OrMu Publishes Social Security Reforms

In April of last year, the Ortega-Murillo dictatorship decided that it was time to “reform” Nicaraguan Social Security. The INSS, Nicaragua’s Social Security Administration, has teetered on the edge of bankruptcy for years. In 2017, the International Monetary Fund told OrMu that the INSS would be insolvent by 2019. Clearly, the government had to do something to save the pension fund, and on April 16, INSS announced that everyone would be paying more into the system. In addition, existing pensions would be taxed at 5%

We all know what happened after the reform was announced, and even though OrMu retracted the reform, the announcement was one of the triggering events that led to the current crisis.

And now, we’re right back at the beginning, with OrMu’s announcement of a tax overhaul. In addition, OrMu dusted off the bulk of last year’s pension reform idea. They published the reforms in La Gaceta, thus making them official as of February 1, 2019. The table below summarizes some of the main changes to the Social Security Law.

The OrMu government has been presenting the law through its propaganda media. OrMu’s version is that the reform is simply a way to secure the future of pensions in Nicaragua. In addition, the reform ensures that those who earn more will pay more, as stated by Assemblyman Gustavo Porras, who presides the Nicaraguan Assembly, in an interview with Radio Ya:

#Nicaragua40Revolución
El que gana más pagará más: Ajustes del INSS garantizarán el pago de todas las pensioneshttps://t.co/9MHLHA9tge

— El 19 Digital (@el19digital) January 30, 2019

In other words, Porras framed the reform as a matter of fiscal fairness, because the reform nixes the salary cap, which is currently at 96 thousand Cordobas (roughly $3 thousand, at at the today’s exchange rate C$32.46 per 1 USD). Porras indicated that salary caps benefit the wealthy, as they end up with huge tax exemptions that most Nicaraguans do not enjoy.

Someone can make 5 million (cordobas) per month and they will pay the same amount as a person that earns C$96 thousand. If they want to pay themselves 5 million a month, they must pay 7% of those five million per month. […] This is a way of evading taxes, and they have to pay what they owe. If they pay themselves 5 million cordobas per month, 7 x 5 = 35, and that is what they must pay.

Porras is right in pointing out that the very wealthy are not paying their fair share into the social security system. Yet Porras himself is partly responsible for this inequity. Mr. Porras has been a member of the Assembly since … forever (the earliest date I could verify is 2002, when he presided the Commission on Health within the Assembly); he is the current president of the Assembly, which makes him third in the line of succession for the presidency, and he is also a member of the FSLN National Directorate, which makes him a very powerful figure within the party. As an FSLN power player, Mr. Porras was most likely privy to the negotiations between the OrMu government and the Nicaraguan business community, which led to an agreement establishing, among other things, a salary cap that would increase gradually, year by year. In fact, INSS announced the salary cap for 2019 on January 7.

In other words, the tax evasion scheme that Porras is referring to was agreed upon, back in the good old days of the “consensus model”, when the COSEP and OrMu were in friendly terms, and until a few weeks ago, the OrMu government did not show any intention of altering the status quo.

When it comes to the average Nicaraguan, though Porras framed the changes as minimal, that is, instead of stating that workers will now have to pay 7% of each paycheck to the social security system, Porras said, “You’ll only pay x% more.”

Employers with less than 50 employees will pay 2.5% points more. The worker, how much will they pay? 0.75% points more.

When you put it that way, it doesn’t sound too bad, does it?

However, what does the increase contribution mean, in actual money? That’s something that Mr. Porras did not discuss. It is an omission that can be easily remedied, using the calculators below.

A reform of this nature will hit Nicaraguan’s purchasing power and financial security, so the fact that the uber wealthy will now have to pay more is small consolation. There aren’t that many of them to begin. In fact, according to INSS own figures, published in their Anuario Estadistico 2017, 99.56% of workers paying into the system make less than C$ 90 thousand.

In other words, the fiscal fairness argument is flawed, and it is best to be realistic about what the reform means for the financial well being of most Nicaraguans. As Gisella Canales explains, it’s going to hurt, and people will have to make hard choices to withstand the financial shock that is coming:

“You should be aware that you will have to pay more each month, which means that the money available for other expenses will be less. Therefore, you will not be able to keep your current level of spending. This is the time to revise your budget, and if you don’t have one, make one so that you can keep track of how you use your money.

Furthermore, since businesses will also be paying more, their structure of costs and expenses will change. It is very likely that prices of many goods and services will shift […]. That will also impact your purchasing power.

Driving the point even further, Canales tweeted the following example:

“A medium sized farm that produces eggs. It employs 55 workers, who are paid an average salary of C$10,000. Prior to the reform, the farm paid C$1,900 per worker per month to the INSS, for a total of C$104,500. With the reform, the farm will pay C$2,250 per worker, for a total of C$123,750. Do you really think that the price of eggs won’t go up?

And no, the solution is not just raising the salaries, magically. That would lead to inflation (we anticipate that inflation this year will be greater than 2018.

Y no, la solución no es aumentar salarios por arte de magia. Eso sólo empujaría la inflación (que este año se visualiza mayor a la de 2018).

— Gisella Canales (@giscanales) February 1, 2019

Simply put, the price of eggs will go up and/or people will be laid off to cut costs. Isn’t that how things usually go?

Aside from paying more, the reform changed the formula used to calculate pensions. According to La Prensa, future retirees will see their pensions drop by 30% when compared to current retirees**. Moreover, according to La Prensa, workers will have to stay on the job for more years, only to receive a pension that is the equivalent of 70% of their salary for the last seven years of employment.

Con la nueva reforma al seguro social los nicaragüenses deberán trabajar más años para conseguir menos, el 70 por ciento de su salario como pensión. Aquí te explicamos >> https://t.co/NMolnyzdD6 pic.twitter.com/aJ67jSgdvl

— La Prensa Nicaragua (@laprensa) January 30, 2019

That is another change brought about by the reform: Pensions will henceforth be based on the salary earned during the final 375 weeks of working life (a little over 7 years). Currently, calculations are based on the final 250 weeks (roughly 5 years).

In a stable economy, you may expect to maintain your current salary for long periods of time. Unfortunately, Nicaragua is not a stable economy. The Nicaraguan economic think tank, FUNIDES, estimated that if the economy continued performing at its current level, it would show negative growth (-5.2%). If things got worse, on the other hand, the negative growth would be of -8.7%.

We may be witnessing the beginnings of the worse case scenario, especially because the INSS reform is not the only economic measure on the agenda. On Monday, the Minister of Finance and Public Credit, Ivan Acosta, presented OrMu’s proposal for tax reform. The bill was scheduled for debate today, but the Assembly decided to postpone.

The Tax Reform is a huge animal, so I won’t write about it yet. As a preview, I leave you with a tweet from Gisella Canales

No one can afford to think that the reforms will only affect one “x” group of people. They will affect us all equally. The difference is that not all of us have pockets deep enough to be able to withstand the reforms. Decrease in consumption will push us towards an economic depression. Mark my words!

Nadie puede darse el lujo de pensar que las reformas sólo afectarán a "x" grupo de personas. Afectarán a todos por igual, la diferencia es que no todos tienen un bolsillo con capacidad de asumirlo. Mayor disminución en el consumo nos empuja hacia una depresión económica. OJO.

— Gisella Canales (@giscanales) February 1, 2019

** Note: Gisella Canales created a downloadable tool to calculate pensions, based on the new formula. It is available here.