Pension funds

Some months ago, my friend Congressman Joey Salceda called for reforms in the Philippine pension system. Our pension system was rated the second worst among 44 economies in Mercer-CFA Institute’s Global Pension Index released last October. Principal shortcoming: inadequate pension for retirees.

The Philippines was ahead only of Thailand. Among the 10 Asia-Pacific economies in the index, Singapore had the best retirement system, followed by Hong Kong and Malaysia. The Global Pension Index assesses retirement systems through three weighted sub-indices: adequacy, sustainability, and integrity.

In terms of integrity, the Philippines’ score dropped to 30  – the lowest among the 44 countries – from 35 last year. Integrity considers a retirement system’s regulation and governance, protection for members, and operating costs.

Mercer said our retirement system can improve by raising the minimum level of support for the poorest individuals, and increasing coverage of employees in occupational pension schemes.

Salceda agrees with the assessment. He said our pensions are woefully inadequate for the needs of old age.

“Among the world’s most populous economies, we have almost the worst pension system. Decades of neglect, bad policies, special treatment for certain sectors and a culture that is indisposed to saving for the future have all led to this predicament. But now that it has surfaced within our lifetime, it is our duty to solve it,” Salceda said.

Data from the Philippine Statistics Authority show only 20 percent of senior citizens in the country are covered by pensions either from the Social Security System or the Government Service Insurance System.

Now that we are talking about the pension funds and why these should be excluded from the proposed sovereign wealth fund, our officials should focus on improving the quality of our pension system.

Our government should figure out ways of strengthening GSIS and SSS instead of putting their investible funds at greater risk. I am told that the capitalization of both funds needs some boosting now.

GSIS has a capital deficiency of P560 billion and SSS has a deficit of P6.9 trillion. In other words, in a financial crisis, they don’t have the ideal level of resources to assure uninterrupted payment of pensions.

There are also bad and capricious investments. The GSIS funds were used to among others in the past, to buy Philippine Airlines and the Manila Hotel and members lost money. Later, it was used to buy paintings, an action defended as investment in another asset class.

Let us also not forget that Congress is eager to lower the retirement age to 56, putting more pressure on the funds to provide for early entitlements of their members. Some congressmen also want to increase the monthly pension of qualified members by P1,000 to P2,000 a month.

This will reduce the pension fund life by 7 to 12 years. An SSS official told ABS-CBN News the latest study projects that the state pension’s fund life will last until 2054.

But paying out the proposed P1,000 increase in monthly pension will cost an additional P47.2 billion for the first year of implementation alone, which is seen to shorten the SSS fund life to 2047.

If you are retiring by 2048, sorry na lang ba?

Then there is the unfunded P9.6 trillion AFP and PNP pension liabilities.

The indexation of pension to active armed personnel’s pay had been a big problem, National Treasurer Rosalia de Leon told a Senate hearing. The unfunded figure of P9.6 trillion in 2019 was already at an alarming P5 trillion in 2016.

The arrears on these pension funds ballooned after Duterte mandated base pay increases for the military and the police. That increased the pension to retired personnel. The government is now required to allocate around P850 billion to cover military and police pensions annually for the next 20 years.

“The average MUP (military and uniformed personnel) pension is nine times that of the average SSS (Social Security System) pensioner and three times that of the average GSIS (Government Service Insurance System) pensioner,” Salceda said.

The automatic indexation system adjusts a retiree’s pension to match the prevailing salary of an incumbent personnel of similar rank. Hence, salary adjustments for active personnel directly affect and significantly jack up the funding requirement for retirees.

Salceda himself thinks reform is now essential because “we can’t keep kicking the can down the road. I don’t want the day to come when we have to tell our retired heroes: We’re sorry, but no more pension for you because we can’t afford it. We need to act on this now.”

Pension spending now exceeds maintenance and other operating expenses or MOOE for the uniformed services.

“It means we were spending more out of the budget to serve retired personnel than to protect active members,” Salceda pointed out.

“This is a looming fiscal crisis. Without the reform, funding the pension scheme will become fiscally unsustainable, shrinking the economy by as much as 7.2 percent in the long run. This is worse than what the economy sustained in the 2004 fiscal crisis and the 2008 global financial crisis,” he said.

Marcos Senior respected SSS funds. Gilberto Teodoro told us he once showed a request from Imelda to FM Senior and was told to ignore it. But GSIS was abused. The last thing these retirement funds need today is more risk to their already inadequate funds.

Cong Joey has filed a proposed bill to deal with the pensions of the military and the police. Hopefully, it gets the attention it needs.

Government must also now set aside money to cover the capital deficiencies of the GSIS and SSS to reassure workers that when they retire, they will get something.

I propose that FINEX offer an investment course for lawmakers to make them understand complex concepts before they open their mouths. No legislator should ever embarrass the whole country by saying something so stupid as to accuse the BSP Governor for being unpatriotic because the BSP invests in US Treasury bonds.

Incidentally, China owns an estimated $972 billion in USTreasuries and is the number-two investor among foreign governments. So unpatriotic those Chinese… imagine that… buying US Treasuries!

Boo Chanco’s email address is [email protected]. Follow him on Twitter @boochanco