ANALYSIS: Are you ready for poverty in old age?

Jose Galang - Your Business

Posted at Jul 10 2017 04:10 PM

With people across the globe now living much longer, a gap has developed between what individuals need during retirement and what is available, pointing to what analysts at the World Economic Forum (WEF) call “a global pension crisis”.

People are now living 8 to 11 years longer compared to life expectancy levels in the 1960s when nations started setting up pension systems. That means pension systems are now having to pay benefits for 2 to 3 times longer than what they were designed for, says a recently released WEF research paper on global pension systems.

The WEF paper projects that based on current longevity trends, the ratio of people in the workforce worldwide to those in retirement will drop from 8:1 today to 4:1 by 2050—a lot fewer working people will be contributing to pension funds that will provide for retirees’ pensions. This dependency rate, says the study, cannot be supported by the world economy, citing a need for sustainability and affordability in current retirement systems that will “protect against poverty in old age”.

Policy-makers must immediately consider, urges the study, how to “foster a functioning labor market for older workers to extend working careers as much as possible”. Also, it calls on employers help workers reskill and adapt their work styles toward a longer working career.

Social security for Filipinos

Findings and recommendations in the WEF May 2017 study should prove useful when lawmakers in the Philippine Congress and economic managers of the Duterte administration begin to seriously look for strategies to cope with the increasing challenges at the Social Security System (SSS), the state-run fund that manages the pension and welfare programs for private-sector employees and retirees around the archipelago.

Recent assessments of the SSS actuarial position reportedly indicate the fund could last until around 2025-2028 based on current levels of members’ contributions and increased pension benefits for retirees. Until early this year, before an increase was implemented in retirees’ pensions, the fund was projected to be good until 2042.

Currently the SSS has over 34.78 million member-contributors and close to 1.29 million pensioners who get an average pension of P3,662 a month, with the minimum at P1,000 and the highest at P17,945. Retirement age in the Philippines is 60, which means that retirees are expected to be receiving SSS benefits for an average of over 8 years based on a national life expectancy rate of 68.3 years.

Government employees, on the other hand, contribute to the Government Service Insurance System (GSIS) who get a minimum monthly pension of P5,000 upon reaching retirement age. As of end-2016, the GSIS had 304,878 old-age pensioners and 32,452 survivorship pensioners, including around 9,800 pensioners getting disability benefits.

The challenges at SSS

With increased pensions released starting last March, total benefit disbursements in the January-March quarter surged forward to P44.77 billion from the year-ago P31.3 billion, the SSS management recently reported. Pensions to retirees jumped to P24.24 billion from P16.1 billion—a substantial increase of 50.5 percent.

The March increase in pensions actually represented just half of the total adjustment that President Duterte approved early this year. Another P1,000 monthly increase will be paid out to retirees starting in 2022, although the SSS management says that could be earlier depending on how a proposed increase in members’ contributions can stabilize the provident fund’s position.

Stability is being worked out also by going after business establishments that are delinquent in remitting their workers’ contributions to the SSS. More than 20 million SSS members are affected by these late remittances, which also effectively curtail their access to loans and other financial support from the fund.

The SSS has announced it was taking “more concrete steps in strengthening the pension fund’s collection and legal enforcement units with the end In view of reducing and preventing occurrences of delinquencies.”

Despite a 12 percent rise in total revenues to P48.78 billion, however, net revenues for the January-March period this year still plunged to P4 billion from the year-ago P12.3 billion on account of the sharply increased benefits disbursements, according to the SSS management.

Sustaining this performance over the coming years without increasing the rate of contributions puts the ability of the SSS to provide for its members under a cloud. An increase of 1.5 percentage point of a member’s wage rates, from the present 11 percent, is supposed to accompany the recent pension rate increase, but the actual start of implementation is still not clear.

Legislators from the Senate and the House of Representatives are also expected to probe into the SSS conundrum and devise ways of propping up the fund’s stability and continued existence beyond 2028.

Averting old-age poverty

The magnitude of the pension challenge can be seen in calculations made by economists at the Asian Development Bank in a working paper made public last month. Public pension expenditures, the study says, tend to rise with a country’s income and average age. The inexorable movement toward more comprehensive—and more expensive—public pension programs has been reinforced by recent international declarations in support of expanded health and social protection coverage, it adds.

“In this context, emerging Asian economies will need to strengthen rule-enforced fiscal discipline to maintain fiscal sustainability,” the study says. The cost of providing a basic level of social protection is feasible even for poor countries, the working paper says, noting earlier reports showing that as a percentage of the total value of all goods and services produced within an economy, the cost of a basic old-age pension package could reach 0.8 percent in Bangladesh and in Vietnam.

Public pension burdens in most emerging Asian economies, including the Philippines, are still “relatively small,” the study says. “However, there are a number of reasons to believe they will increase markedly in the coming years,” it stresses.

As many Asian economies face rapidly ageing populations, pension and other old-age-related spending will rise dramatically. And as economies develop, political pressure to expand the coverage of public pensions and raise pension benefits will likely increase, says the paper says.

The ADB study goes on to identify the potential fiscal burden of public pensions in 23 emerging Asian economies, including the Philippines. Also, the study recommends policies to provide adequate funding for public pension needs, including enhancing the efficiency of social insurance programs, improving the balance of revenues and expenditures, implementing more explicit fiscal rules and frameworks, and establishing stronger fiscal surveillance at the national and regional levels.

Obviously, there is a lot to be done in the coming years to ensure that retirees of the future will not wallow in poverty.

Disclaimer: The views in this blog are those of the blogger and do not necessarily reflect the views of ABS-CBN Corp.