PERA, not pension increase

Romeo L. Bernardo

Posted on June 20, 2016

Our Foundation for Economic Freedom (fef.org.ph), an advocacy group for good governance and market friendly reforms, came out last week with this statement.


Not just increase SSS pension but fix the Philippine pension system

In response to incoming President Rodrigo Duterte’s vow to increase the Social Security System (SSS) pension benefits, we, the Foundation for Economic Freedom (FEF), caution the Duterte administration on fiscal prudence. It is likewise imperative for the administration to specify the source of funds for this measure.

It is important to recall that President Benigno S. C. Aquino III previously vetoed such measure on the recommendation of the Finance Secretary and the President and Board of the SSS, taking into account the following:

1. It is estimated that it will cost SSS P56 billion annually, compared to annual investment income of P30 billion to P40 billion only. Such total payment will therefore yield a deficit of P16 billion to P26 billion annually.

2. It will hasten the depletion of SSS fund life by 13 years to as early as 2029 when many of the current contributors will be retiring.

3. The increase in pension benefits will deplete SSS funds because most of the people who will benefit from the large increase in pension payments will receive much more from SSS than they have contributed before they retired. It is therefore prudent that how the large increase in retirement benefits will be paid for be decided now (e.g. via new taxes or higher SSS contributions from currently working SSS members) and not many years from now, as the advocates of the increased benefits have irresponsibly proposed. Procrastination on this decision will create fiscal risks that would have implications on the credit ratings of our country down the road (e.g. higher interest rates on bonds issued by the national government).

We recommend that any major increase in pension should only be considered in the context of a thorough review of the entire Philippine pension system to improve its structure and governance for a more adequate, affordable, sustainable, and robust system. The Philippine pension system includes the SSS, the Government Services Insurance System, Home Development Mutual Fund or Pag-IBIG, military pensions paid from the budget, private tax-exempt retirement accounts, and the still to be implemented Personal Equity and Retirement Account (PERA) under Republic Act No. 9505, which was passed in 2008.

We are in agreement with independent observations on the issues affecting the solvency of the Philippine pension system.

According to a study on Structural and Governance Reform of the Philippine Pension System commissioned by the Department of Finance in 2006, persistent weaknesses of the Philippine pension system that need to be addressed include: 1) investments decisions need to be protected from political processes; 2) pension assets need to be sufficiently diversified and well matched to risk/return needs; 3) supervision, regulation, and auditing need to be holistic and adequate; 4) mandatory system needs to be sustainable and equitable; 5) benefit formulas need to be harmonized; 6) the defined-contribution, fully-funded element of the pension system needs to be bigger; 7) taxation needs to be harmonized and consistent; 8) administration of the system needs improvement; and 9) the system needs to expand its coverage and sufficiently reach the poor elderly.

End of Quote

I was privileged to have been part of the international consultant team that did that study in 2006. It consisted of known experts in the field of pension reform, including noted author Estelle James (“Averting the Old Age Crisis”). On the local side, I was joined by veteran actuary Ernesto Reyes, former Insurance Commissioner Adelita Vergel de Dios, and colleague economist and CFA, Christine Tang.

The full report is over 250 pages, but for those with an interest, I am posting the twelve-page summary recommendations in my blog spot (which can be accessed by visiting the link http://goo.gl/TD9ZKE.)

Widely followed business journalist and fellow FEF Fellow Boo Chanco wrote compellingly on this subject last week (The Philippine Star, Reforming social security, June 15, 2016). He urged incoming Finance Secretary Dominguez to jump start pension reform by implementing the PERA Act of 2008.

As Chair then of the Financial Executives Institute Capital Market Development Committee, a strong advocate of the bill since 2000, I jubilantly wrote a column on it entitled “PERA -- here at last” (which can be accessed by visiting the link http://goo.gl/JDbd5v.)

“These tax exempt savings for retirement scheme patterned after the similar successful ones in many countries including the IRA in the United States... promises to encourage a higher level of savings, and a redirection of such toward longer term instruments which can aid improving the currency and maturity profile of public debt and increase the pool of resources available for projects with long recovery period such as infrastructure. It will also prompt the development of savings for retirement, especially needed for OFWs, not now mandatorily covered by traditional government sponsored institutions like the SSS and Pag-ibig.”

It is a source of deep frustration for us who labored on this, including the legislators who sponsored and husbanded this through the mill -- notably Senator Edgardo Angara, then Congressman Sonny Angara, and Senator Serge Osmeña, to see this delayed for so long.

Hopes are high that an administration which campaigned on the promise of quick and effective execution will finally get this done.

Romeo L. Bernardo is vice-chairman of the Foundation of Economic Freedom. He was formerly undersecretary of Finance during the Aquino and Ramos administrations.