Biting the bullet: The Marcos administration's push for MUP pension reform

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Metro Manila (CNN Philippines, June 3) — Less than a year in, grievances over major changes within the military have already hounded President Ferdinand Marcos Jr.’s term.

After appeasing soldiers by amending the fixed-term law signed by his predecessor, Marcos now has to tread carefully as he backs the proposal to reform the pension system for the military and other uniformed personnel (MUP), which economic managers said is unsustainable.

On average, Finance Secretary Benjamin Diokno said the pension given to MUP retirees is around nine times higher than the amount given to those from the private sector.

He noted that retired soldiers and uniformed personnel get an average monthly pension of ₱40,000, while pensioners under the Social Security System (SSS) only get an average of ₱4,500. MUP pension is also estimated to be around three times higher than the average amount of ₱13,600 received by pensioners under the Government Service Insurance System (GSIS).

Since unlike in SSS or GSIS, pensions for MUP are fully funded through taxpayers' money and government borrowings, Diokno warned that a "fiscal collapse" is bound to happen if changes aren't implemented.

As Diokno argued as early as a decade ago: "Nobody's contributing, yet the number of claimants is rising."

But the eyed reforms — which would be less beneficial to the MUP sector — could trigger a mass retirement among men and women in uniform, the country's defense chief warned.

Defense officer-in-charge Carlito Galvez Jr. said if the government approves the reforms, his department estimates that some 70% to 80% of enlisted personnel may retire early to enjoy the more generous pension package under the current system.

What are the changes being pushed, and just how necessary are they? CNN Philippines explains the issue in more detail.

MUP pension system, proposed reforms

The MUP pension system began during the administration of former President Fidel Ramos. It covers retirees from the Armed Forces of the Philippines, the Philippine National Police, the Bureau of Fire Protection, the Bureau of Jail Management and Penology, the Bureau of Corrections, the Philippine Coast Guard, and the Philippine Public Safety College.

Its current structure has unique features that economic managers said hurt the nation's fiscal health, and which they want changed. Diokno said they propose that reforms apply to all active personnel and new entrants.

For one, MUP pension is entirely shouldered by the national government through annual appropriations. In other words, soldiers and uniformed personnel do not pay contributions for their eventual retirement benefits, unlike SSS and GSIS members whose salaries are regularly deducted for that purpose.

In 2023 alone, Diokno said the government has earmarked around ₱120 billion to ₱130 billion for MUP pensioners.

Because of this, one of the proposed key reforms is to require contributions from active personnel and new entrants. According to the Department of Finance (DOF), their contributions will start small and increase gradually over the years: 5% of their salary in the first three years, 7% in the next three years, and then 9% in succeeding years.

Another unique feature – which Marcos' economic team wants removed – is that the MUP pension is automatically indexed to the salary of active personnel of the same rank. This means that if the salary of those in service is doubled, retirees would see their pension jump by 100%.

So while it was a welcome development for soldiers and police officers when former President Rodrigo Duterte nearly doubled their pay in 2018, this exacerbated funding problems for the MUP pension.

To add to that, military and uniformed personnel are also automatically promoted to the next rank upon retirement, thus increasing the base of their pension. National Treasurer Rosalia de Leon, in a Senate hearing, said they are proposing that personnel retain their current rank when they retire.

Finally, the proposal deemed to be the most contentious among soldiers is for them to start receiving their pensions at 57 years old.

Unlike most other Filipinos who have to reach 60 to 65 years of age in order to retire, there is currently no minimum pensionable age for MUP, so long as they have rendered at least 20 years in active service. This means that if someone has been in duty since 20 years old, he can already receive a monthly pension at 40 years old if he opts to avail of an optional retirement.

"There will come a time when the current budget will only be about one-third or one-fourth of the money that we are paying for the pensioners. We have to really address that issue," Diokno said in a Palace briefing.

A fiscal burden?

According to the national treasurer, pension spending is projected to balloon to up to ₱1.5 trillion in 2040 if the system remains unchanged.

De Leon noted that likewise, the effects of borrowing for pension liabilities cascade to succeeding years and are sensitive to higher interest rates, amounting to billions of pesos. Based on a 2021 simulation, interest expenses alone could amount to ₱171 billion in 2040.

The MUP pension is eating up such a huge chunk of agencies' budgets that other areas are skimped on, said proponents of a reform law.

