The state-run Social Security System (SSS) has announced plans to increase members’ contributions starting January 2018 to compensate for the higher pensions given to retirees and to sustain the pension fund’s actuarial life.
According to reports in the Philippine Daily Inquirer and Philippine Star newspapers, SSS president and CEO Emmanuel Dooc revealed that the agency plans to increase the members’ contribution rate to at least 12.5 percent of monthly salary credits from 11 percent at present. Apart from the increase in contribution rates, the SSS is also planning to increase the top monthly salary credit to Php20,000 from Php16,000.
The top monthly salary credit serves as the maximum benchmark in computing social security contributions for the employee, which come from both the employer as well as the employee. For purposes of determining the contributions, employees who earn, say, Php50,000 or even Php100,000 are considered being paid the maximum monthly salary credit of Php20,000.
Dooc has argued that the contribution hike is necessary to sustain the pension fund’s life to until 2049 or 2051. Its current actuarial life is only until 2042. From the current 11 percent, the SSS wants to bring up the members’ contribution rate to 17 percent by 2022, with the initial increase to 12.5 percent starting in January 2018.
The increase in contributions was announced along with President Rodrigo Duterte’s approval of the Php1,000 pension hike for SSS retirees early this year, and the fund has given out the additional pension starting March. But the rate hike has been postponed since.
The hike was supposed to take place starting May this year, but had to be put off because of protests from members. To mitigate complaints, the government instead wants to implement the increase alongside the personal income tax cuts proposed under the first package of Tax Reform for Acceleration and Inclusion Act (TRAIN). One of the provisions of TRAIN is to give employees a higher take-home pay through the restructuring of personal income tax rates.
But how will the proposed hike in SSS member contributions from 11 percent to 12.5 percent by January 2018 affect employees take home pay, especially of those earning the equivalent of the top monthly salary credit of Php20,000?
Based on Entrepreneur Philippines’ estimates, the combined effect of the increase in the contribution rate from 11 percent to 12.5 percent as well as the hike in the maximum monthly salary credit from Php16,000 to Php20,000 will be to add Php710 in monthly salary contribution of employees earning at least Php20,000 a month. Instead of only Php1,790 a month at present, these employees’ contributions will rise to Php2,500 a month.
However, assuming that the current ratio of employee-to-employer contribution is retained, employers will shoulder Php479.43 of the Php710 monthly increase while employees will only shell out an additional Php230.57 every month.
The annual impact of the changes, which we derived by multiplying the monthly amounts by 12, could reach Php8,520. Employers will shoulder Php5,753.14 of this while employees will have to cough up Php2,766.86 of the amount. That’s how much their take-home pay will likely go down in a year, assuming everything else remains the same.
The government’s move to time the SSS contribution hike with the proposed personal income tax cuts could help but not by much, especially for households with just a single earner. The Department of Finance estimates that households earning Php19,335 a month will benefit from the entire tax reform package and see their take home pay rise by only Php332 a year. But that is very small compared to the annual impact of the higher SSS contributions of Php2,766.86.
It remains a big question if SSS members will agree to this trade-off between lower personal income tax rates and higher SSS contribution rate.
Pauline Macaraeg is Entrepreneur PH's data journalist. Follow her on Twitter @paulinemacaraeg