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DE RUEHSL #0514/01 3121410
ZNR UUUUU ZZH
P 071410Z NOV 08
FM AMEMBASSY BRATISLAVA
TO RUEHC/SECSTATE WASHDC PRIORITY 2067
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
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RUEAIIA/CIA WASHDC
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RHEHNSC/NSC WASHDC UNCLAS SECTION 01 OF 02 BRATISLAVA 000514 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EUR/CE K. ERTAS AND L. LOCHMAN 
STATE PLEASE PASS TO TREASURY FOR L. NORTON 
STATE FOR EUR/ERA B. ROCKWELL AND J. KESSLER 
 
E.O. 12958: N/A 
TAGS:        
SUBJECT: SLOVAKIA: GOING BACKWARDS ON PENSION REFORM 
 
SUMMARY 
------- 
 
 1. (U) The Slovak government will soon re-open the private 
pension pillar in an effort to get 150,000 workers to 
transfer back to the public pension system.  This is only the 
latest attack in a long-running war on the second pillar, 
which has been subjected to blistering criticism from PM 
Robert Fico and from the new head of the state social 
insurer, who recently told Slovaks that the financial crisis 
had obliterated their second-pillar savings.  Despite the 
rhetoric, it is widely thought that the government simply 
needs the money to prop up the public pension system.  The 
private system has enjoyed great success since its 2005 
introduction and is a rich target for fiscal raiding.  Moving 
workers back to the failing old system represents a failure 
to grasp the importance of structural reform for future 
economic growth.  End summary. 
 
2.(SBU) As of mid-November, the GoS will take another step 
backward in its structural reforms by reopening the second 
(private) pillar of the pension system for six months.  The 
government has said that it hopes to draw 150,000 
participants out of the private system.  This target is 
widely understood to have been determined by the size of the 
deficit in the first pillar (pay-as-you-go) and the need to 
move the general budget deficit from 2.3 percent of GDP to 
1.7 percent.  Nevertheless, the publicly stated rationale for 
urging people out of their private funds is that their 
savings are not safe, and that pension funds cannot be 
trusted to the hands of capitalists whose motive is profit. 
 
 
A SUSTAINED ATTACK ON PRIVATE FUNDS 
----------------------------------- 
 
 3. (SBU) This is the second attack on the second pillar in 
less than a year.  The government had opened it for the first 
six months of 2008 and succeeded in getting 105,000 
participants to leave, while 20,000 participants switched in 
the other direction--a net loss to the second pillar of 
85,000.  PM Robert Fico has maintained a steady drumbeat of 
criticism of the private funds for making risky investments 
(when in fact they are highly regulated toward conservative 
investments), for taking excess fees, and for delivering poor 
returns (an argument helped by willfully misstating the 
returns--a misrepresentation egregious enough to elicit a 
correction from the normally docile National Bank of 
Slovakia).  As the subprime mortgage crisis unfolded, Fico 
cited that as grounds for reopening the pillar, at one point 
comparing the private funds to Iceland.  In addition to a 
propaganda war on the second pillar, the government has also 
tried to divert funds from it by lowering its contribution 
ceiling. 
 
 4. (SBU) Now that a serious financial crisis is underway 
(though mainly beyond the borders of Slovakia) Fico seems to 
have turned the role of lead critic over to the recently 
appointed head of the Slovak Social Insurance Agency, SMER 
party stalwart Dusan Munko.  In an an interview published on 
October 25, Munko said, "Let me be clear...people who joined 
the second pillar have lost all their savings."  Munko's 
remarks were promptly blasted by economists and politicians 
alike, and since then he has found himself increasingly 
isolated from other government figures.  While opposition 
politicians have demanded Munko's resignation, both 
Parliament's social benefits committee chair and the Minister 
of Labor (neither of them exactly Chicago School economists) 
have both publicly asked Munko to explain his remarks.  The 
criticism of Munko has continued through the past week, and 
even PM Robert Fico has characterized his remarks as 
"needlessly frightening people."  As he often does with 
members of his government, though, Fico declined to take 
responsibility for his appointee's remarks. 
 
 
ENTHUSIASM FOR SECOND PILLAR 
---------------------------- 
 
 5. (U) Despite the government's determination to scare 
participants out of the system, Slovaks have been 
enthusiastic about the private pension option, introduced by 
the Dzurinda government in 2005.  Workers must pay 18 percent 
of their salaries into the pension system, half of which must 
 
BRATISLAVA 00000514  002 OF 002 
 
 
go into the first pillar (pay-as-you-go) and half of which 
may, at the participant's option, be paid either into the 
first pillar or into one of six private pension funds 
(collectively known as the second pillar).  Some 1.5 million 
Slovaks pay into the second pillar, of a total of 2.2 million 
paying into the pension system.  The private funds are 
currently managing about SKK 63 billion ($2.6 billion) in 
assets and operate based on gross asset management fees.  To 
date, the funds have suffered only minor losses as a result 
of the financial crisis. 
 
 
COMMENT: RETREAT FROM THE FUTURE 
-------------------------------- 
 
 6. (SBU) The consensus here seems to hold that Fico's 
determination to gut the second pillar stems as much from a 
native hostility to capitalism as from his need for a quick 
shot of money to keep the state insurer afloat and to trim 
the general budget deficit.  Still, this latter motive is 
becoming more urgent, and he is not hesitating to exchange a 
higher pension liability in the future for more budgetary 
freedom today.  Nor is this a trivial amount of money. 
According to the Ministry of Labor and Social Affairs, the 
defection of 150,000 second-pillar participants would bring 
about SKK 951 million ($39.6 million) to the state insurance 
company in 2008, and it would see its financial resources 
increase by SKK 8.6 billion ($358 million) next year, with an 
additional revenue stream of SKK 3 billion ($125 million) per 
year from continuing contributions.  It should be noted, too, 
that social insurance is part of the general budget, not a 
separate fund, so the government could use this windfall to 
pay other expenses, including reducing the deficit or 
increasing other social spending.  There is talk that the 
second-pillar windfall will be used to make up for lower tax 
revenues during the expected economic slowdown. 
 
 7. (SBU) Perhaps the most troubling aspect of Fico's fight 
for second-pillar money--apart from the cynicism of scaring 
workers out of their savings to prop up a failing first 
pillar--is that it represents a failure to grasp the 
importance of structural reform.  Instead, it is in essence a 
populist patchwork approach to both the pension system and 
the general budget.  Right across the southern border is the 
spectacle of Hungary's economic crisis, and the certain 
knowledge that it was caused by the failure to make the very 
structural reforms that Fico is trying to unravel here. 
Rather than fix the pension system and get payroll deductions 
under control, this government is retreating from the future. 
 
OBSITNIK