Biting the pension bullet

The conviction of the former bosses of the Retirement and Separation Benefits System for investing its funds in overpriced real estate properties has raised once again our interest in how our pensions should be funded.

But no matter how we decide, we can't simply abolish military pensions. After all, they have been part of our social life for over a century now.

The Americans handed to us this government program through the Philippine Commission, which approved on Feb. 6, 1903 Act No. 619 to promote good order and discipline in the Philippine Constabulary. The Act created for its officers and enlisted men who would get disabled or die in the line of duty our first public pension system.

It was a contributory fund that required deductions "from the monthly pay of each captain and inspector, one dollar" and "each enlisted man, ten cents."

Act No. 1638 improved it on April 30, 1907 with the creation of the Pension and Retirement Fund of the Philippine Constabulary, which included the payment of retirement pensions for those who had rendered 20 or more years of continuous, actual, and satisfactory service.

At retirement, an officer or enlisted man was to receive an "annual compensation equal to two and one-half per centum, for each year's active service theretofore rendered by him, of the total current pay received annually." This was capped at seventy-five percent and payable for life.

Notably, this very same pension formula is what GSIS is now implementing, although subject to a more generous 90 percent cap.

With the inauguration of the Philippine Commonwealth on Nov. 15, 1935, a new Retirement System for the Philippine Army was created under Commonwealth Act 190.

It absorbed the existing constabulary pension fund, but lowered the pension formula.

It set a lower cap of fifty percent for commissioned officers, and 60 percent for enlisted men and non-commissioned officers. It also reduced the pension to two percent of basic pay for each year of active service, which is what the Social Security System is implementing now for its private sector members.

Unlike its predecessors, the new scheme was non-contributory, and was funded through the annual appropriations for personnel of the Philippine Army.

The provisions of C.A. 190 were further improved by Republic Act No. 340 or the "Armed Forces Retirement Act" that was signed into law on July 26, 1948. This time, the retirement benefit was restored back to two and a half percent of the base and longevity pay for each year of active service, and was capped higher at seventy-five percent.

The retirement pay became payable "in equal monthly installments" or in monthly pensions.

The pension scheme remained non-contributory and funded through annual general appropriations.

The police and military personnel pensions continued to be enhanced thereafter. By now, they could be as low as 50 and as high as 90 percent of base and longevity pay.

Moreover, they are now adjusted automatically according to the prevailing pay of their counterparts who are in the active service.

Singling out the military pensions, President Ferdinand Marcos recognized that "no separate fund or scheme to insure payment of said benefits has ever been established resulting in complete reliance upon the yearly appropriations" and "entailing a staggering sum every year which drains a substantial portion of the appropriations for the Armed Forces of the Philippines."

To remedy this, he created RSBS to pay the retirement and separation benefits of the members of the Armed Forces of the Philippines by signing into law on Dec. 30, 1973 Presidential Decree No. 361.

But this task has remained a mission impossible despite the passage of 43 years. RSBS only succeeded in collecting from our officers and enlisted personnel four percent of their monthly pay deduction, which it refunded at retirement or separation. It never paid a single peso of the contemplated benefits. Thus, Congress had to continue appropriating for them annually.

RSBS was unintentionally programmed to fail considering its actuarially inadequate funding of only 4 percent of pay versus its generous pension benefits. No brilliant investment strategy-even if decided by the AFP Chief of Staff and approved by the National Defense Secretary-could have made this scheme viable and sustainable. Its investment fiasco only worsened this funding failure.

But even if RSBS is abolished-as what Presidents Gloria Macapagal Arroyo and Benigno Aquino had attempted to do-we still must find its proper replacement. Otherwise, we'd continue funding indefinitely these pensions from general appropriations.

Both our military and police personnel must now bite the bullet. To fund their own pensions, they must contribute 9 percent of their pay.

The adequacy of 9 percent has been demonstrated. It's what GSIS members contribute for the same level of pensions that our soldiers and policemen now receive. Government could then add 12 percent to bring to 21 percent of pay their total pension contributions.

What can we do to soften its impact on our soldiers and policemen? We can adopt the Chilean solution when its pension system was reformed in 1981: increase their pay to meet their new pension contribution deduction.

Source: The Standard

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