Benel D. Lagua l December 15, 2022 l Manila Bulletin
This is a quote from The Economist. ”Can you afford to retire? The answer to this is much more likely to be no today than it was a year ago – especially from those old enough to ask themselves the question. The resurgence of inflation is eroding the real value of savings. Higher interest rates have caused a repricing of bonds and stocks. The result is that the pot of assets many future pensioners are hoping to live off has shrunk.”
The article was written for the American audience who have access to “life-cycle pension funds” investing retirement money of workers in accordance with the age of the owner. The report says the typical portfolio of those funds has lost 17% of their value since January 2022. The warning to American potential pensioners is that what they have set aside will not be sufficient.
If our counterparts in the US are seeing a potential problem, the case is much worse for the Filipino retirees. Baby boomers (the generation between 1946 and 1964) are retiring and many have not set aside a big enough savings pool for their non-working years.
In the US, the average Social Security benefit was $1,555 per month in 2021, still below the average wage which was $3,990 according to the Bureau of Labor Statistics. Compare this with our country’s Social Security System pensioners, for example, receiving a range from P2,000 to as much as P18,495. Even at the maximum rate, pensioners will clearly be challenged. Health maintenance requirements alone, common among seniors, puts a big dent on the pension.
GSIS pensioners are luckier in a sense because their pension is computed as a percentage of average monthly compensation for the last three years multiplied by a factor considering number of government service. While it will still be below average salary, it has a soft cap unlike the SSS formula. But similarly, GSIS and SSS pensions don’t have cost-of-living adjustments which are common in developed economies.
According to the 2022 Mercer CFA Institute Global Pension Index, the retirement system in the Philippines is among the worst in the world, second to the last of 44 economies and the last in Asia. The Mercer Index uses three sub-indices – adequacy, sustainability and integrity – to measure each retirement income system.
The adequacy of benefits looks at the objective to provide sufficient retirement income. The sub-index considers the base (or safety-net) level of income provided by the systems. The long-term sustainability of the existing retirement systems is reviewed, particularly in the light of the ageing population, the increasing old age dependency ratio, the public expenditure on pensions and substantial government debt. Integrity considers the role of regulation and governance, the protection and communication provided to plan members, and the operating cost of the system.
Inflation affects everybody, but retirees living on fixed income composed of pensions and the like are most vulnerable. Inflation, like death and taxes, is a non-negotiable reality. It is a question of magnitude. It will result in a higher cost of living for the retirees with limited income, and a not so deep savings pool.
There is a need to look for ways to cope and survive as the retirees cannot solely rely on the SSS or GSIS pension. It is time to face this reality and confront it through conscious choices in moving forward.
The first step is having a robust budget that reviews both discretionary and non-discretionary items. Review spending patterns items. Check expenses that can be eliminated in retirement. Review fixed and variable expenses. There might be a need to adjust planned major expenses and stretch available cash. Downsizing may not be a bad idea while aiming to maintain a good quality of life. The retirees must have a healthy mindset about their lifestyle.
Recent retirees are considering returning to work, even on a part time basis. Those who do not will face more of the adjustments suggested above. Those still active in the work force must seriously set aside a bigger portion of their income for savings in preparation of the retirement days. Self-discipline and some serious review of investment options must be part of the strategy.
It is important to plan. Ask yourself the question raised in the opening of this column. “Can you afford to retire?” We all have our different circumstance and context. The thinking person who asks the hard questions will be better prepared for contingencies. Sad to admit but the country remains among the worst place for retirees depending on local pension programs.
*** (Benel Dela Paz Lagua was previously EVP and Chief Development Officer at the Development Bank of the Philippines. He is an active FINEX member and an advocate of risk-based lending for SMEs. Today, he is independent director in progressive banks and in some NGOs. The views expressed herein are his own and does not necessarily reflect the opinion of his office as well as FINEX.)