Finance, defense chiefs still at odds over pension reform
Benjamin Diokno (L) and Gilbert Teodoro Jr.
Making the pension system for military and uniformed personnel (MUP) financially sustainable is not possible without requiring contributions from all active service members and employees of these institutions from here on, according to Finance Secretary Benjamin Diokno.
In a statement issued late Wednesday, Diokno also said disengaging retirees’ pension benefits from the most recent pay levels is a “nonnegotiable pillar of genuine pension reform.”
But as lawmakers work to craft a sustainable pension system, Defense Secretary Gilberto Teodoro Jr. countered that the “pension burden” of the Armed Forces of the Philippines would ease over time as its troop strength would not increase in the same way as that of other uniformed services.
“From a financial perspective, I must point out that the AFP will not increase its force size in the same manner as the other services, whose numbers are tied in to the country’s growing population,” Teodoro said also in a statement on Wednesday.
He said other uniformed services need to increase their numbers “by necessity in order to maintain an ideal service ratio in proportion to the number of our citizens and communities,” which he said was an “important distinction that the public must bear in mind.”
Article continues after this advertisement“Hence, the pension burden of the AFP retirees on government expenditures will actually reduce over time as the envisioned AFP Retirement Trust Fund becomes viable as a funding source given a constant force size,” he said.
Article continues after this advertisementInitial objections
The defense chief had initially raised objections to the House version of automatic indexation and “blanket mandatory contributions for military personnel.”
“We realize the efforts of our lawmakers to ease our budgetary deficits. However, we are informed that the financial impact of the pension burden of the AFP (stand alone, not with the other uniformed services) retirees, current and prospective, is substantially lower than as originally stated,” he said.
Teodoro also said the agency could use income from the Bases Conversion and Development Authority as well as government-owned and -controlled corporations for the proposed AFP Retirement Trust Fund.
In the current system, which Diokno described as leading to a “fiscal collapse,” retirement benefits are pegged—or indexed—on current pay levels instead of the amounts prevailing when the pensioner retired, regardless of how long ago they ended their service.
The finance chief said that any proposed reforms in the MUP pension system must directly and squarely address the substantial budgetary implications stemming from indexation and the absence of personnel contributions.
‘Unfunded’ liability
Diokno earlier sounded that alarm on a looming fiscal collapse resulting from the MUP pension problem, which is an “unfunded” liability for the government that is expected to exceed P1 trillion by 2035 from P213 billion in 2023.
This means that the national government scrambles to look for sources of funding in order to provide MUP pension benefits since, unlike the benefits of the members of the Social Security System as well as the Government Service Insurance System, the pensioners did not make any contribution to their retirement fund.
Aside from personnel of the AFP, MUPs include those in the Philippine National Police, Bureau of Jail Management and Penology, Bureau of Fire Protection, Philippine Public Safety College, Philippine Coast Guard and the Bureau of Corrections.
Teodoro said in an earlier statement that AFP personnel should have all their pensions and entitlements unchanged, even if reform efforts are gaining ground in Congress.
Contribution rates
For Diokno, “it will not qualify as a reform if indexation will continue and the active members will not contribute… We have to reduce the fiscal impact of the MUP’s pension program and the contribution of active members will greatly help in managing that.”
The Marcos administration’s economic team led by Diokno proposes a mandatory 5-percent contribution of active personnel during the first three years of reform implementation; 7 percent in the fourth through sixth years; 9 percent from the seventh year and onward.
New recruits shall start contributing at 9 percent upon joining the ranks of MUPs.
The contributions are based on the personnel’s monthly base and longevity pay, which they get based on their length of service.
The economic team also proposes that, while active MUPs make contributions, the government will provide a counterpart and larger contribution to meet the 21 percent total pension premium.
Thus, if the MUP’s contribution is 9 percent, the government will shoulder 12 percent. If the MUP’s contribution is 7 percent, the government will cover 14 percent, and so on.
Further, indexation of benefits shall be scrapped for active personnel and new entrants.
For those who are already retired, they will continue to enjoy indexed pension benefits “to ensure the nondiminution of their benefits.”
For the active personnel and new entrants, their future pension will be adjusted according to economic conditions and financial viability of the proposed pension fund.
For annual review
The pension benefits will be reviewed annually for a possible increase of up to 1.5 percent every year.
“The pensioners and the active personnel have different needs,” Diokno said. “It is therefore necessary to ensure that the pension and wages have different bases for adjustment.”
“Removing automatic indexation of pension to the current wages gives us flexibility to respond to the unique needs of the pensioners and the active personnel,” he added.
He said that, since 2018, pension commitments have consistently exceeded the budget for maintenance and other operating expenses and capital outlays of the military and uniformed services.
“This predicament weakened the ability of the government to effectively meet the needs for military modernization,” Diokno said.
According to the Department of Budget and Management (DBM), a guaranteed 3-percent annual salary increase for 10 years with full indexation of pension benefits will require P11.8 billion in 2024, P24.5 billion in 2025, P38.1 billion in 2026, and increasing up to P165 billion in 2033.
The DBM said that without additional new revenues, the national government will be forced to borrow funds to finance these increases in MUP pension benefits.
