Pension hike reasonable, feasible

(Editor’s Note: The warning of Ibarra Malonzo that approval of a bill in Congress seeking a P2,000 monthly across-the-board increase in pensions of some 2 million retirees, survivors and disabled members would spell quick death for the Social Security System  (SSS) drew reactions from pensioners and non-pensioners alike. Malonzo is a member of the Social Security Commission  representing labor. His article appeared in Talk of the Town on Sept. 6.

We are featuring here two articles that question Malonzo’s claim that, among other things, the pension increase is a quick fix that does not address the problems of SSS.)

While a succession of SSS management boards admits that the pension level is indeed very low, they have refused to raise the amount  unless premium contribution is increased.

Pensioners, however, contend that the main reason for the insufficient funding of SSS and its inability to fund a pension increase is its extremely inefficient collection of contributions, failure to recover receivables by not  prosecuting employers who failed to remit employees’ contribution and the inordinate perks and bonuses the board gives itself in spite of these inefficiencies.

SSS failed to undertake institutional reforms that will address these inefficiencies for so long and is the one, in fact, resorting to a “quick fix” solution of solely relying on contribution increases to fund benefit improvements.

We propose a more reasonable, just and sustainable course of action: Immediately address the dismal condition of SSS pensioners by increasing the pension this year while working toward institutional reforms in the next five years to strengthen the SSS fund life and its capacity to provide services and fulfill its social security function.

Dismal life

The SSS minimum pension has been a measly P1,200 a month since 1997, certainly a subhuman level considering that prices of basic necessities have substantially increased.

Based on actual inflation figures, the value of P1,200 a month in 1997 was P518.86 in 2014 since prices  increased 231.28 percent.

The pension of P2,400 a month is now worth P1,037.72, way below the living wage of P5,333 a month for a single person.

My original bill (House Bill No. 4365) in 2011 proposed  a monthly  minimum pension of P7,000. The P2,000 increase, a compromise amount, is not enough to meet the needs of pensioners but hopefully can start to increase their ability  to meet basic necessities.

SSS refused to fix the low pension level and the dismal state of its pensioners for almost two decades when it is obligated by law to do so and when it had a chance to do it in the past 20 years.  Under Section 4 of Republic Act No. 8282, SSS is to submit a review of the pension system every four years to find ways to increase the pension of its members, but no such study has been undertaken.

Unfunded liability

All social security systems around the world have a limited fund life. Some countries have a short fund life of only 12 years or up to 2027, like the United Kingdom’s social security system.  Canada’s fund life is only up to 2022.

For SSS to claim that shortening its fund life to only 14 years or up to 2029 will lead to its bankruptcy is a scheme to scare those who do not understand the actuarial potential of a 14-year fund life. After all, SSS did not find the situation worrisome enough to initiate institutional reforms when it officially admitted to having a five-year fund life in 2001.

The unfunded liability argument, which SSS claims amounts to P1.19 trillion  is a similar scare tactic. All government pension schemes have unfunded liabilities, many of which are larger than that of the  Philippines   per capita but none of them went bankrupt.  A study by Richard Marin (2014), “Surviving the Global Pension Crisis,” showed that  the Philippines was better off than many countries.  (See Table 1.)

The Philippines has a low-funding gap of $22.92 billion or 8.2 percent of the gross domestic product (GDP). Ireland, which has a lower GDP, has a huge funding gap of $320 billion or 156 percent of its GDP.

Unfunded liability is manageable if SSS institutes reforms in the next 14 years to expand its  investment reserve fund. It requires a strong political will on the part of both the Senate and the House of Representatives to come to the succor of senior citizens and approve the proposed pension-increase law.

Long-term solutions

Contrary to SSS allegations that  the measure is just a “quick fix,” the bill’s authors have offered solutions to the actuarial impact of the proposed increase.

