Imminent existential threat, or outright fiscal meltdown?

The guardians of the Republic consist of the Armed Forces of the Philippines, the Philippine National Police, the Philippine Coast Guard, the Bureau of Fire Protection, the Bureau of Jail Management and Penology, the Bureau of Corrections, and the hydrography branch of the National Mapping and Resource Information Agency. Officially, they are the military and uniformed personnel or MUPs.

When they retire from public service, they get their pension. The big problem is that these MUPs do not make mandatory contributions to their retirement. They are different from their counterparts in the civil service whose salaries are deducted monthly by the Government Service and Insurance System (GSIS). Instead, the government sources the funding from the national budget.

This monstrosity descended from the AFP-Retirement and Separation Benefits System (AFP-RSBS) during martial law. Established on Dec. 30, 1973 pursuant to Presidential Decree (PD) 361, with subsequent amendments, AFP-RSBS failed to be a self-sustaining pension system. It was subsequently deactivated on Dec. 31, 2006 through Executive Order 590. Since then, with more pensioners and higher benefits, the annual allocation from the national budget has ballooned and incurred ever expanding arrears.

The budgetary allocation is not minuscule.

MUPs’ pension was budgeted P90.9 billion in 2018; P87.6 billion in 2019; and last year, P81.2 billion. For 2021, no less than P129.7 billion has been earmarked.

Life as MUPs could not be happier because as such, they receive pensions that are indexed to the salaries of active personnel. This is like having a bottomless pit of benefits. After serving for 20 years, MUPs are entitled to a retirement pension even before they reach the retirement age of 56.

How many MUPs are entitled to this kind of retirement benefits?

As of December 2019, there were 402,086 active MUPs; 196,004 regular pensioners; and 93,172 survivorship pensioners, the beneficiaries of deceased personnel.

The fiscal burden became so much more onerous when the government, through Congress in a Joint Resolution in 2018, doubled the monthly base pay for a private in the AFP and the lowest ranking police officer from P14,834 to P29,668 effective January 2018. Overall, the salaries of MUPs rose by an average of nearly 59% for all ranks.

Congress’ generosity also allowed a second base pay schedule to be implemented beginning the following year. All in, the average adjustment amounted to more than 72%. The Department of Budget and Management (DBM), through National Budget Circular 574, funded it from the budgets of the agencies of the MUPs and if short of what was required, from the Miscellaneous Personnel Benefits Fund (MPBF). This singular show of generosity cost the Bureau of the Treasury (BTr) some P64 billion.

What was the rationale for that congressional move?

Congress justified the adjustment as necessary “in order to make it more commensurate with their critical role in maintaining national security and peace and order.” It’s like saying what Publilius Syrus said that anyone can truly hold the helm when the sea is calm. Of course, the resolution also kept the indexation feature. We can understand where our legislators were coming from, but due diligence dictates there must be a source of this generosity.

Sourcing the funds for a non-contributory pension system from the budget means curtailment of other equally pressing demands of public welfare including those for food, medicine, infrastructure, and even digital transformation.

The result is nothing but incongruous.

Without contributing to their pension, MUPs receive an average regular pension of P39,520, or about the same as the average salary of P39,687. In turn, this amount is nine times the average pension of private sector retirees under the Social Security System and three times the average GSIS pension.

If this state of affairs is allowed to continue, the MUP pension system would likely incur a P9.6 trillion unfunded reserve deficit, the difference between the required and the current funding levels. Congress is now afraid that the State will fail to meet the impossible funding requirements.

It is for this reason that the indefatigable Albay Rep. Joey Salceda filed House Bill 9271 to reform the MUP pension system by creating a sustainable framework for their separation, retirement and pension benefits. Making it contributory this time is how to do it.

Given that the MUP pension amount has exceeded the maintenance and other equipment expenses of the uniformed services, Rep. Salceda correctly argued that “we are now spending more to support retired personnel than we are spending to support the operations of active personnel.”

To him, the pension system is facing “an imminent existential threat.” It draws us to question whether this system makes sense at this time that we are spending billions of pesos to manage the health pandemic, support those who are vulnerable in society, and prepare for economic recovery. We need to spend more on vaccines to save lives and on infrastructure to sustain growth instead of supporting an unfair pension system nobody ever paid a centavo to.

Given the GSIS’ actuarial estimate that we need P9.6 trillion to keep it going without reforms, I would also call it a threat of a meltdown.

It is good that the Department of Finance and the BTr are throwing their support behind Rep. Salceda. This must be a difficult crusade because the military has been enjoying these benefits for years. Reforming the policy framework risks losing the support of the military especially at this time when the political leadership appears to be losing mass support for its failure to deliver on several campaign promises. This should not be the thinking of the military personnel, active or retired. A pension program is only as viable as its funding source. Without contributing to the system, nobody can claim that sense of entitlement with only 20 years of service as uniformed personnel. Many civilian service personnel chalk up as many as 40 years of dedicated public service and their pension comes nowhere close.

Both congressmen and senators should rally behind Rep. Salceda’s proposed reform of the MUPs’ pension system. His proposals squarely address the serious weaknesses of the current system.

First, there shall henceforth be mandatory contribution on the part of the MUPs. To achieve a smooth transition, the employees’ share will be increased by phases with the government counterpart fund.

Second, there shall be no more automatic indexation of pension benefits to those of the incumbents. Subsequent changes will be subject to review but only up to a maximum of 1.5% each year.

Third, the fiscal burden shall also be reduced by disallowing promotion to a higher rank upon retirement. Automatic adjustment to a higher rank is not done in the civil service.

Fourth, while not exactly comparable to those in the civil service, the military’s compulsory retirement age shall be raised from 56 to 60 years old. This buys time to accumulate enough funds for retiring military personnel.

Fifth, the pensionable age shall be fixed at 56 years old or the accumulation of a minimum of 20 years of active service. One could still improve this proposal by prescribing a minimum number of years of service before one gets his pension upon reaching the mandatory retirement age.

Sixth, unlike the current system of direct budgetary funding of the pension, all contributions to the Fund shall be pooled into an MUP Trust Fund to be managed by the GSIS. This will enable the pool to grow together with other additional sources of funding, making the pension system more sustainable.

Seventh, the pension system shall be tax-exempt to maximize its funding for after all, providing such retirement benefits to qualified MUPs is a governmental function in itself.

Last, the Secretary of Finance shall be the fiscal risk manager of the MUP pension system covering policy formulation and risk management.

If these reforms are carried through Congress, the unfunded future liabilities of P9.6 trillion to both active members and current pensioners shall be reduced by P6.7 trillion, leaving a balance of P2.9 trillion, a hefty 69% reduction.

This is the long and the short of Rep. Salceda’s house bill. If support falls short, Rep. Salceda’s existential threat would certainly morph into an outright fiscal meltdown.

 

Diwa C. Guinigundo is the former Deputy Governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was Alternate Executive Director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.