“SOCIAL security will cover most of my retirement expenses and I can fully rely on my company’s retirement plan to further support me. Additionally, I can live comfortably on a smaller budget in retirement.” While these thoughts are common when people think about retirement income, it is important to consider whether they might be too optimistic, as they could lead to complacency and hinder adequate preparation for retirement.

The Mercer CFA Institute Global Pension Index (GPI), launched in 2009, is an annual report that ranks pension systems worldwide. A pension system refers to the government and employer-sponsored programs that provide benefits to individuals when they retire. The index evaluates how well each system supports retirees in terms of income, sustainability, and fairness. The goal is to provide valuable insights to stakeholders to help them improve the quality of life for retirees. The index uses a grading system from A to D to compare the performance of each country’s pension system.

Kudos to the Philippines for participating in this annual survey since 2019. It demonstrates a commitment to benchmarking against other countries, particularly in Southeast Asia, to learn and improve our pension system.

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In the 2023 edition, we received a “D” rating with a score of 45.2 out of 100, ranking 46th out of 47 countries. This score highlights the significant weaknesses of our current pension system, which faces major challenges and urgently needs reforms to improve its adequacy, sustainability and integrity.

The report points out that social security benefits are insufficient to replace a substantial portion of pre-retirement income. For example, the average monthly pension from the SSS is P5,123, and for GSIS, it is P18,525 — amounts that are often inadequate to sustain a comfortable lifestyle, particularly for retirees with health issues. Furthermore, the system does not regularly adjust for inflation or the rising cost of living, which further erodes retirees’ purchasing power.

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In addition, it is unable to offer adequate protection against poverty, leaving many older individuals struggling to cover basic living expenses after retirement. A matter of great concern, too, an estimated 80 percent of workers — especially those in the informal sector, freelancing and the gig economy — lack access to formal retirement savings plans. Without a pension or savings, they are left highly vulnerable, with no safety net during retirement.

The report includes several key recommendations, such as increasing support for the poorest elderly to enable them to live with dignity, setting aside government funds to ensure a more sustainable pension system, introducing rules to prevent premature withdrawals so members have sufficient funds at retirement, and reviewing the standards for private companies managing pension funds to better secure retirement savings.

Interestingly, these same recommendations were made back in 2019, when we first joined and scored 43.7, ranking 34th out of 37 countries. This highlights that improving the pension system will take time before we see significant progress. While both the public and private sectors are exploring ways to enhance our pension system, we, as individual stakeholders, must also be more proactive in ensuring a good quality of life when we retire.

Perhaps the first step is to reassess our expectations regarding the adequacy of both social security and company retirement benefits. With the help of a formula, a few basic assumptions, or assistance from our human resources department, we can easily estimate future retirement benefits from both sources and compare them to our desired standard of living in retirement. This will quickly reveal if there is a gap — and, more importantly, how significant that gap might be. Gaining a clear understanding of our retirement program is essential to fully maximize its benefits when the time comes.

By taking this initial step, we will realize that we have been holding onto common misconceptions about the adequacy of social security and company retirement plans. In reality, social security is designed chiefly as a safety net, not as a primary solution to retirement income concerns. On the other hand, company retirement plans place a high value on long years of service. However, with today’s more mobile workforce, shorter stints with a single company can lead to smaller retirement benefits, particularly if the plan is not portable. Some companies are moving from defined benefit plans to defined contribution plans. In a defined contribution plan, employees contribute a portion of their salary, and the company matches it. However, the investment risk falls on the employee. This means that the responsibility for building an adequate retirement fund shifts to the employee. Without strong financial literacy, this can lead to bigger problems for the retiree in the future.

For those not part of any formal retirement program, whether from the public or private sector, it is important that they take the initiative to explore their options. There are retirement products available, and it is a good idea to seek advice from professionals in the financial services industry to make informed decisions.

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