Failed

There is no coup brewing over proposals to reconfigure the pension system for military and uniformed personnel (MUP). What is happening is potentially worse.

According to military and police officials, the possibility of the MUP pension system being reformed creates the possibility of wholesale early retirement in the security and public order agencies. If this happens in any significant scale, we could see our military and police agencies seriously decimated.

Choosing early retirement is a right – even if the possibility of dislocation is great. It will take years to train replacements for personnel choosing early retirement. That might not happen quickly enough. In the meantime, we will have to try and cope with gutted services.

We are told that the proposal to reform the MUP pension system is now causing serious demoralization in the ranks. But not undertaking the reform has become unsustainable.

The MUP pension system is a textbook case of myopic policymaking – in this case animated by the desire to curry political favor with the uniformed sector. This sector has been allowed a separate pension system where member contributions are minimal and benefits are generous.

This is an unsustainable system. It can only be kept afloat through humongous subsidies. Government now coughs up hundreds of billions to support this badly designed pension system. If left unattended, the subsidy will run into the trillions.

It seems this system was designed for popularity points in complete disregard of actuarial science. This is, unfortunately, how many of our policies are shaped.

This is a benefits-driven system, a way of rewarding the loyalty of our uniformed personnel without the transparency of a wage schedule. No one in the policy- and law-making process gave a thought about sustainability. It is as if government coffers are there for the looting.

A benefit, once granted, is very difficult to withdraw. We see that in the angry protest actions going on in France over the thoroughly sane proposal to raise the retirement age from the present 62 to 64. Even after adjustment, the French retirement age is still lower than what prevails elsewhere. And even after that adjustment, the pension system is still not sustainable, considering the aging population.

In our case, the faulty actuarial design of the MUP pension system is aggravated by the fact that our soldiers are made to retire at 56 – a waste, considering all the money spent on their training. After that, they begin receiving pensions. Soldiers who retire tend to live longer lives. That means they could be receiving pensions for more years than they actually served.

Add to this the survivorship clauses that allow spouses to continue collecting from the pension system. That extends the payout period even more.

Under the MUP, a retired officer could expect to receive P40,000 monthly for the rest of his life. That is much higher than what SSS and GSIS retirees get – even if, during their active service, MUPs contributed a much smaller share of their pay than those in the other two pension systems.

Government cannot continue funding the MUP pension fund without raising taxes dramatically across the board – or by wanton borrowing. It will be very hard to qualify borrowing to support a badly designed pension fund. Therefore, the borrowing is likely to cost more.

The GSIS and the SSS have both been criticized for having short actuarial lives. There is real danger that younger Filipinos in the workforce might be unable to collect pensions by the time they retire.

By comparison, the MUP pension system has no actuarial life to speak of. It already depends on subsidies to cover their payouts.

Much has been said about the irresponsible borrowing that brought us to a severe debt crisis in the eighties. Not enough has been said, however, about the fact that much of the borrowing prior to the debt crisis went to the Napocor and the MWSS. Government subsidized electricity and water to placate the people. A large portion of the debt we continue to pay to this day went to electricity and water consumers.

Today, unless the MUP pension system is dramatically reformed, we will be in danger of piling up our debt stock even more to subsidize an actuarially unsustainable setup. Those who enjoy the sumptuous benefits from the failed MUP system – and those who will try to lock in their benefits by retiring early – must be reminded that the payouts are made possible only by large public subsidies.

There is catastrophe lying in wait down the road. The MUP pension system has failed. The GSIS and SSS could fail in due time if contributions are not increased. Government will have a financing problem in the trillions if all pension systems are not corrected today.

But reconfiguring the pension system will be a political challenge. We have seen how everyone reflexively opposes any effort to raise contributions to the pension funds. Meanwhile, we all expect the SSS and the GSIS to suspend loan collections for communities hit by calamity. Our political system is not the most financially literate in the world.

In the particular case of the MUP pensions system, government will have to muster political will in heroic proportions to get the reforms done. The community of uniformed personnel is a powerful lobby group in our system. This community will definitely exert pressure for government to abandon pension reforms.

In they are unable to block the reforms, many will opt for early retirement. They will take the money and run. Patriotism will not hold them back.