The challenges of the pension system and Mulino's path to reform

PANAMA - Report 16 Sep 2024 by Marco Fernandez

President Mulino made several important announcements on Thursday, September 12, focusing on the path of the pension reform and placing strong emphasis on measures to improve the healthcare system, which could lead to political gains. On the pension system, Mulino confirmed a dialogue table starting September 16, with proposal submissions open until October 31. The final reform will be drafted into a bill for debate in the National Assembly between November and December. On the healthcare system, Mulino announced plans to unify the CSS and MINSA purchasing systems to address medicine and supply shortages. He also revealed the relocation of the National Oncology Institute to the new CSS City of Health and improvements to the appointment system.

In this report, we focus on the pension system, which faces several challenges, with the most pressing being the financial deficit. Panama’s pension system is approaching a crisis due to the growing deficit of the Exclusively Defined Benefit Subsystem (SEBD), which has no new contributors and is set to deplete its reserves this year. The SEBD deficit is projected to reach 1.5% of GDP in 2024 and average 2.1% of GDP until 2070.

Various reform options are available—including parametric adjustments, transition to an individual-accounts-only system, or merging subsystems—but any solution will require significant government financing. Relying on public debt could jeopardize Panama’s investment-grade status. Even with the most aggressive parametric reform, at least 0.6% of GDP per year will still be needed, suggesting that pension reform will likely be accompanied by fiscal reforms in the medium term.

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