De Leon pointed out that last year, government spending for MUP pension was bigger than for MUP agencies' capital outlays, and maintenance and other operating expenses (MOOE). Capital outlays are appropriations spent for the purchase of goods and services, the benefits of which extend beyond the current year and which add to government assets.

"The threat [that] the government will be unable to meet expansion commitments or improve the country's defense posture is real," De Leon said. "We're already spending significantly more on pension liabilities than on keeping our military and uniformed services safe, competent and in fighting shape."

Workforce feared to bleed

In a 2013 column, Diokno had pointed out that a soldier or policeman is likely to get higher retirement benefits than a teacher or health worker. "No wonder, more Filipinos would rather join the Army or the PNP than be part of the teaching or medical profession," he wrote.

On the other side of the coin, Senator Bato dela Rosa – a former PNP chief – argued that the reforms may weaken national defense because of "very demoralized" personnel.

A significant number of employees opting for early retirement is also likely.

Police officials said from around 1,600 in 2018, the number of PNP personnel who availed of optional retirement more than doubled to 3,700 in 2019 after a possible MUP reform was discussed.

PBGen. Niño Rabaya, PNP Retirement and Benefits Administration Service director, told lawmakers that this "most probably" has to do with apprehensions that they will get less favorable retirement benefits. He added that at the time, the number of new recruits only averaged at 1,000 – smaller than vacated positions.

"'Yung bill na bago ngayon, Sir, just in case na magkaroon din ng ganung mga kwento, bababa 'yung benefit, baka magkaroon din ng additional…Mag optional retirement na, Sir [The new bill now, Sir, in case there are similar stories that there will be lower benefits for pensioners, the number of optional retirees may increase]," PMGen. Robert Rodriguez, head of the PNP Directorate for Personnel and Records Management, also told a Senate hearing.

As for the AFP, Galvez said he sees the same scenario playing out.

Compromise sought

The country's defense chief said the MUP sector acknowledges the arguments raised by the economic team and is "more than willing" to help address the impending fiscal crisis.

However, Galvez stressed the need to reach a compromise.

He said uniformed personnel particularly oppose raising the pensionable age to 57 – describing it as "the most controversial” proposal. To meet halfway, Galvez suggested that the government could instead increase the age for optional retirement – for instance, allowing personnel to retire after 25 or 30 years in service, instead of the current 20.

He also told senators that soldiers are resisting the move to do away with the automatic indexation of their pension.

"The indexation is a very sensitive issue, lalo na po sa ating mga [especially among our] retirees and pensioners," he said.

According to Galvez, the pay and benefits enjoyed by soldiers only recently improved.

"Actually, 'yung previous years, 'yung mga veterans po natin atsaka 'yung mga pensioners po natin, napakaliit po talaga nung base pay nila. So, kung hindi po nag-index ngayon, hindi po talaga makakaabot sa inflation 'yung kanilang mga sweldo," he said.

[Translation: Actually, in previous years, veterans and pensioners had a very small base pay. So, without the automatic indexation, the money they receive wouldn't beat inflation.]

The defense chief also said that despite backing a reform law, Marcos was "very much concerned" on its impact on the morale and welfare of uniformed personnel.

"I believe that's also the position of our president — that we need to consult our soldiers, our PNP, and also our MUP, so that we can get the sentiment and some sort of common ground," he said.

Marcos' economic team, meanwhile, gave assurances that it will closely engage with stakeholders to formulate a "fiscally sound and acceptable" version of the MUP pension reform.

'Monumental task'

The push to change the MUP pension system is nothing new.

During their respective terms, the late President Benigno Aquino III and his successor Duterte raised in their State of the Nation Address the importance of passing a pension reform law for uniformed services.

Ultimately, however, there had been no progress on the sensitive matter, which Diokno described as an "elephant in the room."

But recognizing the ill effects of inaction, the finance chief said Marcos approved the proposals and was even part of the decision-making. The president, he added, is willing to spend his political capital to push for the reform law.

"Mr. Marcos also has very strong control of both houses of Congress, so it's going to be less problematic for him to push forward such a major reform," Diokno added.

In a speech earlier this week, Marcos acknowledged that the MUP pension issue is a "monumental task."

However, he also emphasized the need for the government to bite the bullet — or, as he put it, to establish "the most strategic mechanism” that will enable the system to survive in the long run.