SSS pension hike: Win-win or win-lose?

So it has come to pass. After showing some reluctance to approve a P2,000 SSS pension hike until he finds a win-win solution, President Duterte finally gave his nod for an initial P1,000 pension hike last January 10, 2017 — half of the amount originally proposed. The hike will be implemented May 2017 with the second P1,000 hike possibly being given before 2022.

Was it indeed a win-win solution?

A little background

It was one of the more popular promises that President Duterte made on the campaign trail. When then President Aquino vetoed the bill arguing that the move would bankrupt the state pension fund as it would reduce the fund’s life from the year 2042 to 2029 (just 13 years), he received a lot of flak from some sectors, mainly labor organizations, militants and some of the election candidates. Duterte himself disagreed with Aquino’s veto, saying that he thought Aquino should have approved the hike and that any funding deficit can be “corrected along the way”. When Duterte became President-elect, he reiterated his support for the pension increase for seniors.

In a press conference shortly after President Duterte approved the SSS pension hike, Presidential Spokesperson Ernesto Abella made the announcement public, referring to the approved hike as a “…social contract (emphasis is mine) with the Filipino people, especially the elderly and the poor who gave the best years of their lives in service…” Sec. Abella was also quoted to have also said that the pension hike will be funded from current contributions and the SSS investment reserve fund, not government funds.

The SSS responded by announcing a contribution increase effective May 2017 equivalent to 1.5% increase based on monthly salary credit, with planned annual contribution increases over the next six years until the contribution rate hits the targeted 17%. The maximum monthly salary credit would also be raised from P16,000 to P20,000. The purpose of the contribution increases, according to SSS, is not to fund the pension hike but rather, to ensure that the SSS fund’s life stays at year 2040.

If I were simply thinking of myself, I would welcome the pension hike. After all, I am much closer to being a pensioner myself than my 20-year old working self. But I have family members who are just beginning their working life and are registered SSS members. I think about them and whether there will still be an SSS fund to count on when they reach retirement age.

Let’s look at this from different angles.

THE SSS FUND MUST BE KEPT FREE FROM POLITICS. The President has noble reasons for hiking pension and frankly, I believe such a hike is overdue. But it is being handled as a social contract that needs to be fulfilled even without the much needed actuarial evaluation and careful planning for fund build-up.

It is disturbing to find Congress intervening as well in how the SSS fund, which is a private fund, is to be used. It is even more worrisome for me when I hear SSS executives themselves seem to forget they are guardians of the SSS fund. SSS Chairman Amado Valdez was quoted as saying ”We want to thank profusely (emphasis mine) our President for his sense of caring for our pensioners…” Thank profusely? Chairman Valdez may be forgetting — he owes not just the pensioners but the current and future active members the kind of care and prudent management needed of the entire fund so that even the young ones now can be assured that they will have their own pensions when the time comes.

SSS is not a political basket one can dip into any time to please constituents.

THE SSS PENSION IS SUPPOSED TO AUGMENT LIFE SAVINGS OF SSS PENSIONERS, NOT SUSTAIN THEM SOLELY AND COMPLETELY. There is no way that one’s total SSS contributions, even if wisely invested, can come back to you in amounts that will sustain you for the rest of your life. SSS only acts as a trustee that manages the pooled contributions and invests it in order to provide the benefits under its charter. SSS is not a welfare program for the poor.

It is unfortunate that majority of Filipinos badly need a good foundation in financial literacy. We need to teach all working Filipinos that, while young, they need to plan and prepare for retirement and not depend on their SSS pension alone.

THE PENSION HIKE IS NOT BACKED BY ACTUARIAL STUDIES. Actuaries have an important role to play within SSS. They use financial and statistical models that look at different factors such as population growth, age demographics, projected SSS membership, members’ life span, extent of availment of benefits during the lifespan of a member, projected interest rates under different scenarios, estimated investment income, and many more. All of these modeling iterations are meant to manage future risks, help establish fund levels including reserve funds, and basically provide management with recommendations regarding member benefits and maintaining an ideal fund life.

Clearly, what an actuary does is complicated and has a long-term horizon. Any planned changes SHOULD NOT be done without referring back to these actuaries and their projections because they have long-term financial implications.

