Question: Many have said to me that the pension that Social Security System (SSS) will pay is a pittance compared with what I will be spending in the future for my retirement. Nevertheless, they say that you have no choice if you are an employee, as SSS membership is mandated by law. They say that self-employed people are lucky because they have a choice of being an SSS member or not. The same is true for overseas Filipino workers. Are they right?
Answer: There is a lot of misconception about the benefits that SSS members can enjoy, including pension benefits.
Firstly, the computation of SSS monthly pension benefit is the higher of the following three formulas plus P1,000: the sum of P300 plus 20 percent of the average monthly salary credit (AMSC) plus 2 percent of the AMSC for each accredited year of service (CYS) in excess of 10 years; or 40 percent of the AMSC; or P1,200 provided that the CYS is at least 10 years or more but less than 20 years, or P2,400 if the CYS is 20 years or more.
There is also a onetime payment granted to a retiree who has not reached the required 120 monthly contributions prior to retirement. The lump sum amount is equal to the total contributions paid by the member and/or employer, including interest earned.
Also, there are two ways to receive SSS monthly pensions. One is to apply for a straight pension for life. The other is to advance the first 18 months of pension, discounted by a preferential rate of interest to be determined by the SSS, and then receive the balance of monthly pensions starting the 19th month after filing for retirement benefits with the SSS.
Finally, 100 percent of the monthly pension is paid to the primary beneficiary in case of death of the pensioner.
I did some “back of the envelope computations” on the investment return that an SSS member gets from his pensions. I did computations for the lowest monthly salary credit of P3,000 and the highest monthly salary credit of P25,000. I also assumed a CYS of 40 years and life expectancy of 69.5 for males and 73.9 for females. Finally, I assumed an inflation rate of 5 percent.
Assuming that the SSS monthly member contributions will stay the same throughout my projection period, a low probability for an AMSC of P3,000 with pay going up but very probable for an AMSC of P25,000, it appears that the return on such contributions from monthly pensions alone is attractive particularly for employees. The attractiveness is afforded by the free and portable contributions that employers make for their employees.
So, for married male members and female members regardless of civil status, and assuming an AMSC of P25,000, the return comes to 6.8 percent per annum (p.a) and 4.9 percent p.a. for retirement ages of 60 and 65, respectively. I assumed that the pension of the male married member is paid to his spouse upon his passing. For single male members, because of males’ shorter life expectancy, the returns are slightly lower at 5.7 percent p.a. and 2.9 percent p.a. for retirement ages of 60 and 65, respectively.
For married male members and female members regardless of civil status, and assuming an AMSC of P3,000, the return comes to 8.1 percent p.a. and 6 percent p.a. for retirement ages of 60 and 65, respectively. For single male members, the returns are also slightly lower at 7.1 percent p.a. and 4.1 percent p.a. for retirement ages of 60 and 65, respectively.
The returns are much lower, depending on the AMSC and age of retirement, for voluntary members because they need to shoulder the equivalent contributions of an employer. However, with life expectancies getting longer, returns can still improve for both volunteer and mandated members, especially if members retire at 60 years of age.
Moreover, SSS membership also comes with sickness, maternity, disability, unemployment, death and funeral benefits on top of housing repair/improvement and salary loans.
The question, though, is will the absolute peso amount of SSS pension benefits match your retirement lifestyle? Many times, even when taken with the lump sum retirement that is mandated for private sector employees, SSS pensions will not be enough to support many levels of retirement lifestyles. That is why there is a need for you to diversify your sources of cash flow for retirement by creating your own retirement fund, which can now be turbocharged with the tax advantages offered by the Personal Equity Retirement Account or Pera law.
Be or stay an SSS member. Every little bit helps toward a long and healthy retirement. INQ
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Efren Ll. Cruz is a registered financial planner and director of RFP Philippines, seasoned investment adviser, bestselling author of personal finance books in the Philippines and a YAMAN Coach. To consult with a YAMAN Coach, email yaman@personalfinance.ph. To learn more about personal financial planning, attend the 99th RFP Program this January 2023. To inquire, e-mail info@rfp.ph or text 09176248110.