Quick fix or sudden collapse

FINANCIAL AID  Hundreds of senior citizens of Barangay Capitol Site in Cebu queue up to receive P1,000 in cash assistance from the barangay. They also received loaves of bread.      JUNJIE MENDOZA/CDN

FINANCIAL AID Hundreds of senior citizens of Barangay Capitol Site in Cebu queue up to receive P1,000 in cash assistance from the barangay. They also received loaves of bread. JUNJIE MENDOZA/CDN

Several bills in the House of Representatives and Senate propose that the Social Security System (SSS) grant a P2,000 monthly across-the-board increase in pensions to retirees, survivors and disabled members numbering around 2 million. There is an added note of urgency from the proponents to enact this proposal into law before Congress adjourns.

There is no doubt that pensions should be increased if SSS wants to fulfill its mandate of providing a safety net for its members and their families and keep them from falling into poverty. The minimum guaranteed monthly pension of P1,200 for members who made 120 months of contributions and P2,400 for members who made 240 months of contributions was enacted in 1997 when the price of one kilo of rice was P20, compared with the current price of P40.

I myself started getting in 2010 my SSS pension of P10,725 monthly after 34 credited years of service and 290 monthly contributions. I received an increase of 5 percent in my pension last year, equivalent to P536.25. But with an inflation rate of 20 percent over the last five years, my pension today has actually decreased by about P1,500 in real value. I also know of several top-level managers who retired 20 years ago after contributing the maximum rate for 40 years, receiving only P3,500 in pension today.

A pensioner, who received a minimum pension of P1,200 in 2000, has lost 43 percent of the value of his pension due to inflation. (See graph.) Likewise, a pensioner receiving P10,000 in 2010 has lost almost P2,000 in pension by 2015 due to inflation. This rule can be applied to the entire pension benefits of nearly 2 million pensioners.

Flaw in SSS pension

These two examples highlight the flaw in the SSS pension system. Contribution rates lag far behind the funding needed to maintain the value of the pensions. There is no provision to adjust pensions to catch up with inflation on a periodic basis. Contribution rates are raised only when the pension fund is on the brink of bankruptcy.

While the intent of the proposed legislation is laudable, there is a huge problem. The authors of the House and Senate bills do not appear to provide for the financing source of the pension increases that would amount to about P52 billion if implemented next year and increasing by 10 percent each year. So, we can only guess how the money could be raised.

First option

There are several options.  First, Bayan Muna Rep. Neri Colmenares, principal author of the House bill, talks about SSS earnings as a source of financing. Indeed, SSS has generated more revenues from collection of contributions and investment earnings. Deducting expenses (mainly benefit payments and cost of operations), SSS today has an investment reserve fund (IRF) of about P450 billion.

Is it wise to use the net revenues to pay for additional pensions? The answer is no.

The projected net revenue of SSS in 2015 is P38 billion, short of P14 billion to pay for the increase in pensions. The deficit of P14 billion will have to be drawn from the IRF, which in turn will bring down the net earnings that can be generated in 2016. If this course is followed, the IRF will dry up in 2029, instead of lasting until its projected fund life of 2042.  Once the IRF is drawn to zero by year 2029, SSS will not be able to pay the benefits due its members and its operation expenses. In short, SSS will be bankrupt.

There are still graver consequences. The unfunded actuarial liability of SSS or the difference between its liabilities (all future benefits of its members) and its assets (IRF and future revenues) was already computed at P1.6 trillion as of December 2013. The P2,000 pension increase will raise SSS’ unfunded liability to P2.7 trillion.

Second option

The second option is to increase member contributions by raising the rate of contribution.  The average annual contribution of 13 million paying members is around P10,000 per member for a projected total collection of P130 billion this year.  Each paying member will have to pay P4,000 more annually to cover the additional P52-billion pension increase. To bring this about, the present contribution rate of 11 percent of monthly salary credit should be raised to 15.5 percent.

In fact, the contribution rate has been raised only three times since 2003 while the pension increased 21 times. The increase in contribution rates has to be programmed to match the need to increase pensions to catch up with inflation.

But will SSS members agree to this drastic increase? This is going to be a hard sell. SSS managed to get a measly 0.6-percent increase on top of the 10.4-percent contribution rate last year that yielded an additional P7 billion contribution collection. Given this experience, increasing SSS contribution rates will take a lot of time and effort. This will require a long-term perspective of at least 20 years, say up to year 2036.

