MANILA, Philippines – A plan to fix the Philippines’ unsustainable military pension system is supposedly pushing enlisted soldiers to retire early, leaving President Ferdinand Marcos Jr. to spend his political capital to address both pressing concerns.

The average monthly pension of a retired military uniformed personnel is around P40,000 a month, which is 8.8 times more than an average pensioner of the Social Security System (SSS) is receiving. It is also 2.9 times higher than the average pension under the Government Service Insurance System (GSIS). 

Under the SSS and GSIS, and basically most pension models, people contribute a part of their income for the fund. Military personnel do not contribute a single peso in the current system. In effect, taxpayers contribute for their pension funds through appropriations in the annual budget.

On top of this, military uniformed personnel are automatically granted one rank higher upon retirement. For instance, if an army colonel retires, the pension is equivalent to the pay of a brigadier general.

Their monthly pension is automatically indexed to the salary of personnel in active service. Military pensioners can receive their pension after being in service for 20 years with no minimum pensionable age.

Almost three decades since this system was implemented, the cracks it has caused in the government’s coffers are widening every year and will lead to a fiscal collapse if not patched up.

How and when did this system start?

The pension system was implemented during the final months of 1998, or the presidency of the late Fidel V. Ramos, who himself fought during the Korean War. He did so after the previous military program called the Retirement and Separation Benefit System (RSBS) effectively collapsed.

The RSBS, an initiative of late dictator Ferdinand E. Marcos, required uniformed personnel to contribute and gave the fund a steady cash flow. It was, however, grossly mismanaged, and its managers invested in risky assets like golf courses. The Asian financial crisis of 1997 further caused the bleeding.

Soldiers, who at the time were dealing with insurgencies and terrorist groups, were not compensated well for their efforts. At the end of their active-duty career, the RSBS only gave them back the total amount they contributed without interest.

While uniformed personnel’s pensions greatly improved under the new system where pension funds are appropriated from the annual budget, the financial impact is felt almost three decades later.

Finance Secretary Benjamin Diokno once called it the “most generous pension system for the military in the entire world.”

“While the common practice is to base the pension benefits on the highest salary (usually the last) of the retiree, under the law approved by Mr. Ramos, the pension is based on the salaries of the incumbent. Absurd but true,” Diokno said in a column published way back 2013. His convictions on the issue stand to this day, as he pushes for pension reform under Marcos.

Former president Rodrigo Duterte further strained government finances by doubling the take-home pay of soldiers and police officers. Duterte also recruited more uniformed personnel during his six years in power.

Fiscal impact

The Department of Finance (DOF) has raised the alarm over the urgent need for military pension reform, as pension spending already outpaced spending on maintenance and other operating expenses (MOOE) and capital outlays (CO) of the military.

In 2022, pension spending reached P164 billion, while MOOE and CO stood at P125 billion. 

“For 2021 and 2022, military uniformed personnel pension was 82% and 80% of the respective annual personnel services expenditures,” the DOF said.

The DOF estimated that pension expenditures could reach P290 billion by 2028 or the end of Marcos’ term. Worse, it could hit a whopping P1.5 trillion by 2040.

DOF figures also revealed that the current share of unfunded military pension liabilities is already at P9.6 trillion, 53% of the Philippines’ gross domestic product.

The government is effectively borrowing for pension liabilities, and issuing treasury bills is sensitive to higher interest rates. 

The Bureau of the Treasury warned that the current system could increase public debt by 25% by 2030.

A 2019 actuarial study by the GSIS estimated that the government would have to spend P848.39 billion annually for the next 20 years to finance the current pension system.

If we do not address the huge and rising unfunded liabilities of the current military pension system now, securing sufficient resources to provide for the benefits of future pensioners and their dependents will be extremely challenging.

Finance secretary benjamin diokno

Military morale

Military pension reform has been thumbed down many times. 

It did not prosper at all during the administration of former president Gloria Macapagal-Arroyo, who then faced multiple threats of being unseated and needed military backing.

The late Benigno Aquino III once acknowledged the ballooning military pension and its impact on the budget. He mentioned the issue several times in his State of the Nation Addresses but effectively passed the buck to Congress.

There were also talks of military pension reform during the Duterte administration, but those proposals also fell through due to lobbying from former military personnel who were pensioners themselves.

Duterte’s finance chief, Carlos Dominguez III, once said they would push for creating a unit at the GSIS to manage a pension fund for military personnel. Those plans did not prosper.

Diokno, Marcos’ finance secretary and Duterte’s former budget chief, said that Marcos is more than willing to spend his political capital to push for reforms.

Marcos, whose father was ousted through people power that saw the participation of military factions, would have to carefully explain to soldiers the financial impact of their above-average pension.

An estimated 70% to 80% of the military’s enlisted soldiers may opt to retire early if the current plan to fix the pension system pushes through, Department of National Defense officer-in-charge Carlito Galvez Jr. told the Senate on Monday, May 15. Galvez added that the plan has “affected morale.”

Middle ground

Galvez said they are seeking a “middle ground” in which new entrants are only covered by the pension reform.

“There’s no problem if the new system will be given to the new entrants. They all unanimously agree,” Galvez said. Otherwise, the military might be deluged with thousands of soldiers opting to retire early, causing bigger organizational problems.

“If this is still financially impossible, we are very amenable and open to modifications in the system so long as these are fair and equitable to the military and the MUP (military and uniformed personnel) and also this is based on the financial soundness and scientific actuarial science.”

Galvez cited one issue that has spawned “adverse reactions” from enlisted men: that the lump sum they are going to receive will be reduced “from 36 months to 18 months.”

“While we fully support the enactment of legislative measures to address the current issues hounding the pension system, the [Department of National Defense] and the [Armed Forces of the Philippines] respectfully appeal that morale and welfare be given due weight in these deliberations, considering that the mere notion of modernizing our pension system already created some sort of apprehension,” Galvez said.

So far, the DOF is proposing that all active personnel and new entrants begin contributions to the pension system. The percentage of the mandatory contribution will be staggered over uniformed personnel’s years of service – from 5% in their first three years to eventually 9% of their salary.

It also seeks to remove the automatic indexation of pension to the salary of active personnel of similar ranks. 

The DOF is also proposing for uniformed personnel to get their pension at the age of 57.

Diokno is confident that Marcos will be able to pull it off, citing his landslide win in the 2022 elections. –Rappler.com