Thinking about fiscal risk

PHILIPPINES - In Brief 17 Dec 2015 by Romeo Bernardo

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Congress has passed a bill granting a P2,000 across-the-board increase in the minimum monthly pension received by members of the Social Security System (SSS). The proposal has been sent to Malacanang and is now reportedly awaiting the President's signature. We gathered from concerned officials that the Department of Finance (DoF) has recommended that the President vetoed the bill since it does not specify how the estimated P56 billion annual cost (and growing over time) will be funded. Lawmakers have presumably prioritized this bill over other vote-winning popular measures taking for granted that the SSS will fund the proposed increases. The SSS is a government owned financial institution overseeing a defined benefit pension program for private sector workers. Pensions for retirees, while funded out of member contributions, are guaranteed by the state. The head of the SSS has told us that the fund cannot sustain the annual bleed, which he estimated will shorten fund life by 13 years. Actuarial estimates last year showed that fund life was a little over 30 years and less than half the 70-year international standard for fund perpetuity. Per the SSS official, implementing this measure without compensatory increases in the contribution rate would mean that the reserve fund would be depleted by 2029. Unfortunately, past attempts to increase the contribution rate have met with stiff resistance from both labor and employer groups with the SSS managing only three such increases since 1980. Despite what the technocrats say, there is nevertheless the non-trivial risk that the President would find it hard to veto the bill in an election season. If he simply failed to act on the p...