Third way

A third way of increasing collection is by expanding SSS coverage. There are a lot of delinquencies or noncompliance with the SSS law by employers large and small. For example, employers of construction workers who are mainly short-term project workers and employers of kasambahay, the self-employed in the informal economy, doctors, lawyers and other professionals.

SSS-paying members consist of only 30 percent of what is legally covered under the present law, meaning SSS is short by 70 percent of paying members to attain universal coverage. Not counted within labor force statistics are the 4 million overseas Filipino workers (OFWs) classified as voluntary members. SSS law cannot compel them to be members and to pay contributions. Raising the level of social security compliance to say 70 percent would require institutional reforms and cannot happen overnight.

Fourth option

The fourth option is for SSS to fall back on subsidy from the national government. Section 20 of the SSS Act of 1997 provides for government contribution to be appropriated by Congress to meet the expenses of SSS for each year. Congress shall appropriate from time to time such sums needed to ensure the maintenance of an adequate fund balance for SSS.

Further, Section 21 provides that the benefits prescribed in this law not be diminished. In addition, to guarantee the benefits, the Philippine government accepts the responsibility for the solvency of SSS.

Government subsidies for pensions are provided by almost all developed countries. Even Germany, which takes pride in its long-ingrained Protestant ethic of work and living within its means, provides a central government subsidy for pensions on top of payroll tax for pensions.

In Greece, pensions cost 16 percent of the gross domestic product (GDP), one big reason for its never-ending crisis. Is there enough fiscal space for government to subsidize SSS?  Will Congress be willing to appropriate the amount for increased pension and President Aquino buys in?

The quick fix intended by the authors of the SSS pension increase does not genuinely address the deep-seated problems of SSS. My greatest fear is that this issue will be taken over by lawmakers who are not looking beyond the elections that are nine months away. For what is needed is a long-term strategy to move closer to universal coverage and collection, adequacy of benefits and long-term financial sustainability of the system that can pay for the promised benefits of new members entering SSS 60 years from now.

How to improve system

How do we improve the SSS pension system? We should comply with International Labor Organization (ILO) Convention 202 on minimum social security standards. It requires coverage of at least 50-percent membership of the employed labor force. In the Philippines, this is around 40 million, including unpaid family workers. If we include the 4 million OFWs on short-term contracts, who are excluded from the official definition of labor force, the number would go up to 44 million.

The SSS-paying membership is 13 million, including those paying one or two contributions a year, who most likely will not complete the minimum contribution of 120 months for pension entitlement.

ILO Convention 202 provides for a minimum pension that can keep a person above the poverty level in old age. I suggest that the minimum pension be half the minimum wage for industrial workers in Metro Manila or P5,000 a month. The SSS minimum-guaranteed pension is P1,200 for those who have contributed 120 months and P2,400 for those with 240 monthly payments. These amounts are way below the poverty threshold, aggravated by the fact that pensioners might also support their spouses, children and grandchildren.

PH, ILO Convention 202

The Philippines has not ratified ILO Convention 202 primarily because it cannot comply with the minimum standards, particularly with respect to coverage and pension levels.

As a signatory to the Universal Declaration of Human Rights, which includes the right to social security in old age, the government is obligated to seek ratification and implementation of ILO Convention 202 within a realistic time frame of say 15 years or by 2030.

But with an economy growing at 6.5 percent per year as measured by the GDP, it is a realistic goal to double the average income level of Filipinos in real terms by 2030 by maintaining steadily or even exceeding the GDP growth rate of the past six years.

By then, the economy will have the means to double the real value of SSS pensions, double the number of pensioners and increase paying members from 13 million to 30 million. SSS can grow way above its actuarial projections done in 2013. We can do it.

Opposite direction

But the hearings in Congress on the pension increase are drawing SSS in the opposite direction. Sen. Cynthia Villar, chair of the committee on government corporations and public enterprises, at an Aug. 18 hearing, virtually assured passage of the Senate bill increasing SSS pensions by P2,000 a month.

She addressed the burning issue on how to finance the pension increases by first ruling out increase in contributions by employers and workers. Next, she called on SSS to run after delinquent employers.

