16-8-2023 (MANILA) The Philippines faces the looming risk of losing its coveted investment grade rating if it doesn’t take decisive action to reform its “unsustainable” military and uniformed personnel (MUP) pension system. The Finance Secretary, Benjamin Diokno, has sounded the alarm, cautioning that failure to address this issue could severely restrict the country’s capacity to curtail its debt and deficit.
President Ferdinand Marcos Jr. has prioritized the overhaul of the retirement system for service personnel in a bid to streamline the nation’s financial stability and allocate resources for critical infrastructure projects.
The stakes are high, with the Philippines potentially facing a downgrade of its investment-grade rating, which it has maintained for a decade, to the more detrimental “junk” status. Diokno underscored this point during a budget hearing with senators, stressing that if the country overlooks the urgency of MUP system reform, dire consequences could follow.
Currently, Fitch Ratings places Philippine sovereign bonds at BBB with a stable outlook, Moody’s Investors Services ranks them at Baa2, and S&P Global Ratings rates them at BBB+, all with stable outlooks.
Under the current retirement framework, troops and uniformed personnel, including police and prison staff, are exempt from contributing to their pensions. Instead, the funding is solely derived from the government budget. Diokno has been advocating for essential changes, including mandatory contributions, to expedite fiscal consolidation.
This reform is aimed at reducing the government deficit to 3.0% of gross domestic product (GDP) and the debt to 51.1% of GDP by 2028. This would mark a significant decrease from the current 6.1% deficit and 61% debt-to-GDP ratio.
However, changes to the MUP pension system necessitate legislative action. Presently, around 214 billion pesos (approximately $3.8 billion), equivalent to 0.9% of GDP, is allocated for MUP pensions. Government projections indicate that this sum is set to surge to 537 billion pesos by 2030 and an astonishing 1.5 trillion pesos by 2040.
Diokno characterized the current pension structure as “unsustainable,” noting that it lacks the integral aspect of contributions from beneficiaries themselves. He emphasized that a functional pension system requires both contributions from beneficiaries and government involvement.
The Finance Secretary expressed concerns that the current setup would ultimately become an unwieldy burden on the national budget, potentially destabilizing the country’s fiscal health.
