Here we go again, about to take another roller coaster ride, if Senator Risa Hontiveros would have her way to cut the value-added tax (VAT) back to 10% from the present 12%. Couple this with the call of the Social Security System (SSS) for an increase in monthly contributions by SSS members, to help raise another P45 billion this year and help keep the fund afloat until 2044.
Both initiatives, while seemingly meritorious, is short-term, in my opinion. In this regard, perhaps we should carefully review both proposal but plan for a longer term. Band-aid solutions, done not in conjunction with any long-term strategic plan, tends to just bring us up and down — much like a roller coaster ride — and we have been on such a ride long enough.
The VAT, since its implementation in the post-EDSA years, have gone up from 5% to 10% and then to 12%, and for good reason. A consumption tax like VAT has helped maintain the government’s revenue stream in the last three decades. It was especially helpful in the last 10-12 years, and perhaps more so with income tax rates reduced starting this year.
I do not see any logic in Hontiveros’ proposal, but then she may be in possession of studies, statistics, and simulations that can prove me wrong and show that cutting VAT to 10% will be good for the economy in general, and will benefit the most number of people. But, if she cannot make her case, then I reckon her proposal is nothing but a populist move to court votes.
As for SSS, I see an increase in contribution rates also as a temporary solution to prolonging the life of the fund — to until 2044, says SSS officials. Of course, there are no guarantees here. Precisely because prolonging the fund relies heavily on the quality of SSS investments in the coming years. Any investment that yields below than expected surely impacts on the fund life.
For years I have been advocating for pension reform. I believe that as the administration gets more money from taxes to fund public infrastructure and services, it can also better manage its expenses by reforming the way it spends money on pensioners, both in public and private service, and uniformed personnel.
The government is short of money, even the SSS is short of money. And here comes Senator Hontiveros calling for a cut in VAT? This doesn’t seem right. Unless, she honestly believes a lower VAT will give relief to people, and for some reason this actually will stimulate consumption and spending and thus drive long-term and inclusive economic growth.
As for SSS, and the pension system in general, the perennial problem of dwindling reserves requires a long-term solution. With its planned increase, SSS is now targeting a fund life until 2044.
As early as six years ago, the Asian Development Bank (ADB) reported that periodic increases in contributions from members may not be enough to help prop up SSS in the long term.
ADB said that more reforms were necessary to stabilize the condition of SSS and similar funds all over the region and to assure their continued viability given the “region’s rapidly aging population.” It noted that “with the already high benefit-to-contribution ratio of the SSS [as of 2012], greater increases in contribution rates would be required to sustain the pension program if no improvement is made on the current compliance rate of 31%.”
ADB, in its report, had also noted that as of 2012, the SSS, GSIS, and the military pension system “covered about 79% of the labor force and 28% of the population aged 60 and older.”
Without major reforms, ADB had said it had expected the GSIS fund to last only until 2055, and the SSS fund to last only until 2031. This time around, with a planned increase — if approved by the President — the SSS is looking at 2044.
Among the reforms ADB suggested included “raising the retirement age, increasing contributions, combining the two programs [SSS and GSIS], gradually shifting to a defined-contribution system, and expanding the economy — although the current population growth rate of 2%, one of the highest in Asia, will make sustained economic growth a challenge.”
As for the military and police pension system, the administration already noted in mid-2016 that this was “non-contributory” in nature and that it was presently funded through general appropriations. Thus, the proposal to include police and military pension with that of non-uniformed government retirees at the GSIS.
In a previous media interview, Budget Secretary Benjamin Diokno noted that by President Duterte’s last year in office, “the amount of budget for pension will be about 80% of the total budget for the military, while only 20% will go to salaries” of soldiers in service. He also noted that to date, the “pension of the military is much higher than the salaries of incumbents. In the police, it’s almost equal.” In absolute amounts, Diokno added that for 2017 alone, the government was allocating P80 billion for military pensioners.
In 2016, the Cabinet-level interagency Development Budget Coordination Committee (DBCC) reported that the “problem is mainly attributable to the features present in all existing retirement laws of the uniformed services — pension entitlement of a retiree is automatically adjusted based on the prevailing scale of base pay for similarly ranked active personnel; pension is non-contributory in nature hence budget comes from the annual general appropriations of the government; and early entitlement to pension benefits even before attaining the compulsory retirement age of 56.”
DBCC noted the 2016 pension budget of P71 billion was projected to more than double in eight years to P187.9 billion by 2024. This amount will come from the national budget, unless changes are made. If so, where will the government get the money, more so if Hontiveros gets her way of lowering the VAT to 10%.
Simply put, the government needs more and more money to fix problems that resulted from short-term planning and short-term policy decisions of previous governments and congresses. I believe a comprehensive pension system overhaul is urgently necessary. Perhaps Senator Hontiveros can instead look into this, rather than lowering the VAT.
Marvin A. Tort is a former managing editor of BusinessWorld, and a former chairman of the Philippines Press Council.
matort@yahoo.com
