Pension reform

THE FINANCIAL EXECUTIVE
Business World


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The PERA also serves as a pilot test for the mandatory defined contribution pillar of a multi-pillar pension architecture1.

Under the proposed architecture, the defined benefit second pillar, currently consisting mainly of the pension programs of the Social Security System (SSS) and Government Service Insurance System (GSIS), will be downsized while a mandatory defined contribution third pillar will be established to supplement retirement income provided under the second pillar. The third pillar will essentially be an enlarged PERA system.

Mandating it puts the burden of prudent regulation on government, which will have the opportunity to learn the "tricks of the trade" during this test period and work on strengthening oversight.

Successful reform of the pension system is important from both capital market development and fiscal sustainability perspectives.

As it is, the pension institutions, particularly SSS (not to mention RSBS!), are financially sapped and are at risk of becoming net takers instead of providers of funds to the capital market.

In fact, based on actuarial studies made in 1999, the SSS is projected to start drawing down its reserves as early as 2008, with its reserve fund running out by 2015. If nothing is done to stop the bleeding, the National Government would eventually have to step in to fulfill its guarantee of the pension obligations.

In 1999, the implicit public debt (the cost of accumulated pension obligations) associated with the SSS (based on a status quo on current policies, especially the level of contribution rate and benefit entitlements) was estimated at P1.5 trillion (about 50% of GDP) and must be significantly higher by now. This very real fiscal risk should override any concern over short-term tax losses.

At the end of the day, the truly binding constraint to Philippine capital market development has been and will be the paucity of available long-term savings and savers.

A fully functioning third pillar will help build up domestic savings needed to broaden and deepen the local capital market, providing savers with more investment choices and firms with access to long-term peso-denominated financing. That is the long-term vision. PERA takes us one step closer.

1The proposed multi-pillar pension architecture considered by the World Bank's "Averting the Old Age Crisis" as international best practice consists of: a redistributive social assistance first pillar, a mandatory defined benefit second pillar, a mandatory defined contribution third pillar, and a voluntary private pension fourth pillar.