Short-run vs long-run welfare

“IN THE long run, we are all dead,” the great economist John Maynard Keynes once wrote. But he never meant to suggest that we should only live and act for the present, and not care about long-term consequences of what we do today.

The complete quote is: “But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.” Paul Krugman clarifies: “Keynes’s point here is that economic models are incomplete, suspect, and not much use if they can’t explain what happens year to year, but can only tell you where things will supposedly end up after a lot of time has passed. It’s an appeal for better analysis, not for ignoring the future.”

It is this future that President Aquino had in mind when he vetoed the measure that would raise pensions from the Social Security System by P2,000 a month. It’s a classic example of no free lunch. To be sure, granting such increase now will help some 2.15 million pensioners currently receiving monthly SSS checks. But someone else ultimately has to pay for all that—and this includes you and me, apart from our children and their children after them.

How so? “You and me” could refer to the 33 million currently active SSS members, whose salary loans, sickness and disability payments, and emergency calamity assistance may have to be substantially cut to raise the P56 billion needed every year. That is what’s needed to pay 2.15 million retired members an additional P2,000 per month for 13 months. Otherwise, unless contributions are further raised, the SSS must eat into its principal fund, the investment earnings of which have made it possible for each retiree to draw anywhere from P6-15 for every P1 contributed. Not only would that reduce the fund’s earnings, it would also eventually deplete and collapse the system in as soon as 11 years, based on actuarial estimates. The victims will include you and me—those of us who expect to be receiving SSS pensions after we retire, but will not. Same goes with our children and their children after them, who would be deprived of social security altogether.

A third alternative is to have national government pick up the additional cost, now and in the future. That implies taking it from the pockets of all taxpayers—meaning, again, you and me, and our children and beyond. There’s simply no way out of it. There is no free lunch.

There’s another complicating factor missed by most analyses I’ve seen, and this is the fact that because our population growth is slowing down, the number of working Filipinos paying into the SSS will fall over time. At the same time, the number of Filipinos drawing from it is rising as the “baby boom” generation enters retirement. Meanwhile, rising average income and improving public health let people live longer. Richer countries that have undergone this demographic transition already face this problem. Their own social security systems, now under severe financial stress, are forced to reduce benefits or keep them unchanged in the face of rising costs of living. Such countries with aging populations now see the financial stability of their pension systems compromised, leading them to urge citizens not to rely entirely on social security and put up their own individual retirement accounts as well. As it is, demographic changes are due to put future pressure on our own system, and we don’t need irresponsible moves now to make things even worse.

The problem is that lawmakers find it so easy to legislate popular measures that lead to substantial new spending, but so hard to legislate measures that would raise the revenues needed to finance them. They see the former as a way to win votes, the latter a way to lose them. Our own legislative history is replete with such expenditure-raising measures that never identified additional revenue sources to fund them with, even as this goes against Article VI, Section 25(4) of the Constitution. Little wonder that the national government has had to grapple with perennial deficits over time. That is why the executive has long pushed for a fiscal responsibility law, a key provision of which will stop enactment of laws that create more spending without providing for revenue-generating or expenditure-reducing measures to fund it. Otherwise, lawmakers may keep driving the country deeper into debt, whose long-run implications need little explanation. It’s often lamented that politicians only care for results visible within their short political terms; after all, future generations of voters are of no use to them. Short-run thinking is thus a habit that our politicians will always find hard to shake.

The same difficulty with seeing the long run leads to undue bashing of the conditional cash transfer (CCT) program, known locally as the Pantawid Pamilyang Pilipino Program or 4Ps, whose critics tend to harp on the program’s current or short-run costs. And yet the CCT is in fact a novel long-run investment in the country’s next generation. Indeed, assessments worldwide and here at home already show how it has kept more children in school, and I need not explain how that benefits us in the long run. Other instances abound when short-run and long-run interests clash, and the choice is ours to make.

Yes, in the long run, we may all be dead—but our children and grandchildren would still be very much alive to suffer the long-run consequences of misdeeds we commit today. I’d like to believe that most of us, our pensioners included, care about our children’s welfare at least as much as, if not more than, we do for ours.

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