Correa signs controversial law that eliminates government’s obligation to the Social Security program and strengthens employment rules

President Rafael Correa wasted no time signing the new Law of Justice and Labor. The controversial legislation, passed by the National Assembly Tuesday night, abolishes the government’s mandatory 40% contribution to the Social Security (EISS) program and makes major changes to employment law.

President Rafael Correa

Correa had 30 days to sign the bill and business and retiree groups had urged him to veto it.

It was Correa himself who had proposed the elimination of the government’s obligation to EISS. In his Saturday Sabatina three weeks ago, he said that EISS had plenty of money in reserve and didn’t need the contribution. He and other government officials said that the system should be self-sufficient.

Critics of the legislation said that it could mean that EISS draws down reserves that could be needed in a future crisis and puts a burden on future members of the system. “The weight of this law will fall on young members who will be paying into the system for years,” said economist Marco Proaño Maya. “They will bear the burden for today’s financial crisis.”

Assemblywoman Mae Montaño says the law is unconstitutional and that her CREO party will challenge it in court. In addition, a number of retiree groups say they will take to the streets in protest.

Supporters of the law applauded the voluntary inclusion of housewives into the EISS system. It allows a housewife who pays into the system for 20 years to receive a Social Security pension. The amount of the monthly payment is determined by family income.

Alexandra Ocles, coordinator for the ruling Alianza País party, said the law protects not just housewives, but other the vulnerable groups through new employment requirements.

“The law strengthens the protections of employees that were previously missing,” she said. “Now, employers can not use an open-ended labor contract to avoid paying some benefits.”

Business groups are protesting the new rules, saying that new employment and contract requirements will cost companies more and discourage employers from adding employees.

The new law also makes a number of other changes to employment practices, including allowing employers to divide the 13^th month bonus into monthly wages, putting a limit the pay differential between highest and lowest paid employees, and tying annual increases in retirement pensions to the rate of inflation. Currently, pensions can rise as much as 16% a year, depending on circumstances.

The law does not affect existing programs within the Social Security system, such as the one allowing voluntary membership in the system’s health care program, to which many foreign residents belong. Changes to current programs would be made by the EISS board of directors.