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Brew Point

Cutting the Gordian knot

/ 12:22 AM January 12, 2017

President Duterte promised it. Therefore it will be delivered.

The matter of the additional pension for members of the Social Security System has been quite a conundrum. On one hand, the existing pension levels are clearly inadequate, eaten up by inflation over many years. On the other hand, raising pension benefits could imperil the life of the fund, raise contingency obligations, and probably result in a downgrade of the Philippines’ credit ratings.

When Congress passed a resolution calling for a P2,000 increase in pension benefits, the President’s economic managers were appalled. The added benefit, multiplied by two million SSS retirees, amounts to a pretty significant sum. Without increasing contribution rates, that sum could kill the fund. Those only now starting out in life and making contributions could face the prospect of inheriting a depleted fund.  In the event the fund becomes unsustainable, the situation could force the government to hijack taxpayer money to save what is, in every respect, a private fund.

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When the resolution was passed, the SSS had an actuarial life of 42 years. That is less than ideal. In the best of all worlds, pension funds should have an actuarial life of 72 years—the average life span. Granting the recommended pension increase without raising contribution rates would greatly shorten the actuarial life of the fund.

But the two million pensioners were direly in need. Denied the increase in pension, they will not have enough even to purchase their maintenance medicines. If their expectation was fully granted, the 38 million members currently working and contributing to the fund will be disadvantaged.  This might seem an impossible situation to resolve one way or the other.

President Duterte took full stock of the situation. He convened several meetings with financial experts and economic managers. He wanted a “win-win” solution to this problem. He finally found that solution.

Last Tuesday, the features of that “win-win” solution were announced. An initial P1,000 pension increase will be granted as soon as possible to bring relief to the expectant pensioners. By May, a 1.5-percent increase in the contribution rate will come into effect. That will be the first of several annual rate increases. As soon as the fund is strengthened so that it can absorb paying out additional benefits, another P1,000 will be granted. That could happen as early as next year.

That is a reasonable solution to the conundrum. Benefits will be increased but they will be matched by staggered increases in the contribution rate. Pensioners will get what they need while the life of the fund is kept safe. Those who seek alleviation for the pensioners are happy. The financial experts are reassured. Everybody wins.

The few who are unhappy are unreasonable. They are what economists call the “free riders”: those who want benefits without contributing anything. They want additional pensions but not additional contributions. That cannot be the way the world works.

The solution President Duterte found involves no magic. All it needed was hard thinking and hard work at consensus-building. The previous administration might have done the same and found the solution to what might seem an intractable problem. Instead, it sat back and simply rejected any pension increase. There lies the difference between a chief executive willing to do work and the one who refused to budge.

What had seemed to be a Gordian knot was cut decisively—but not unfairly. The consensus forged on added pension benefits and adjusted contribution rates required imaginative leadership. What could be done was done.

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The resolution found for the pension increase conundrum gives us a glimpse into the sort of decision-making we might expect from the Duterte presidency. Although the President might seem rash at times because of his speaking style, he is actually a very deliberate leader. He is an executive capable of patiently working out a consensus among contending views.

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TAGS: Duterte, hike, pension, retiree, Social Security System, SSS
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