The Social Security Act defines the amount of pension as the sum of P300 and the product of 2 percent of a member’s average monthly salary credit and his credited years of service.
Seemingly simple, it becomes complicated to a member as soon as he starts computing his AMSC and CYS, and applies to the resulting pension amount the guaranteed minimum provision.
The charter defines only the initial amount, and while it mandates the review and adjustment of pensions at least once every 4 years, it leaves out the exact date and amount of adjustment.
The pension adjustment provision is so vague it had consequently divided us as a nation on whether or not SSS should grant the now controversial P2,000 pension increase that former Representative Neri Colmenares proposed, Congress approved, but President Benigno Aquino III vetoed upon the advice of officials of the Social Security System.
Must government subsidize it or should workers and employers pay for it via additional contributions?
Pension professionals describe the SSS pension system as “defined-benefit,” which links weakly one’s pension amount to his actual contributions. Consequently, some pensioners receive more than they had given, while others less.
The Government Service Insurance System, the military, police, judiciary, and Constitutional bodies also administer DB pension schemes with varying degrees of contribution sharing.
We seem comfortable with this type of pension. For instance, after we debated hotly the merits and demerits of the conditional cash transfer program to needy families and the P500 social pensions to indigent senior citizens, we eventually settled down and made them the centerpieces of our non-contributory public welfare programs where beneficiaries receive tax-funded benefits without having contributed anything.
In contrast, the scheme is called “defined-contribution” if an individual’s pension benefit is equated to his actual contributions and their earned investment income.
DC schemes include those of Pag-IBIG and similar provident funds of public and private institutions. Their members receive at retirement the exact equivalent of what they had contributed plus their investment earnings—no more, no less.
Participants of DC schemes know that they cannot demand benefit amounts that exceed what they had contributed.
Unlike them, SSS pensioners get back much more than what they had contributed.
To illustrate, those who had contributed P84 a month for 10 years would have paid a total of only P10,080, yet they are entitled to a monthly pension of P1,200. No matter how wisely their contributions had been invested, their accumulated value would never be enough to pay for even a year’s pensions.
Obviously, active members now pay for their pensions.
It’s true that the SSA mandates the adjustment of pensions, but only if the actuarial soundness of the reserves remained guaranteed and the same contribution rate were kept. It only allows pension adjustments if there are surplus funds in the reserves that are no longer needed.
SSS used to have such surplus funds when it granted 22 pension increases from 1980 to 2014, but not anymore as disclosed consistently by its responsible officials.
Thus, in plain and simple language, SSS officials could no longer adjust pensions even if they had already stagnated.
But pensions—like wages—should be periodically adjusted for inflation. The question is, how should it be funded?
Increasing the contribution rate is the most obvious way. It is more preferred over increasing the maximum salary subject to contributions, which also raises future pension obligations.
Certainly, other events—sometimes, not even catastrophic—could occur and threaten the soundness of the pension reserves.
Even a stable economy could create a regime of low investment returns, and the loss in projected investment income would have to be compensated by a higher contribution rate.
The steady improvement in pensioners’ longevity—especially if accompanied by declining rates in birth and labor force participation—could also increase pension liabilities.
We must also consider the unfunded liabilities that were created by the recent increase to P40,000 of funeral benefits and the acceleration of coverage of highly-subsidized, low-income informal sector workers.
Unintentionally, perhaps, they were launched without prior actuarial studies. Nonetheless, they had added pressure to increase the rate of contribution and the cash flows of revenues and benefit payments would soon show this even without implementing any pension increase.
At the extreme side, a catastrophic event such as war or a worldwide economic crisis could wipe out SSS investments and force establishments to close down and lay off workers. Consequently, contribution collections and member loan repayments would drop considerably while benefit claims would soar.
Beyond doubt, they could only be mitigated by increasing contribution rate, which is the universal way of responding to them.
Yet the Social Security Act lacks in its provisions detailed formulas on how to adjust the contribution rate, pension amount, and other funding requirements. It’s therefore high time that these formulas be incorporated into it.
SSS would celebrate its 60th anniversary on Sept. 1, 2017 and members and pensioners would expect to hear from President Digong Duterte’s appointed officials that they had accomplished so much.
But what would they tell them if these enabling amendments haven’t been legislated by then—empty promises of undoable pension increases, again?