Third, she dismissed the danger of shortening the life of the pension fund by a few years by touching SSS reserves. Highlighting this danger in a testimony, SSS president Emilio de Quiros pointed out that in 2001 the SSS fund life was good for only nine years as a result of several mandated benefit increases during the term of former President Gloria Macapagal-Arroyo.

Subsequently, the contribution rate was raised in 2007, extending the fund life to 2039. Last year, contribution rates increased to 11 percent plus an increase of the maximum salary credit to P16,000 from P15,000 brought the SSS fund life to 2042.

Fourth and lastly, Villar bore down on the President to solve the problem of financing the pension increases quickly, meaning government should pay.

Votes, angry pensioners

If Villar and Colmenares succeed in pushing the ball to the President’s court, he can either veto or approve it, or by inaction, allow it to lapse into law. A President’s veto will enrage 2 million pensioners and their families to the extent that they may reject  Mr. Aquino’s anointed presidential candidate in May. Proponents of the pension increase will get the votes of angry pensioners and their families.

If Mr. Aquino signs the enactment or allows it to lapse into law, everyone will be happy—the pensioners, and proponents in the House and Senate. The President and candidates of the Liberal Party will be relieved.

Unsustainable

But is this the right way to go? Will this law be good for the development of a strong and sustainable pension system?

I do not think so. First, making the national government pay P52 billion for 2 million pensioners (on top of the SSS pension cost of P75 billion in 2015) is not sound stewardship of government money. There are other better uses or this money. For instance, the poor and near-poor senior citizens (altogether numbering 2 million) can receive P13,000 a year (P1,000 x 13 months).

The present social pension of P6,000 (P500 x 12 months) a year does not go very far and doubling their pension to P1,000 monthly for 13 months will require a budget of P26 billion.

Subsidize poor

At this stage of our pension system, government should increase SSS coverage by subsidizing SSS contributions to the poor and near-poor self-employed in the informal economy earning below P8,000 a month rather than subsidizing pension benefits. It is unfair for the working poor—mostly vendors, tricycle drivers, farmers and fishers—to pay the entire SSS contribution, while those employed pay 33 percent and the employers pay 67 percent.

The poor in the informal economy can pay for 50 percent of their contribution rate while government can subsidize the other half. For an estimated 10 million members in the informal economy, members’ contribution of P3,000 yearly (or P250 monthly) will pump in P30 billion yearly to SSS coffers.

Add the government matching subsidy (constituting the other half of members’ contribution) of another P30 billion yearly and that will total P60 billion to augment SSS coffers. This amount exceeds the P52-billion tab for the pension increase.

Unsound financing

There is a second reason why paying P52 billion in government money for 2 million pensioners is not sound financing. It will stunt the development of a contributory social insurance system. Employers will use this as precedent not to pay higher contribution rates. Even workers will ride on the same argument that they are too hard up to increase their SSS contributions, even as they expect better pensions in the future to be subsidized by government.

The same argument is now being raised by the proponents of government subsidy for SSS pension increase to resist tax reforms that are meant to raise the overall tax collection for needed social services and social protection, such as decent housing for the urban poor, education, skills training, health and rural infrastructure.

By refusing to pay more SSS contributions to improve pensions and taxes for public goods, even as the economy is growing steadily at a higher level than it has in the past 50 years, we are foreclosing the door to a more inclusive growth that can bring us closer to social protection for all. Instead of expanding social protection for the elderly, we are narrowing their numbers and their benefits in the longer term.

Expectations raised

Already, the proposed legislation has raised high expectations from pensioners on the imminent pension increase. But without appropriate financing, the law will be defective and cannot be implemented. A half-baked pension law is a bad law. Instead, I propose that Congress pass a joint resolution to increase pensions at a certain date and set in motion the process of crafting a good law.

Pension reform is a huge undertaking that will involve not only pensioners but also employers, workers and taxpayers who will foot the bill. Several provisions of the SSS law would have to be amended. All this cannot be crammed into and dealt with soberly and wisely in the remaining session days of the 16th Congress.

Choosing a quick fix, as the proposed amendment does, over a sustainable strategy will bring SSS to a sudden death.

(Ibarra A. Malonzo is a member of the Social Security Commission representing the labor sector. The views expressed in this article are his own.)

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