AT the Saturday forum at Annabel’s last Saturday, one of the featured topics for discussion was President BS Aquino’s unpopular veto of the P2,000-peso hike in pensions for some two million SSS retirees.
I raised at the forum, which featured among others Rep. Neri Colmenares, principal author of the pension bill, the argument that it is principally because social security is a Ponzi scheme, that the pension fund is prone to easy manipulation and mismanagement, and is finally doomed to eventual bankruptcy.
Before proceeding, I want to place on record that I am not batting for the end of social security in this country. Rather, I believe with many social reformers that social security is one of the most, vital, humane and dynamic social programs invented in the modern era. It is precisely because of this essential contribution to welfare for the aged, that our government must responsibly strive to fix and reform our social security system, well before it collapses on itself.
I put forward five points at the forum:
1. It is because SSS is a Ponzi scheme that managers of the pension fund can exploit it to their advantage (by awarding themselves obscene salaries and allowances) while denying the merest increase in benefits to SSS members.
2. It is because it is a Ponzi scheme that SSS officials will always argue for an increase in the premiums SSS members pay to the fund, every time there is a petition to adjust the pensions to the cost of living.
3.President Aquino, who vetoed the pension hike, is not a member of the SSS and has never had to work for a salary in his life. He absolutely has no idea of the life of salaried workers and retirees.
4. The SSS commissioners and officials of the SSS set as their first priority what they can
take out for themselves from the pension fund, not what they can reasonably award to SSS members, who are the lifeblood of the system.
5. As a fundamental qualification for anyone who serves as an official of the SSS, he or she must be able to successfully defend the system from the charge that it is just a gigantic Ponzi scheme. They must be able to explain why and how social security can be sustained in this country.
1. Social security is a Ponzi scheme
Charles Krauthammer, whose Washington Post colums The Manila Times publishes, puts the issue bluntly and mercilessly: “Of course, social security is a Ponzi scheme.”
In a Ponzi scheme, the people who invest early get their money out with dividends. But these dividends don’t come from any profitable or productive activity — they consist entirely of money paid in by later participants or investors.
The scheme cannot go on forever because at some point there just aren’t enough new investors to support the earlier entrants. Word gets around that there are no profits, just money transferred from new investors to old investors. The merry-go-round stops, the scheme collapses and the remaining investors lose everything.
Ponzi schemes are illegal. It is a fraudulent investment scheme. It is why Bernie Madoff is now in jail, after swindling his investors of millions.
2. Social security is mandatory .
The crucial distinction between a Ponzi scheme and Social Security is that Social Security is mandatory.
Lack of compulsion is why Ponzi schemes always collapse; and compulsion is why Social Security does not. When the pyramid scheme is mandatory, you ensure an endless supply of new participants. Indeed, if Charles Ponzi and Bernie Madoff had had the benefit of the law forcing people into their schemes, they would still be flourishing up to now.
But there’s a catch. Compulsion allows sustainability; it does not guarantee sustainability.
This means that even a mandatory Ponzi scheme such as Social Security can fail if it cannot rustle up enough new entrants.
You can force young people into Social Security, but if there just aren’t enough young people in existence to support current beneficiaries, the system will collapse anyway.
Krauthammer explains the actuarial life of American social security this way: “When Social Security began making monthly distributions in 1940, there were 160 workers for every senior receiving benefits. In 1950, there were 16.5; today, three; in 20 years, there will be but two.
Now, the average senior receives in Social Security about a third of what the average worker makes. Applying that ratio retroactively, this means that in 1940, the average worker had to pay only 0.2 percent of his salary to sustain the older folks of his time; in 1950, 2 percent; today, 11 percent; in 20 years, 17 percent. This is a staggering sum.”
Demography is destiny
With the Philippines having a large population of over 100 million and still high birthrate, it might seem superficially that our SSS will never run out of young entrants into the system.
This is just an illusion.
Unless the country faces now the challenge of reforming our social security system, the fund will collapse into insolvency.
Philippine policy makers must understand the new demographics that are bearing down on the nation. They should remember that at best our demographic dividend (young workers compared to dependent population) will last us at most up to 2035, when our population will start to age as fast as that of our Asian neighbors.
Key policy steps that must be studied now are: 1. Change the cost-of-living measure, 2. apply means-testing for richer recipients, and 3, raise the retirement age.
The current retirement age is an absurd anachronism. Bismarck arbitrarily chose 70 when he created social insurance in 1889. Life expectancy at the time was under 50.
When Franklin Roosevelt created Social Security at the height of the great Depression, he chose 65 as the eligibility age, while life expectancy was 62. Today expectancy is now almost 80. FDR wanted to prevent the aged few from suffering destitution in their last remaining years.
The crucial point to remember is this: social security was not meant to provide decades of ease for senior citizens in their late years.
Hard realities in Philippines
This will sadden my colleagues in the seniors’ community in this country, but the hard reality is that President Aquino was correct in vetoing House Bill No. 5842, or the proposed Social Security Act.
There was no other way for him to go. The hike is fiscally suicidal for our social security system, even as rejecting it may turn out to be politically suicidal for the administration’s bets in the May elections.
The pension hike was approved and deliberated in haste by members of Congress who sought to make political capital out of helping the elderly.
Congress did not hold hearings that got to the heart of the uncertain future facing social security in our country.
It did not press SSS officials to provide substantive testimony about the actuarial life of the fund, and the threats of insolvency that looms in the future.
Here’s the really sobering reality. The SSS cannot pay for the pension hike with the premiums it collects from current members. That cannot be used because the SSS must also take care of things like salary loans, sickness and disability payments, and help for members who have suffered from disasters and catastrophes. In other words, there are other members, besides retirees, who have to be cared for.
The SSS must take care of all its members. There will be a point where the pension increase decreed by HB 5842 will put at risk the social security of other members.
The forthcoming debates in Congress about the proposed override of the veto must grapple with the hard and grim realities of social security.
The overzealous proponents of the pension hike must come down to earth. They must make sense of the numbers and face the real-life importance of social security in our lives.