Pension Diagnostic Assessment and Conceptual Framework Philippines SPL Course March 9, 2016

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Pension Diagnostic Assessment and Conceptual Framework Philippines SPL Course March 9, 2016 Mark C. Dorfman Pensions Team SPLJ Global Practice The World Bank d

2 Organization I. Background II. Existing system, challenges & needs III. Analysis undertaken and tools used IV. Options to improve SSS Sustainability V. Options to Close the Coverage Gap VI. Conclusions & lessons learned

3 Background Role of the Bank Previous engagement Earlier analysis Political economy Counterparts SSS, GSIS, DSWD Existing system, challenges and reform needs Demographics & aging SSS parameters & coverage Previous efforts to improve coverage Previous parametric changes Social pension, CCT & targeting

4 Analysis undertaken Demographics Existing scheme parameters, coverage, adequacy, sustainability. Simulation of reform options. Assessment of labor force characteristics, poverty incidence and severity across the life cycle, co-residency. Review of fiscal position, delivery systems, financial inclusion, health coverage, identification systems. Tools employed Literature review PROST ADEPT SP & Poverty APEX Comparative analysis

5 Total dependency ratio flattening as OADR increases & Youth dependency decreases Demographic Profile 5

6 Labor Markets High levels of informality Barriers to employment generation: investment climate and costly business, tax and labor market regulations. Weak worker skill set (partly from outmigration) Informality makes compliance enforcement difficult & costly Informal workers => low and intermittent earnings => avoid SSS participation. Other SP risks (loss of income, weather shocks, health) may be more important than old age, disability & survivorship. 6

7 Elderly Income & Living Arrangements 7

8 Poverty & Inequality 8

9 Pension benefit as a percent of individual pre-retirement wage Individual Ret. Benefit as a % of Average Elderly Benefits Stylistic Illustration of the Coverage Gap About 26% of the employed contribute on an active basis (75% informal) About 1/3 of the elderly receive old age benefits either by the SSS, GSIS the DSWD Social Pension program. Informality contributes to low coverage. Uncovered workers who will not meet the vesting requirements for a benefit at retirement Voluntary supplementar y occupational/ individual pension savings DSWD Social Pension (about 10% of elderly) Individual pre-retirement wage as a % of the average wage in the economy Individual Wage as a % of Average Mandatory, contributory scheme DB, DC; PAYG, funded (about 75% of workers)

10 Most beneficiaries and benefits who of SSS/GSIS pensions go to the highest income households Contributory Pension Disbursements as a Percent of Household Income (by decile) (Percent) 50.0% 45.0% 40.0% Pensions Receipts as a % of Total Receipts (per decile) 47.5% 35.0% 30.0% 25.0% 20.0% 19.8% 15.0% 12.9% 10.0% 5.0% 0.0% 4.4% 0.3% 0.6% 1.1% 1.3% 1.5% 1.8% 2.5% 0.3% 0.7% 1.6% 2.2% 3.1% 3.4% 3.9% Source: NSO, Family Income and Expenditure Survey 2011, Table 3, Number of Families and Family Receipts by Income Decile. 7.7% 4.9% 10

11 Why is worker coverage weak? High levels of informality (75+% of the labor force): low, volatile & non-wage incomes Limited savings capacity, high discount rate/liquidity preference, savings focused on non-social security needs Low levels of financial inclusion - Low bank penetration, limited mobile money payments, micro-savings just starting. Infrastructure constraints (foundational identification, industry constraints). High costs of serving informal sector clients w/existing infrastructure Inefficiency in financial intermediation low account coverage, relatively high transaction costs. Payroll-tax DB pension design aligned to formal sector employment Possibly some lack of public confidence discretionary indexation, sustainability concerns 11

12 Amount per Annum Almost half of households have negligible savings voluntary saving for a poverty level pension beyond the affordability of all but the top 4 deciles Average Income, Expenditure and Savings of Families by Per capita Income Decile ( 000 pesos left axis, % right axis) 690,000 Income Expenditure Savings Minimum Contribution as % of Savings 350% 590, % 300% 250% 490, % 390, % 290, % 190,000 49% 32% 21% 14% 212,000 9% 6% 4% 1% 50% 0% 90,000 79,000 49,000 33,000-73% 1,000 6,000 9,000 14,000 21,000 (10,000) 1(4,000) Decile Source: National Statistics Office, 2012 Family Income and Expenditure Survey Final Results. -50% -100% 12

13 Options for Reducing Coverage Gaps (for informal workers & retirees) Social Insurance Micro-savings Social Assistance Possible Subsidies for the poorest incl. through a match Savings/Ins. Instruments - Old Age, Disability, Survivors Health Insurance Mobile Payments & Micro-Savings Elderly Assistance Assistance to the Poorest Identification Data/Account Management Payments 13

14 Coverage expansion requires strategies for ID and delivery system design Mobile payments platforms and micro-savings vehicles -> provide longer term financial planning & savings behavior for informal workers 14

15 SSS Baseline + Impact of proposed parametric reforms SSS Impact of Reform Packages on Sustainability Annual Current Balance Unify the SSS benefit formula; Automatic inflation-based indexation; Extend the wage base; Gradually increase the retirement age to 65; Gradually reduce the accrual rate (in 15 years) Gradually increase the contribution rate. 1.0% 0.5% -0.5% -1.0% -1.5% -2.0% -2.5% Source: Bank estimates. (Percent of GDP) Annual current balance (% of GDP) 0.0% no reform package1 package2 package3 package4 package4a 15

16 Conclusions and lessons learned Closing the Coverage Gap Improving sustainability can at the same time improve incentives and equity. PROST outputs can strengthen the case and measure the impact of parametric reforms Sustainability & parametric reforms Improving sustainability can a the same time improve incentives and equity. PROST outputs can strengthen the validity of the rationale for parametric reforms 16

17 Thank you! further reading: Mesa-Lago, C., Viajar, V.D, Castillo, RCJ, Pensions in the Philippines: Challenges and Ways Forward, Friedrich Ebert Stiftung, OECD & World Bank, Pensions at a Glance, East Asia and Pacific, OECD, Rutkowski, Jan, Employment and Poverty in the Philippines: Philippine Labor Market Review, Draft mimeo, July Social Security System, Actuarial Valuation. World Bank, Enhancing Financial Capability and Inclusion in the Philippines - A Demand-side Assessment, World Bank, Finance and Markets Practice, 2015., Philippine Development Report: Creating More and Better Jobs, World Bank Philippine Office, East Asia and Pacific Region.