SUBSIDY OR NOT? The P1,000 pension hike will mean shelling out another P33-B for about 2 million pensioners. SSS, according to reports, says that this will cut the fund’s life to 2032 without additional infusion. But if additional contributions are imposed, the fund’s life can be brought back to 2040 or longer.

I look at this statement another way. The increase in contributions simply keeps the fund’s life STEADY at around year 2040 (no added benefit to the contributing members). Without the pension hike, the additional member contributions would effectively already increase the fund’s life BEYOND 2040. If that is not a subsidy by active, contributing members, I do not know what is.

Let’s remember — our SSS fund life is currently only hovering at 25 years when the global best practice is to have a fund life of around 75 years. We still have a long way to go.

INCOME FROM INVESTMENTS AND LOANS IS INSUFFICIENT TO COVER THE SSS PENSION HIKE. With interest rates so low these days, it is a real challenge to find good investment products that can earn enough to increase the pension fund. Can you think of investments that can generate P33-B in income annually to cover the pension hike?

There is a double whammy too. SSS funds get depleted because of members who avail of loans but are unable to repay them. Loan condonation and restructuring programs have been offered time and again by SSS to encourage repayment. In fact, one loan restructuring program is in effect till April 2017.

Unlike bank loans where strict credit investigation of a borrower is made before a loan is granted, SSS does not have the luxury of lending only to good borrowers because it is mandated to extend loans to members for as long as they have met the minimum number of contributions. Bad debts are a huge risk that SSS takes on, whether it likes it or not.

BOTH COLLECTION EFFICIENCY AND MEMBERSHIP COVERAGE SHOULD BE IMPROVED. There is disagreement as to what the actual collection efficiency is. Those opposing the pension hike claim the collection efficiency is only 38% while SSS says it is 88%.

Cong. Neri Colmenares said that out of about 30 million members, only 9 million are reportedly paying contributions regularly. On the other hand, the previous SSS administrators claimed that what Colmenares was referring to was the coverage rate and not the collection efficiency. SSS cited collections of P103.1-B versus collectibles of P116.6-B, including a P13.5-B employer deficiency, justifying their claim of a collection efficiency of at least 88%.

The real collection efficiency is likely somewhere in between. Colmenares’ ratio is based on membership headcount while the previous SSS administrators computed their ratio based on amount collected. Colmenares’ numbers include members that stopped paying due to unemployment, overseas foreign workers (OFWs), and those from the informal sector. The SSS assessment of its collection efficiency also looks overstated because it does not yet consider potential collections from companies in the private sector with non-member employees as well as non-member workers in the informal sector.

In imposing the planned contribution hike starting this May, it is not delinquent employers and non-paying workers who will actually be hurt and burdened by the hike but those who are already faithfully making their regular SSS contribution payments.

My thoughts? A two-pronged approach. One, strive to increase membership to cover working non-members. Two, improve collection efficiency and run after delinquent employers. This one-two punch will surely help boost fund contributions.

RAISING MEMBERSHIP CONTRIBUTIONS – THE LOW-HANGING FRUIT. In all discussions on raising member benefits, the default solution has always been to raise member contributions. Why? It’s the easiest option! In other words, it is the low-hanging fruit. But is it the ONLY solution? NO.

The profit equation applies to a fund such as that of the SSS. It can be increased in three ways: raising revenue, reducing expense, or both. SSS has almost always approached fund deficits using the revenue option. Why can’t SSS look inwards for a change? The expense management option has not been given enough emphasis in past pension hikes. In any organization, expense reduction can be painful and even controversial internally. But if SSS has the political will to find ways to increase the fund even before it thinks of raising contributions, it will consider this option. After all, isn’t it also member contributions that cover its overhead? Instead of justifying the controversial executive compensation without clear performance goals, should we not peg a portion of their compensation to actual performance indicators?

It is probably too late to take back the SSS pension hike. I can just imagine the dilemma of its actuaries now who have to revise their projections, evaluate the long-term impact of this politically-charged decision, and try to find a real win-win solution.

But from where I stand now, the pension hike will definitely be subsidized by active, paying members until a more equitable and actuarial-based plan is put in place. This, to me, is a win-lose scenario.

This post is supported by a writing grant from the Philippine Center for Investigative Journalism (PCIJ)