Capitalists And Money

Improving the pension system

PHILIPPINE STAR/MIGUEL DE GUZMAN

By raising its members’ contribution rate to 15% starting this January, the Social Security System (SSS) expects to extend its fund life by 28 years. In essence, the SSS claims it will have sufficient resources to provide benefits — such as pensions, loans, and maternity leave benefits — until 2053 without requiring members to pay additional monthly premiums.

SSS President and Chief Executive Officer Robert Joseph M. de Claro stated that the latest increase in the contribution rate will add approximately P51.5 billion to the SSS fund by 2025. Of this, 35% — or P18.3 billion — will be allocated to the Mandatory Provident Fund accounts of SSS members. He also noted that the 1% hike this year would mark the final increase in a series of adjustments implemented since 2019.

While the initiative extends the fund life to 2053 from the previous projection of 2032, Mr. De Claro acknowledged that the ideal fund life is 68 years. However, he conceded that achieving this target would be unrealistic without government subsidies. He further explained that aiming for a 68-year fund life might not be practical due to its potential cost to members.

“[It] doesn’t make sense to ask members to pay more than 15% of their salary, especially considering they also have to pay income tax of around 25% to 30%. The take-home pay would shrink significantly,” Mr. De Claro said during a press briefing at Malacañang. This observation underscores the burden on individuals, where 40%-45% of income goes toward mandatory obligations.

The government faces a significant challenge: how to achieve an ideal fund life of 68 years while minimizing the financial burden on members already contributing 15% of their salary. While Mr. De Claro mentioned subsidies as a potential solution, any additional government support for the pension fund could necessitate new fees or taxes.

The funds must come from somewhere. Supporting the pension system may divert resources from other critical areas, such as education and social services. Additional borrowing to sustain the SSS could also lead to higher debt payments, further straining government finances. But there are alternative pension options.

Globally, the average mandatory pension contribution rate in wealthier countries is approximately 15%, placing the SSS contribution rate on par with these systems. For example, Iceland has a mandatory contribution rate of 15.5%, split between an 11.5% employer contribution and a 4% employee contribution.

Iceland, along with the Netherlands and Denmark, is frequently cited as having one of the most effective pension systems globally. In these countries, pensions are funded through a combination of state pensions and mandatory occupational pension funds, with contributions from both employers and employees.

In contrast, the Philippines has a state pension system but lacks a mandatory occupational pension scheme. This is where the private sector could step in to complement the government’s efforts. Occupational or industry pension funds could augment the benefits retirees receive. With an aging population, this need becomes even more pressing.

In the Netherlands, the state pension is funded through payroll taxes, while occupational pensions are supported by contributions from both employers and employees. Denmark employs a similar approach, with public and mandatory occupational pensions funded primarily through employer contributions. In addition, both countries have private pension funds, akin to those in the Philippines.

The combined contribution rate for state and occupational pensions in wealthier countries is substantial, reflecting the goal of ensuring adequate retirement income. In Denmark, for example, mandatory contribution rates, determined through collective agreements, range between 12% and 18% of salary. Starting this month, the SSS contribution rate stands at 15%.

Expanding beyond state pension funds is essential to securing adequate retirement benefits for seniors. This is likely why the SSS is exploring other models, including what Mr. De Claro described as a shift to a “variable or hybrid model” from the current “defined benefit” system. Under a variable-benefit model, the 68-year fund life goal may become less critical.

Transitioning to a variable-benefit model, however, poses challenges. This approach would provide members with a variable income stream after retirement, as opposed to the fixed income currently offered. Personally, I believe the SSS should retain the fixed-income model, while the government incentivizes the creation of occupational pension funds offering variable income streams.

Countries like Iceland, the Netherlands, and Denmark maintain fixed income streams for state pensions, providing retirees with a stable financial foundation. Variable income streams, such as dividends, are typically associated with occupational or private pensions.

A fixed state pension, like the SSS provides, ensures a universal basic benefit for all members and is relatively straightforward to audit. The SSS can continue to offer supplemental benefits, while occupational pension funds can provide variable payouts depending on fund performance and contribution levels.

The Netherlands offers an interesting model: workers contribute to pensions through payroll taxes, which are part of their income tax. The contribution rate is about 17%, with no direct employer contribution to the state pension fund. However, when payroll tax revenue is insufficient, the government uses general tax revenues to cover the shortfall.

Occupational pensions are mandatory in many sectors in the Netherlands. Employers and employees both contribute, with employers typically shouldering 60%-70% of the total premium. Contribution rates for occupational pensions range from 15% to 25% of gross salary. Additionally, all residents, including non-working individuals, accrue pension rights based on years of residence (up to 50 years). This universal system ensures a flat-rate pension upon retirement, with the retirement age tied to life expectancy, currently at 67 years.

Iceland’s pension system has its own unique features. Public pension benefits are adjusted based on the retiree’s income and assets. While everyone meeting the residency requirement (at least 40 years) is entitled to a basic state pension, supplementary benefits are reduced proportionally based on other income sources, such as occupational pensions, private savings, or employment income. If a retiree’s assets exceed certain limits, state pensions may be reduced or denied. Pensions are also periodically adjusted for inflation, income levels, and government policies.

Given these examples, a comprehensive review of the Philippine pension system is urgently needed. While the SSS has extended its fund life to 2053, it should not remain the sole option for retirement benefits. Private pension funds and occupational pension schemes should be encouraged to provide retirees with additional options and ensure a more secure retirement for future generations.

Marvin Tort is a former managing editor of BusinessWorld, and a former chairman of the Philippine Press Council

matort@yahoo.com