Pension reform now
While lawmakers work on the government’s tax reform program, perhaps the Duterte administration should already ask Congress to initiate reforms in pension systems. In particular, I refer to the Social Security System (SSS), the Government Service and Insurance System (GSIS), and the military pension system.
This way, as the administration tries to raise more money from improving the tax system, and thus have more funds for public infrastructure and services, it can also better manage expenses by reforming the way it spends money on pensioners, both in public and private service, and uniformed personnel.
As early as mid-2016, the administration already noted the problem particularly with military and police pension, noting that it is “non-contributory” in nature and that it is presently funded through general appropriations. Thus, the proposal to include police and military pension with that of non-uniformed government retirees at GSIS.
The question, moving forward, is whether GSIS will be capable of efficiently managing the military and police pension fund, with adequate protection from corruption and fund mismanagement. Also, has there been moves in Congress to actually effect such a change? And, have there been sufficient independent studies conducted to determine best options?
In a media interview last year, Budget Secretary Benjamin Diokno already 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.”
This is where the urgency and necessity of pension reform comes in, considering that, as DBCC noted, the 2016 pension budget of P71 billion was projected to more than double in eight years to P187.9 billion by 2024. The amount is to come from the national budget, of course, unless changes are made in law with respect to the funding mechanism.
And while putting the military and police pension under GSIS is an option, this will also mean infusing more government money into GSIS, Diokno had noted. And this infusion, according to DBCC, will require a seed money equivalent to P5.57 trillion. That is, based on the latest actuarial study by GSIS, “if no reforms are introduced to the existing pension system.”
With changes in the system, the seed fund required can go down to about P2.04 trillion.
And here lies the problem, in my opinion.
With or without changes, the government will need trillions of pesos — an amount equivalent to the annual national budget or more — just to fix a problem that was created by poor policy decisions of previous governments and congresses. Is it actually possible for the government to quickly raise that kind of money? Through loans and new taxes that taxpayers will have to bear?
Mind you, even the “private” pension system SSS is not free from troubles. It is again involved in scandal, this time with its own officers allegedly self-dealing or trading stocks for their own profit. And, it is unclear if they have been using SSS funds for the purposes, or were commingling personal funds with SSS funds, or were simply taking a percentage of profits from SSS trades. One complaint claimed that SSS officials profited by trading stocks via the same stockbrokers managing the pension fund’s portfolio, and that officials were getting cash bribes from brokers.
Five years ago, the Asian Development Bank (ADB) reported out a study that periodic increases in contributions from members may not be enough to help prop up SSS in the long term. It said that more reforms were necessary to stabilize the condition of similar funds all over the region and to assure their continued viability given the “region’s rapidly aging population.”
In previous columns, I have already raised this concern, also given the penchant of administrations to order pension increases periodically. I had noted ADB’s concern 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.
These reforms, ADB added, could include “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.”
In arguing for raising the retirement age to 70, from 65 for government workers and from 60 for private workers, the ADB study had noted that “decreases in fertility rates combined with increases in life expectancy will age the Philippine population… and if the present trend continues, the top-heavy structure may eventually result in the collapse of the [pension] system.”
By now, the ADB report may already be outdated.
And perhaps GSIS and SSS have their own studies indicating the remaining life of their respective systems, and the urgent reforms necessary to prolonging them. However, the problem with the pension system for the military and the police is real and imminent.
Despite being dated, I still believe the ADB report has merit, and among its recommendations, perhaps the easiest for Congress to consider is the adjustment in retirement ages for government and private workers as well as uniformed personnel.
However, a singular effort to delay retirement only may be for naught. A comprehensive pension system overhaul is urgently necessary, and it is now timely to hear all possible solutions to this brewing problem.
Marvin A. Tort is a former managing editor of BusinessWorld, and a former chairman of the Philippines Press Council.
