Unlike in Australia where one’s pension fund (called Superannuation locally) is managed by employee’s choice, in the Philippines this choice is limited either to the GSIS if you work for the government or the SSS if you work in the private sector. But since both are government agencies, its ability to manage its funds for its members is always subject to political influences. Maybe another option to managing them efficiently is privatizing them similar to the Superannuation practices in Australia where the only political influence is setting the required employer contribution (currently at 9% of the employee’s salary).
Pension systems in trouble
THE ASIAN Development Bank (ADB) released last month a publication which indicated that “pension systems in many parts of developing Asia are unprepared and underfunded to meet the needs of the region’s rapidly aging population.” The study included the Philippines, where it said the “significant disparities in the [pension system] challenge both its equity and sustainability.”
And sadly for Asia’s elderly, the 164-page publication noted, even their traditional fallback to pension schemes — “family support” from the younger generation — was being threatened by “globalization.” It noted that “family-based old-age support mechanisms, such as with children supporting their elderly parents, are breaking down, particularly as globalized labor markets trigger a surge in migrant workers.”
Discussing the new publication, ADB Principal Economist Donghyun Park said in a statement, “Across Asia, great divides exist in pensions available in rural and urban areas, between retirees from the public and private sectors, and those leaving the informal and formal job sectors.” Park edited the new book, entitled, “Pension Systems in East and Southeast Asia: Promoting Fairness and Sustainability.”
Park added, “Without far-reaching reforms, the financial burden of these [pension] schemes on future workers may become more than they can bear.” ADB said the new publication aimed to urge Asian policy makers “to provide adequate old-age income support,” citing key lessons from China, Indonesia, Korea, Malaysia, the Philippines, Singapore, Thailand and Vietnam.
Citing some examples, ADB said that in China, where “the number of elderly already outstrips the combined total of senior citizens in all European countries, multiple pension systems cover urban enterprises, rural dwellers and civil servants, and will need to be rationalized to create a balanced, sustainable pension framework.”
And in Indonesia, where “the existing system covers just 14% of all private formal sector workers, pension programs will have to expand by more than 700% to cover both formal and informal sectors.” And while Singapore has a single-tier pension system with nearly universal coverage, “the average funds per member will be insufficient as the population ages in the next 20 years.”
As for the Philippines, the new publication noted that “with the already high benefit-to-contribution ratio of the SSS [Social Security System], greater increases in contribution rates would be required to sustain the pension program if no improvement is made on the current compliance rate of 31%.” As such, SSS members and employers should brace themselves for higher premium rates in the future.
The ADB study noted that SSS, the Government Service Insurance System (GSIS), and the Armed Forces of the Philippines Retirement Service Benefit System cover about 79% of the labor force and 28% of the population aged 60 and older. The bank noted the SSS fund is estimated to last until 2031 (another 19 years), and the GSIS fund until 2055.
“The GSIS program generally offers better benefits than the SSS as reflected in the gap between their replacement rates, but in both the rates are much higher than the best practice targets of 40% to 50% which make the programs unsustainable as the population ages. Removing the wage ceiling for GSIS members in 2003 exacerbated the gap, and short-term salary averaging is another source of perverse redistribution,” the ADB study said.
“The large discrepancy between the contribution rate of the GSIS (21%) and the SSS (10.4%) reflects the significant imbalance between contributions and benefits in the SSS. This accounts for its shorter fund life (2031) compared to that of the GSIS (2055). In addition, both programs are administered and amended by GSIS members, which could result in bias. The significant disparities between the SSS and GSIS test the fairness and sustainability of the entire system for present and future retirees,” it said.
It added that “the longer this imbalance continues, the greater the burden to be passed on to future generations of contributors as greater increases in contribution rates will be required to catch up with ever growing pension payments.” The Philippine section of the new ADB study was prepared by Ernesto Reyes, an independent consultant and actuary, and a Fellow of the Actuarial Society of the Philippines.
The ADB study also said that to “preserve the pension system, the government should consider raising the retirement age, increasing contributions, combining the two programs, gradually shifting to a defined-contribution system, and expanding the economy although the current population growth rate of 2%, one of the highest in Asia, will make sustained economic growth a challenge.”
The study added that “both the public sector and private sector programs are administered by separate government-run pension institutions; however, the administrators of these institutions, as well as the legislators who created and amend the programs, are covered by the public sector program. This could result in preferential treatment for the GSIS that could be eliminated if the programs were combined.”
In arguing for raising the retirement age, the study noted that “decreases in fertility rates combined with increases in life expectancy will age the Philippine population… and if the present trend continues, the top heavy structure may eventually result in the collapse of the system.”
In concluding the Philippine section, the study said, the options include reducing benefits by modifying the benefits formula; or, raising the Retirement Age as proposed under Senate Bill No. 2797, which suggests increasing the mandatory retirement age for government workers from 65 to 70. The ADB study said a corresponding bill applying to the private sector program should also be filed.
The government can also consider combining the Social Security System and the Government Service Insurance System to “remove the current inequities between the two programs, and any savings for the government can be channelled to social assistance programs. This can also involve off-loading non-pension related activities such as the non-life insurance operations of the GSIS, or the social assistance coverage of the SSS,” the ADB study added.
Without doubt, the new ADB study is timely. But one can only wish that policy makers are actually in the mood to review and learn from its discussions of options and constraints. More important, the new study presents compelling research data that should convince policy makers of the urgency of reforms in the country’s pension systems.