Downside to SSS rate hike

Published by rudy Date posted on April 11, 2011

A PLAN by Social Security System (SSS) to increase the contribution rate of employers and their employees has struck a raw nerve among workers’ groups—and for good reason.

According to the SSS, the plan is aimed at responding to members’ request for more generous benefits without putting at risk the solvency of the state-run pension fund.

The plan calls for a 0.6-percent increase in the contribution rate to 11 percent of the monthly salary of members, to be shared equally by employers and their employees. At present, the contribution rate stands at 10.4 percent.

Under the new SSS leadership’s plan, the maximum monthly salary credit, which is the ceiling that serves as basis for contribution payments, will be raised to P20,000 from the current P15,000 to enable workers with bigger salaries to save up for retirement through higher contributions.

The increase would add seven years to SSS’ fund life and provide leeway for benefit enhancements.

Among the enhancements it is eyeing are a P500 one-time grant to pensioners, 10-percent across-the-board increase in pensions and higher computed benefits for active members.

Without the contribution rate increase, the planned benefit increases would strain the SSS and shorten its actuarial life, which at present is projected to last until 2039, based on the 2007 actuarial valuation.

With the contribution rate hike, the actuarial life would extend to 2046 even with the 10-percent across-the-board increase in pensions and the P500 grant.

In arguing for the increase, the SSS pointed out that the current contribution rate is less than half the 21-percent imposed on the public sector by state-run Government Service Insurance System (GSIS), and way below the 23 percent among Asian countries, and 35 percent among European countries.

We’re not sure if comparing the Philippine social security system to the EU is apt, in light of the latter’s graying population. In contrast, the Philippine population is predominantly young.

In fact, an international rating firm earlier said that Asian countries, including the Philippines but excluding Japan, are under no threat from inadequately funded social security systems in the medium term given the region’s young population and relatively higher birth rates.

Granted, any increase in SSS benefits requires an upward adjustment by at least an equal amount of revenues for the pension fund to maintain its actuarial life. But the SSS should first ensure it has plugged leaks in its contribution remittance system before raising the rate, as a hike would only serve to bloat non-revenue or un-remitted contributions.

Moreover, member and employer contributions are but one of the sources of SSS’ revenues. Besides contributions, other sources of revenues in the past had included investments in corporate securities and loans to both members and the corporate sector.

During the previous administration, the pension fund gained a reputation—some say notoriety—for tilting the balance in corporate takeovers, and in so doing earning for the SSS a princely sum in terms of price appreciation of the shares of the affected companies.

A huge institution like the SSS can throw its weight around in a small stock market like ours, and in the process generate outsized returns on investment. Especially so in a market that is poised to post respectable growth in light of the country’s sound macroeconomic fundamentals.

But then again, a buoyant market would be no use if the pension fund has no in-house team of sharp fund managers who can divine the goings-on of the local bourse.

Has the Aquino administration’s ongoing crackdown on the perks of government-owned and -controlled corporations resulted in a flight of talent from the SSS? If so, then we can understand why the pension fund is now resorting to the all-too-easy option of raising contribution rates.

The problem with the contribution rate hike is that it comes at a time of rising inflation. As a mandatory deduction from the salaries of fixed-income earners, the SSS contribution is a de facto tax on the current purchasing power of members.

If salaries fail to increase accordingly, then members would be squeezed between rising prices of goods and services on the one hand and higher mandatory salary deductions like the SSS contribution on the other.

The impact would be felt on consumer spending, which heretofore remains the main driver of the Philippine economy. As it is, the political crisis in the Middle East and North Africa region is threatening to dampen consumer spending, with the return of overseas Filipino workers, whose remittances helped fuel the Philippines’ record economic expansion last year and propped up the domestic economy throughout the two-year global financial crisis before that.
Had the Aquino administration jumpstarted its public-private partnership (PPP) scheme early on, then we could probably manage a slight reduction in consumer spending. But the PPP, which is supposed to trigger private investments in a massive infrastructure buildup, has yet to take off.

The SSS therefore is treading dangerous ground given the wider economic implications of its planned contribution rate hike.

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