamental to dispel the citizenry’s concern that the financing is coming from the PFAs and thus from the workers’ contributions.” The bottom line, however, was that the Right managed to sow confusion among the populace.
A second battle against
Obviously, the mixed model involves a reduction of earnings for one of the most lucrative businesses El Salvador has ever known. And it is also the second major initiative of the FMLN governments against the neoliberal model and its privatizations.
The first battle originated in 2002, when the Flores government instigated a crooked business deal with the Italian transnational ENEL Green Power, which allowed it to appropriate state goods to exploit geothermal energy in violation of a constitutional mandate that such goods belong to Salvadorans and cannot be turned over to anyone else.
In 2008, ENEL took the country to international arbitrage for having been denied the possibility of investing US$100 million in LaGeo and because it wanted to exceed the 50% maximum stock possession in the company. After a years-long legal battle, the Paris Tribunal found in favor of ENEL and ordered El Salvador to allow it to make the investment. But the government of Mauricio Funes was courageous and persistent and refused to totally privatize the energy resource.
In the end, ENEL Green Power sold its shares to the Salvadoran government, which had to invest US$280 million to buy something that already belonged to the nation, making it a bittersweet victory. Despite everything, the country recovered the sovereignty of an important patrimony and with that rejected a symbol of neoliberalism in El Salvador.
This will be a people’s victory
The pension reform is important because it’s the second great battle against neoliberalism, even though the proposal has its limitations. It doesn’t touch some underlying issues such as coverage, given that only 25% of the population is employed in formal jobs and therefore eligible. Nor does it significantly alter the small amount of the pensions, as they are directly related to salaries, which are also low in our country. Good salary hikes, including of the minimum wage, which is a current dragged-out battle, are required to guarantee decent pensions. Nor does the reform propose totally doing away with the disastrous PFAs, which will continue to mock the working population, although to a lesser degree.
The 1996 privatization of the pension system was an emblematic event in the consolidation of neoliberalism in El Salvador, and this reform proposal, despite its limitations, will be a reversal for that model. It will be a people’s victory.
That is the only way to understand the costly campaign by ANEP, the Salvadoran Foundation for Economic and Social Development (FUSADES) and ARENA to convince the population that what is good for the oligarchy and the transnationals is good for the people. It is also the only way to understand the defense of the reform by the pensioners’ associations. Although they know it won’t solve all their problems, they are fighting alongside the government to get the mixed system the reform proposes.
Elaine Freedman is a grassroots educator and the envío correspondent in El Salvador.