Crossroads (Toward Philippine economic and social progress)
Philippine Star, 20 January 2016



Of what use is a measure that proposes to do good if it destroys the very institution that produces the goodie? Don’t kill the goose that lays the golden egg!

President Benigno Aquino III did the right thing when he exercised a seldom used veto power to reject a “very popular” measure passed by Congress that would exactly do damage to the institution that the country has set up to provide social security.

It is a credit to the president that he exercised the veto. Otherwise, the approved measure by Congress would have lapsed into law.

Social security pension increase without the means. The particular measure being discussed is the law granting a P2,000 pension increase across-the-board for all retirees of the Social Security System (SSS).

The SSS estimated that the increase in pensions mandated by the bill would render the system bankrupt by the thirteenth year. There were no means provided by the bill except to rely on the existing resources of system.

This is not “actuarially sound.” As constituted, the Philippine social security system is built around contributions by both employer and employees during the working years of the employee. The contributions to the system are invested to earn incomes to pay future benefits.
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“Actuarial soundness” means that the contributions and all its earnings are calibrated to pay for the benefits given. When the benefits exceed those that are earned in terms of contributions and further earnings, the system goes into deficit, like any other business.

The way to increase the benefits of social security is therefore to raise the contributions. If times are prosperous reasonably attractive, earnings might even lead to better benefits because system resources could also have good earnings.

However pension funds cannot be expected to earn high returns because their investments need to be – for reasons of safety of the funds of the members – conservative.

Social safety net. As presently constituted, the SSS structure and financing is patterned after best practice setups established elsewhere in the world. Social security systems vary across countries in their particular histories and respective evolutions.

In our country, there are two major pension funds run by the government: the SSS for the private sector and the GSIS (Government Service Insurance System) for government employees. (There is also a separate pension fund for the armed forces).

The SSS was founded during the independence period, in 1952. It is the more modest system in terms of contributions to the system per employee although in terms of size of membership and the volume of resources, SSS total assets are now twice as big as those of GSIS.

The GSIS is the older pension fund. It was founded during the Philippine Commonwealth period, during the time of the Great Depression.

The size, success, and benefits accorded to members are woven strongly with the performance and evolution of the national economy. The contributions collected from the salaries and wages of government employees are much higher than those collected from the SSS.

Thus, government employees tend to receive higher pensions than those from SSS. The SSS might be the more modest pension system at present compared with the GSIS.

In the private sector, there are however much larger private pension funds, known as provident funds, that are devised for private sector employees that are superior to what the GSIS provides.

These private provident funds have their own rules on contributions and on the pensions and benefits that they confer. The big, private companies that are financially very successful have stronger pension systems. They supplement the SSS pensions and benefits, since all private employees are members of the SSS.

Populist measures, over-reaching government, and democracy. Good and righteous intentions in the democratic process can lead to depraved outcomes because restraint or discipline is not observed.

Populist causes are often in this mode. Politicians sponsor them in order to earn “pogi” points to crown their laurels. They aspire to be responsive to popular needs.

If their solutions to public clamor lead to new problems, they kick those problems down the road for later administrations to solve. In doing so, they endanger institutions, they postpone or destroy the road to economic prosperity.

The SSS pension increase is just an example of this. The Congress passed a bill imposing an additional pension for all retirees but irresponsibly failed to provide the means by which it would cover that additional benefit.

The House actually saw the light. It passed a separate bill to raise contributions to support the rise in pension payments. The Senate however did not do its duty because it did not pass this House bill and insisted only on the new pension.

The bill as passed by Congress then turned out to be what was correctly vetoed by the president.

Many examples of populist measures in our midst. We have many examples of populist measures with adverse economic outcomes. Oftentimes, such measures arise out of a desire to respond to certain sectors of the economy to solve particular problems.

They abound in the area of development policy. This column in fact is devoted to the exploration and analysis of such policy measures, always, with the end in view toward understanding them so that we can improve upon our responses to the problems they invite.

Below is an incomplete sample:

(1) Labor and other advocates are so focused on getting government to intervene and raise the level of the minimum wage at least in the regional community (Metro Manila) so that they can set guidelines for other regions. Excessive direct interventions have led to the loss of job and many labor-using industries to other countries, thereby the prevalence of many poor, unemployed Filipinos.

(2) Rent control on housing for the poor has led to the diminution of relative space for rental housing. The growth of squatter communities and the crowding of housing spaces in poor areas has led toward a diminution of housing supply for the poor.

(3) High industrial protection in response to nationalistic pressures created the uncompetitive industrial sector that lost to competition once the country liberalized imports.