Firstly, SSS must improve its collection efficiency. For all the voluminous statistics churned out by SSS, there is one strangely missing data it refuses to divulge and even discuss—its collection rate efficiency. Due to SSS failure to publish its collection inefficiency, we resorted to comparing its paying members to the total membership to measure its efficiency:  (See Table 2.)

SSS maintaining a 35- to 38-percent collection rate is rank inefficiency.  Worse, it fritters away investment opportunities for the fund. A mere 10-percent improvement in collection efficiency will go a long way in increasing its investment fund, which means larger investment and income per year and longer fund life.

SSS has no right to demand an increase in members’ contribution if it cannot even achieve a 40-percent collection efficiency of contributions due for collection. It is like imposing new taxes when government cannot even collect current taxes due.

At the 2009 Senate proceedings for the approval of the SSS Condonation Law (RA 9903), it was found that SSS had failed to collect a total of P94 billion from employers. At the end of the condonation period, only 24,043 employers availed themselves of the program by remitting P3.545 billion.

According to an SSS report dated Jan. 12, 2013, there were 174,985 delinquent employers with total liabilities of P8.515 billion as of Dec. 31,2010. The number  did not include the 131,907 intermittently paying and  delinquent employers with total liabilities of P8.005 billion.

SSS failed to collect P13 billion from delinquent employers as of 2014 while its aging member loans amounted to P64.01 billion, of which P19.407 billion represents loans outstanding for more than five years.

Secondly, SSS can improve its prosecution of employers who did not remit collected contribution. Of the 164,111 delinquent employers in 2010, SSS filed an average of only  1,200 cases a year, which means it will take SSS more than 100 years to collect from these employers.

Thirdly, SSS should cut down on exorbitant bonuses to its board members. It cannot claim that it lacks funds to support a pension increase while  awarding board members with more than P1 million bonus each in 2012 and refusing to take back more than P200 million in retirement packages to its board members in 2009.

Holzmann et al. (2000), as cited by Manansan, found that the administrative cost of running SSS was high relative to that of social security systems in other countries. For instance, the operating expense of the pension fund in Malaysia is 2 percent of total contributions while that of the pension fund in Singapore is 0.5 percent of total contributions.

In contrast, the operating expense of SSS stood at 11 percent of contributions in 2007. In 2014, the operating expense (P8.11 billion) of SSS was still high at 6.73 percent of total contributions (P120.65 billion).

Government subsidy

The “bankruptcy argument” is further exposed as baseless because government, under RA 8282 has the obligation to appropriate funds should SSS fail to replenish the projected P4 billion deficit resulting from the pension increase.

There can never be a bankrupt pension system because government will always intervene if necessary. Even Vietnam subsidized its last 10-percent pension increase.

An increase in  pension is not only a social justice tool but also an economic tool because improving  the spending capacity of the elderly impacts economic activity.

Additionally, due to the very low pension rates, retirees cannot afford food that will provide them with proper nutrition and maintenance medicine for various ailments, increasing the burden on the health system and the national budget.

An appropriate pension increase will ease the burden on the health and social welfare system of the Philippines.

SSS admitted in its opposition to the increase that “[r]aising the level of social security compliance to, say, 70 percent would require institutional reforms and cannot happen overnight.”

The pension fund itself failed to do institutional reforms for nearly 20 years. So, it has only itself to blame. Instead of being deluded by the promise of an SSS pension increase after institutional reforms, Congress will have to assert its power to mandate a pension increase and at the same time work for institutional reforms in the next five years to strengthen SSS  and enhance its fund life.

If the pension-increase bill becomes law, maybe the SSS board members will be forced to work for their salaries and huge bonuses and perform their tasks efficiently and serve their constituents effectively.

(Neri Colmenares, a Bayan Muna party-list representative, is a senior deputy minority leader and is on his last term as a member of the House of Representatives. He authored the original SSS pension bill in 2011 and has been an advocate of pension and tax reforms.)