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Business World, 13 August 2013
How would the military pension be financed in future years?
Here’s what I call the big elephant in the room — the huge and ballooning military pension. Nobody’s contributing, yet the number of claimants is rising. And no one wants to talk about it. The amount involved is enormous — 64.2 billion this year, and 65.1 billion next year. That’s much higher than next year’s budget for conditional cash transfer which will benefit some four million families.
Hence, I was pleasantly surprised when President Aquino III openly acknowledged the ballooning military pension, and its threatening impact on proper budget allocation in his recent State of the Nation Address. But, sadly, he failed to suggest a solution. Instead, he conveniently passed the buck to Congress.
Mr. Aquino, with the help of his economic managers and the heads of the two social security institutions — the Social Security System (SSS) and the Government Service Insurance System (GSIS) — should have presented to Congress an urgent bill that will remove the indexation feature of the current military and police pension system. After all, his proposed legislative agenda is so thin and could easily be expanded.
With every day of inaction, the size of the military pension balloons.
Under existing retirement rules, a soldier or policeman is likely to get higher retirement benefits than a teacher or health workers. No wonder, more Filipinos would rather join the Army or the PNP than be part the teaching or medical profession.
Unless the existing military and police pension system is reformed soon, total pension payments might overtake the salaries and wages of the military and the police by 2016.
This year, 64.2 billion has been allocated to pay the pension of the Armed Forces of the Philippines retirees, war/military veterans of the Department of National Defense (DND), the uniformed personnel of the Department of Interior and Local Government (DILG), NAMRIA, and the Philippine Coast Guard.
In 2014, the same military and police pension will expand to 65.1 billion. It will continue to balloon and pretty soon, will exceed the salaries and wages of the current military and police personnel.
RAMOS CHANGED THE RULES
What happened? Well, during the final months of the Fidel Ramos presidency, he approved what I consider to be the most generous pension system for the military in the entire world. While the common practice is to base the pension benefits on the highest salary (usually the last) of the retiree, under the law approved by Mr. Ramos, the pension is based on the salaries of the incumbent. Absurd but true.
The growing size of the military pension is only part of the problem. The other part of the problem is its source of financing. While the retired private sector workers source their pension from the SSS and their own company’s retirement fund and retired government personnel source their pension from the GSIS, the military pension is directly appropriated in the annual budget.
The uniformed personnel of the AFP, the DILG, NAMRIA and the PCG have to rely on direct appropriations by the national government. Why? Because the military’s pension fund collapsed a long time ago as an aftermath of the Asian financial crisis and the financial mismanagement of their respective retirement funds.
REFORM NEEDED TO STOP THE BLEEDING
No doubt, drastic reform is needed in order to reduce the hemorrhaging of the budget. Indexation has to discontinued now. But it’s easier said than done.
During the transition, the scrapping of indexation poses a major risk. If it becomes imminent, there will be a mad rush to retire for those who are eligible to do so, either mandatorily or optionally, in order to take advantage of the generous pension benefits under existing retirement rules. Should that happen, the AFP would have fewer soldiers while the PNP would have fewer policemen.
Unavoidably, the immediate solution is to scrap indexation. The medium-term solution is to integrate military personnel into the GSIS retirement plan. But this won’t be a walk in the park either. Military personnel retire early but they live longer — unless they die young in battle or are salvaged by fellowmen in uniform. With differing characteristics, aligning pension benefits enjoyed by military retirees with those enjoyed by government civilian personnel could threaten the financial stability of GSIS.
The alternative is to stall, defer, freeze the ball. This may be convenient way out, but it will be more costly in the long run. In addition, it poses a serious threat to long-term fiscal sustainability.
