PERA: A step towards pension reform

THE FINANCIAL EXECUTIVE
Business World

Opposition to the Personal Equity Retirement Account (PERA) bills in the Finance department and among some members of Congress appears to stem from fears that the favorable tax treatment accorded these accounts would reduce government revenues at a time when government is working overtime to legislate new taxes. First of all, the argument goes, tax deductibility of contributions will reduce the personal income tax base. Secondly, in all likelihood, there will be no "new" savings. Rather, funds will merely migrate from taxable accounts where they are currently held, to PERA products where they will be tax-exempt (or deferred).

These arguments are not unreasonable. The tax exemptions are after all, key features of the bills. The PERA is also entirely voluntary and chances are, prospective contributors have already formed the habit of saving and are simply seeking higher net returns on their savings. Nonetheless, judging PERA by the amount of taxes it deprives government today is myopic.

To appreciate the significance of the PERA bills, one should focus instead on the potential contribution of PERA to long-term fiscal sustainability and capital market development. The way I see it, PERA is a first step to harmonized financial regulation and pension reform, both necessary conditions for capital market development. Pension reform, particularly containment of unfunded pension liabilities, is likewise critical for long-term fiscal stability.

How can PERA lead to harmonization of tax and regulatory regime? As envisioned, funds contributed into PERA may be invested in a host of savings instruments, including stocks, bonds, mutual funds, bank deposit products, etc., which ideally should receive similar tax treatments so that investment decisions are not made on the basis of differential taxation. It is also expected that different financial institutions (e.g., banks, insurance companies, investment houses, mutual funds), supervised by different regulatory institutions (i.e., the Bangko Sentral, Insurance Commission, SEC), will be offering PERA products; thus the need to define a single product jointly and uniformly regulated by the three. Only with a sound regulatory framework, including equal application of tax and accounting standards, can another pre-need fiasco be avoided (in this case, it will take even longer - over 40 years from work-age to retirement versus 16 years for educational plans - to discover any anomalies) and confidence in PERA be engendered.