Social security

LOS ANGELES – Social security is a hot topic here specially in the light of a disappearing middle class amidst growing income inequality. According to Forbes last week, 56 percent of Americans in a recent survey said they have less than $1,000 in their checking and savings accounts combined. About 25 percent have less than $100 to their name.

Some 38 percent said “they would pay less than their full credit card balance this month, and 11 percent said they would make the minimum payment—meaning they would likely be mired in debt for years and pay more in interest than they originally borrowed. It paints a daunting picture of the average American… steeped in credit card debt, living paycheck-to-paycheck, at serious risk of financial ruin if the slightest thing goes wrong.”

The big fear here about getting old is not having enough money to cover basic living and medical needs. President Obama in his final State of the Union message quipped, to the discomfort of members of Congress that they are the only ones with real social security.

Social Security is a solution to a looming retirement income crisis but the old age and disability trust funds combined will be unable to pay full benefits in 2033. This is why social security is such a basic concern here.

Social Security is a key source of income specially for US retirees. It has been estimated that for more than half of Social Security recipients aged 65 or over, the program provides over 50 percent of their family income. Because of its lifetime income protection and survivors benefits, Social Security is particularly important for elderly women.

Of course the Americans have a more comprehensive social security system than what we have. Ours don’t provide the kind of protection we can really depend on. Ours do not cover most of the costs at time of need.

But here as it is there back home, social security is all about long term viability. It means keeping the fund healthy enough to provide the benefits promised its members. This is why even if as a retiree I will benefit from the recently vetoed proposal to raise SSS pension benefits, I can see why P-Noy did the responsible thing.

I remember that when it was pointed out to Sen. Cynthia Villar that the proposal will shorten the actuarial life of SSS funds, she rejected the comment saying in so many words there is time to let the future take care of shortfalls. There is a need now and they are providing for that need.

It was obvious that the need the senators and congressmen had in mind was in aid of election. They needed to be able to point out to something as their accomplishment. It is clearly a shortsighted proposal.

There is no such thing as a free lunch. Someone has to pay the bill at some time. Some say the increase is needed for social justice sake. Then they should call for a subsidy out of the National Treasury. The proposed increase in pension by itself would deplete the fund.

But increasing contributions, a logical companion move to the vetoed bill, is not popular with the employers and members. Or, as former NEDA chief Solita Monsod pointed out, they could have made SSS like GSIS which provides more benefits as a result of its contributions structure. Government employees contribute nine percent of their income every month to the GSIS. SSS members contribute only 3.63 percent of their income to the SSS.

SSS also puts a ceiling on that 3.63-percent contribution to a maximum P15,000 of income, while GSIS members have no such ceiling; they pay nine percent on total income. The government contributes 12 percent of income as its contribution, so the total is 21 percent.

In the SSS, employers pay 7.36 percent, so the total is 11 percent. If the private sector wants larger pensions, it should contribute larger amounts. Or maybe the time is ripe for a unified social security system combining the pool of government and private sector workers under one set of rules as in many countries.

For now, SSS must also think of members other than retirees. It provides current working members benefits like salary loans, sickness and disability payments, and assistance for members who are victims of disasters and catastrophes. Most importantly, it must make sure it has enough funds to provide pensions in the future.

At present, SSS funds are projected to last for 27 years, until 2042. Raising pensions by P2,000, as proposed by the bill, will nearly cut the SSS fund life in half, from the current 27 years to only 14 years, with the funds only sufficient until 2029.

What the proposal will do is put the social security benefits of our younger generations at risk. I don’t think that is fair to them, specially because pension benefits today are being paid by these young workers now. We are talking here of the interests of 30 million members against that of 2 million pensioners.

Many people forget SSS is not funded by the government. We, its members, fund it with contributions. The fund must grow through investment gains to meet its commitments.

Simply, SSS revenues or fund inflows come from contributions and investment income. Benefit disbursements and operating expenses constitute outflows. The average net revenue for the past five years (2010 to 2014) has increased to P33 billion compared to the average net revenue of P8 billion from 2000 to 2009.

But, as SSS chairman Johnny Santos explained to me some months ago, the strong performance in SSS net revenues can easily be nullified by drastic increases in outflows such as the proposed P2,000 monthly pension increase.

Johnny pointed out that net revenue in 2014 was P44.5 billion and implementing the proposal will require at least P56 billion per year. That wipes out revenues and will require SSS management to dip into the reserve fund for the deficit. This scenario will worsen in succeeding years, as the number of pensioners continues to grow.

SSS management pointed out during the public hearings that this has happened before. SSS had to repeatedly consume part of its reserve funds to meet its benefit obligations due to successive pension hikes in the past without the corresponding increase in contribution rates. The responsible thing to do in managing pension funds is to think long-term.

There have been observations about so called excessive compensation being collected by SSS management. What is excessive depends on two things: one, what the law allows and second, performance.

Getting good money managers to look after the fund means we must be ready to pay the price. The way I see it, the guy who calls the shots on investment decisions should get compensation that is competitive to what someone in the private sector with the same skill and reputation gets. Giving them their due also eliminates an excuse for corruption.

Alternatively, the responsibility for investing SSS funds can be given to a private fund management firm for a fee based on an agreed performance criteria. This way, we don’t have to worry about overpaying SSS officials who are government employees and still get professional performance.

Maybe, we can save some money in compensating members of the Board who do not have day to day management responsibilities. They should serve in the interest of public service and not look to SSS for extraordinary compensation and perks. Besides, these are mostly political friends who contribute little or nothing to SSS. The SSS president should also not get what looks like double compensation because he also sits in the board.

How well are they managing SSS funds? According to materials shared with me by Johnny Santos, they did rather well. “The average return on SSS investments reached of 9.8 percent from 2009 to 2014, higher than the 5.5 percent average of benchmark rates over the same period. These benchmark rates include the inflation rate, the 10-year Treasury bond rate, and the 365-day Treasury bill rates.”

That’s pretty good performance, specially at this time. Indeed it makes sense for some members to have the option of making additional contributions for the purpose of having SSS manage it. This will make the pension mean more when one hits retirement age. Right now, the top monthly pension of less than P15,000 means little to high earning members who contributed at the maximum rate during their working years.

The presidential veto of this obviously politically motivated measure should spark serious discussions of how to make our SSS more relevant to its members. And we don’t have to reinvent everything because there is a wealth of experience on how to do it right from many countries.

We just have to be serious about fixing the system for good. –Boo Chanco (The Philippine Star)