Reforms pushed to cap P10 trillion in unfunded AFP, police pensions

MANILA, Philippines — The Duterte administration wants to resolve the fiscal strain to be inflicted by the ballooning pension of the Armed Forces of the Philippines and uniformed personnel — now estimated to be close to P10 trillion in unfunded liabilities — before it steps down next year, according to the head of the government’s economic team.

Finance Secretary Carlos Dominguez III on Friday said they were hopeful to see the light at the end of the tunnel and mitigate the continued rise in military pension disbursements posing a risk to the government’s limited annual budget resources.

Even before the current administration, the Development Budget Coordination Committee (DBCC) had been flagging the substantial yearly increases in these pension payments. Dominguez and then budget chief Benjamin Diokno proposed to reform the military pension system in 2016, but bills to do so remain pending in Congress up to now.

Downside risks

In the DBCC’s Fiscal Risks Statement 2022 report published last week, it said “the inability to reform the current pension scheme for military and uniformed personnel” was among the downside risks to fiscal consolidation or reducing the budget deficit to prepandemic levels. The fiscal gap had been projected to reach its biggest-ever this year at P1.86 trillion, or about 9.5 percent of gross domestic product, as the government needed to spend more to fight COVID-19 while tax and nontax revenues slowed due to pandemic-induced livelihood losses.

In June, the DBCC said it supported the House and Senate bills aimed at changing the current system, as payments grew at an average 12.3 percent yearly from 2010 to 2019, such that the military and uniformed services sector spent more on pension than capital outlays as well as maintenance and other operating expenses.

Automatic indexation

This was due to automatic indexation of pension where retirees enjoyed the same increase in benefit each year alongside rising salaries of active personnel. The pay of active military and uniformed personnel rose by an average of 19.6 percent annually from 2008 to 2019, DBCC estimates had shown.

“Without funding sources to support this growing expenditure, the military and uniformed personnel pension system, as well as the fiscal stability of the national government, is at serious risk. The ability of the government to compensate active personnel and invest resources to keep military and uniformed personnel in fighting shape is also in jeopardy,” warned the DBCC, which groups the Office of the President, the Department of Budget and Management, the Department of Finance and the National Economic and Development Authority.

“If we are to modernize our uniformed services into a credible and advanced defense force, we must have the fiscal space to hire personnel, purchase state-of-the-art military equipment, and invest in their training and protection,” the DBCC had said.

Military and uniformed personnel’s unfunded liabilities soared to P9.6 trillion in 2019 from only P5 trillion in 2016, the latest actuarial studies undertaken by the Bureau of the Treasury and the Government Service Insurance System (GSIS) had shown.

Unfunded liabilities referred to the amount anticipated as future payouts for active personnel as well as current pensioners.

If unaddressed, GSIS estimates had shown the current pension scheme will cost the government P850 billion yearly during the next two decades.