Dealing with a looming military pension crisis

FEW ARE AWARE that our military, while government employees, are not members of the Government Service Insurance System (GSIS).  Thus, when they retire, they will not draw their pension from the GSIS but directly from the government via the yearly approved General Appropriations Act (GAA). This has several flaws. For one, it is on a pay-as-you-go basis, meaning the government pays only the existing pension and does not set aside annual amounts for future payments (full funding of future liabilities). Moreover, unlike with other government employees with GSIS, no premiums are deducted from the salaries of our military. Thus, the government fully pays for the pension of the military while the GSIS members pay partly for their pension through monthly deductions from their salaries.

The question naturally arises. Why not just absorb them into the GSIS? The GSIS actually did an actuarial study of the financial impact of absorbing the military and estimated that this would involve assuming P9.6 trillion in unfunded liabilities, clearly beyond the financial capacity of the GSIS. And so the problem looms. Last July, the DBM released P26 billion to cover the 1st Quarter pension requirements of our military. Our Congressional Planning and Budget Department estimates that if no reform is undertaken, the National Government will need P800 billion for the next 20 years.

There must be another way of dealing with this looming military pension crisis.

First, a short course on Pension Economics 101.

Pension is the money an employee receives upon or after retirement from a company.

The size of his pension rises geometrically the longer he stays in the company for three reasons:

1) Eligibility — Usually an employee will get a pension only if he works in the company for a minimum number of years. Moreover, in a process called vesting, he receives only a percentage of the pension benefits he would get if he stayed with the company until retirement. For example, if he leaves the company after 10 years, he is entitled to only 10% of the pension.

2) Last salary basis — When an employee retires, his pension is computed on the basis of his last salary. Thus, a person who leaves the company after five years will have a much lower last salary than one who leaves the company after 20 years; and finally,

3) Length of service — The pension is usually computed based on the number of years served. And so, the more years served, the higher the pension.

After World War II, the US Congress, in recognition of the service of its veterans, enacted the G.I. Bill of Rights which in effect allowed veterans to go to any school that they chose and that would accept them, all at government expense. It was so successful that it was continued and now it is available to all serving US military personnel.

With this educational benefit, US soldiers now have an incentive to transition as fast as possible to civilian life. As noted, the US Army retention rate is 5% for those with 37 to 48 months of service. (Unfortunately, we have no comparable figures for the Philippines, but we believe the retention rate to be much higher as noted below.)

And so, Pension Economics 101 kicked in and the US government, unlike the Philippines does not have a military pension crisis.

More important than economics is the impact on military doctrine. As with most countries, the military doctrine adopted by the Philippines is that in case of war it mobilized its citizens to fight led by a professional officer corps.

In some countries such as Israel and Singapore, the government requires every citizen to serve in the military, usually for two years. Thus, when mobilized, the citizenry knows how to fight.

And what about those countries which do not conscript such as the United States and the Philippines? The US military encourages young men to enlist, gives them free education, and then encourages them to return to the civilian sector. This policy of high personnel turnover assures the military of a large pool of militarily prepared citizenry.

The Philippines has not adopted such a policy. We are thus faced with a situation where young men enter military service usually out of economic necessity and then cannot return to civilian life as they do not have employable skills needed in the private sector. Congressman Joey Salceda notes that for our soldiers, the military pension is not earned until after 20 years of service. The fact that despite this, we have a looming military pension crisis indicates that we have a lot of overstaying soldiers.

Putting all this together, we argue that the government should launch a Transition to Civilian Life Program whose objective is to transition our rank-and-file soldier to civilian life after a maximum of 10 years of military service. This program would include among others, career counseling services, school vouchers for education, and partnership with the private sector in terms of internships, job fairs, and subsequent hiring. Moreover, we should consider giving a demobilization bonus so the retiring veteran will have some funds in his new life as a civilian. This program could include our officer corps if surveys show they want it.

The expected outcome of this program is a larger pool of militarily trained citizens, our veterans with bright prospects in civilian life, and a solution to our looming military pension crisis. n

Dr. Victor S. Limlingan is the chairman of the Cristina Research Foundation, Inc., a public policy advisory firm, and the Regina Capital Development Corp. He is presently a Regent of the Board of Regents of the Pamantasan ng Lunsod ng Pasig. Among the books he has written are The Overseas Chinese in ASEAN: Business Strategies and Management Practices and The Visible Hand and the Developing Economy. As public policy adviser to the legislative branch, he advised on legislation such as Kalakalan 20, Overseas Workers Development Fund, the charter of the Banko Sentral ng Pilipinas and the EPIRA Law.