#2000 increase

                          We need to ask the correct questions.

 It is a story many of us have heard, about the fellow who finds a young boy fishing on a Pacific island and attempts to convince him to get a formal education. We all probably already know how this story ends: “So I go to school to get a job so I can retire and fish all day?”

The reality is that any decision, any choice, addresses the question of why. Still in the news this week is one of those questions: Why was the 2000 peso hike in SSS pensions vetoed? There is, of course, the easy answer: There’s not enough money for it.

Of course, all of us know that that’s not enough of an answer. For the young boy fishing, the reality of a changing world and a vaster horizon is not considered. Vastly larger issues remain unmentioned in the easy government explanation to the pension increase veto.

Why?

The official government explanation is this: The increase would cost 56 billion pesos in the first year. This amount will increase as the number of SSS pensioners increase. They further explain that the current pensioners are about 2.15 million, a very small number compared to the 33 million active members, who, the government argues, would lose out if the system shuts down. And that, of course, is the government’s final salvo. The increase would result in shortening the fund lifetime to 11 years (ending in 2027), from the current 26 years (ending in 2042). At this point, what nobody seems to be willing to admit is that, not too long ago, the SSS actually had a fund lifetime of only about 15 years.

The facile answer of not enough money presumes that there are no ways to raise the funds for an increase. The real question is to those who proposed the increase in benefit. Clearly, it is irresponsible to propose an expense without taking into account funding.

As for funding, taking into account the fact that there are vastly fewer pensioners than active employees, one could argue that the 2000 per month for each pensioner actually translates to a cost of 130 a month for each active member. To the extent that that increase is palatable and the relative size of active members to retired members holds, then the pension increase could be deemed acceptable.

Funding

The facile answer of not enough money also sidesteps the question of what the system can afford. The truth, as the actuarial profession knows, is that most pension schemes are managed assuming that there will be future cost of living adjustments in the pension benefit.

What can the system afford? There are reports that the SSS itself reported that the system can sustain a 500 peso monthly increase. If so, why was the presidential action just a veto and not a recommendation for a downward adjustment?

The other question is this: In recommending contributions, and managing investments, what does the SSS assume concerning increases in pension benefits?  Let’s take this into account. The average SSS member retires at age 60. The system guarantees 60 months or five years of pension. In 2007, Gracie Cruz, Director of the UP Population Institute, estimated that Filipinos aged 60 expected to live another 17 to 19 years. Clearly, assuming no increase in pension benefit for over 15 years would point to a system that either had no empathy for its members or had no understanding of real life.

The reality, of course, is that, historically, the SSS pension does increase. Another really interesting question is this: what is the process for increasing pensions?

Pension benefits are long-term. Since reality dictates that there be increases in benefits, management of the fund must already build in assumed increases in benefits. Any increases beyond that originally anticipated have repercussions beyond the current year. Hence, these unanticipated increases must consider the need for an increase in contributions.

We need to stop decoupling the benefit decision from the funding decision. Managers who propose spending without taking into account how to pay for the spending are always taken to task. The same rule should apply to politicians. The same holds true for managers and policy makers who knowingly withhold benefit increases, possibly in order to hold them for opportune moments.

Responsibility

Now the tricky question. The government wishes us to worry about the SSS fund running out in 2027 if the 2000 peso increase is approved. However, the government seems completely comfortable with the current estimate of the fund running out in 2042, a 26 year lifetime. Let’s put this into perspective. For the moment, let’s assume that the average member retires at age 60, and lives an extra 18 years after age 60. If you are now 52, you will retire 8 years from now, year 2024. At that point, your life expectancy will be exactly the same as the funding lifetime of the SSS fund. What this means is that, if nothing changes, everybody below age 52 should be worrying.

So should we worry? The reality is that no government would knowingly plan for a pension system to actually run out of funds. Any actuary will explain that a system can either be fully funded, partially funded, or pay as you go. A pay as you go system means that, each year, pension payments are dependent on budget availability. That, clearly, is a very uncertain method. Full funding is the other extreme. It is, however, what most private pension systems aim for. It is also what I understand the GSIS board hopes to aim for. Partial funding is what the Philippine social security system uses. The funding lifetime, essentially, is the time that the system can use to amend contribution schedules and other non-pension benefits in order to ensure that benefits can continue to be paid.

Should the increase have been approved, disapproved or amended? This is a question that sets us up for disagreement.

What we really need to know is what the system aims to provide and what it can afford. What we could ask is what do the other systems provide? What benefits are provided to GSIS members? What benefits are provided to uniformed personnel? How are those funded? How are they adjusted?

We need to ask the correct questions.

First published 22 January 2016 by The Standard  in the column Integrations by Maria Elena “Maya” Baltazar Herrera.