By Nicholas Birch in Istanbul -

It was supposed to be a flagship law for a government already noted for its reform-mindedness.

But the future of the already delayed legislation on Social Security and General Health Insurance was far from clear this week after a top Turkish court annulled sections of the law less than a fortnight before they were due to come into effect.

The Constitutional Court’s decision appeared to wrong-foot the government, with ministers initially vowing to vote a redrafted version of the law through parliament before the January 1st 2007 deadline. The court hasn’t yet said why it shot the reform down.

Analysts say parts of the legislation annulled can't be changed until after parliamentary elections next year. Interviewed on television this Sunday, the normally calm Labour Minister Murat Basesgioglu briefly sounded more pessimistic. “There is a real risk that this law could fall into oblivion”, he said.

Whatever the uncertainties, nobody doubts this last minute hitch constitutes a serious blow to the government’s programme of fiscal tightening.

Turkey’s social security set up has been laughably profligate since populist laws passed in 1986 made it possible for women to retire at 38 and men at 42.

Unsurprisingly, the system has been in the red since the early 1990s, despite a demography that makes this country the envy of aging Europeans. According to Ministry of Labour calculations, the social security deficit plus debt servicing cost Ankara YTL475bn between 1994 and 2004. Last year alone, the deficit was worth 4.7% of GNP.

In a report on Turkish pension reform published this November, the OECD opined that, “the unsustainable social security system deserves a large part of the blame for Turkey’s fiscal challenges over the past decade.” The IMF, meanwhile, made social security reform a sine qua non of its on-going loan programme.

Before the Constitutional Court stepped in, the new legislation looked set to whittle away some of the worst excesses of the present system.

A 1999 law had already ensured the gradual phasing out of very young minimum retirement ages. The new law set retirement at 65 from 2036 onwards. More radically, it also foresaw free health care for children under 18. With the exception of the very poorest, adults were to pay a health premium worth 12% of their income.

This was always going to be controversial. Turks working in the formal economy protested what they called “graveyard retirement.” This April, Turkey’s president briefly vetoed changes to the retirement age, saying they contradicted the constitution’s defence of “a social state.”

Researchers at Bogazici University’s Social Policy Forum, which has been investigating health reform for two years, warn that the new system of premiums risks not only fails to help Turkey’s poorest people but criminalizes them too.

On the other side of the coin, the OECD insists more needs to be done to persuade workers to stay in the formal economy. One way to do that would be to do what most countries do: reduce pension benefits for workers retiring younger than the official retirement age.

But it wasn’t any of these things the Constitutional Court rejected as unconstitutional. What concerned the judges were plans to equalise pensions for private and public sector workers alike.

At present, Turkey has three social security institutions, two for private sector workers and one for the country’s 1.7 million civil servants (not including an estimated 200,000 state-employed tea makers). The last is the most generous by far, offering better health care provisions and pensions three times bigger than the other two.

It’s also the most expensive: while they make up only 18% of total contributions payers, public workers account for half of the social security deficit.

This defence of such an inequitable system doubtless has political roots. The court was only responding to an appeal made by Turkey’s secular opposition party, traditionally popular among state workers. With elections due next year, the party is shoring up loyalty amongst a key constituency.

But analysts say that above all it exposes deep contradictions in Turkey’s state model: two thirds unadulterated Ottoman paternalism, one third liberal democracy.

The constitution defines Turkey as a “country without class or privilege”, but it also allows the defence of civil servants’ privileges, comments veteran business columnist Gungor Uras. He quotes an old Turkish proverb, which says that “if you’re holding the honey, you lick your fingers.”

He might just as well have quoted a much more famous saying: “The property of the state is a sea, and anybody who doesn’t drink is a pig.”

Ultimately, argues Tarhan Erdem, a former political party leader and respected pollster, the fault doesn’t lie with the Court but with the 1982 constitution, a product of the most authoritarian and étatiste of Turkey’s three military governments.

“We have a constitution that does not permit any policy of change accepted by the parliament”, he says.