The two social insurance programs of the Philippine government are the Government Service Insurance System (GSIS) for public employees and the Social Security System (SSS) for private workers. Under the law, membership to either one of these programs is compulsory for all workers below a certain age (for the SSS, it’s 60 years old).
Private employers must obey the law, since they can be sentenced to jail for not remitting their employees’ SSS contributions. However, I have yet to hear of a self-employed individual who was imprisoned for not paying his/her own SSS premiums.
This raises the question: if you were self-employed, would you be better off investing your hard-earned money in a mutual fund instead?
One advantage of the state-backed SSS is that it is supposed to be steady and dependable for life. It will provide an allowance every month, like clockwork, even if you live up to a hundred and fifty. Sounds good, but the problem is, this monthly pension remains constant despite inflation. I know someone who is relying solely on an SSS pension of P6,000 per month — it might be okay for now, but how about five years down the road, when the prices of goods and services are much higher? It may be hard to live on just P6,000 by then.
To answer my question, let’s compare two scenarios:
#1: Paying the highest premium for self-employed individuals per month (P1,560), and
#2: Investing that P1,560 in a mutual fund instead.
We’ll use actual historical NAVPS data* from a mutual fund for #2. Usually people retire at 60+ after working 30-40+ years, but Philequity Fund (PEFI), which I believe is the oldest existing mutual fund in the Philippines, is less than 20 years old. As such, our hypothetical working period is only 18 years, from 1995 to 2012.
*published NAVPS figures are already net of the annual management fee, which is amortized daily
Some assumptions for simplicity’s sake:
- Instead of investing P1,560 per month to PEFI, P18,720 (P1,560 x 12 months) is invested annually at the beginning of the year. For a more accurate comparison it should be monthly, but computation is easier if it’s annually. Same amount, different timing, and way fewer numbers to crunch
- Constant 3.5% entry fee every year for PEFI. Perhaps it was higher or lower in the past — I don’t know
- Constant maximum allowable contribution per month (P1,560) for SSS. I believe it was only P240 before 1997
For both scenarios, the total amount of money invested is P336,960 (P1,560 x 12 months x 18 years).
#1: As explained on its official website, there are three ways to determine one’s SSS monthly pension:
a) “the sum of P300 plus 20 percent of the average monthly salary credit plus 2 per cent of the average monthly salary credit for each accredited year of service (CYS) in excess of ten years”
P5,700 = P300 + 0.20 (15,000) + 0.02 (15,000) (8)
b) “40 per cent of the average monthly salary credit”
P6,000 = 0.40 (15,000)
c) “P1,200, provided that the credited years of service (CYS) is at least 10 or more but less than 20 or P2,000, if the CYS is 20 or more”
The retiree receives the highest figure of the three, which in our case is P6,000. This is the monthly pension of our hypothetical self-employed individual, whom we shall call Juan.
#2: If Juan invested his SSS premiums in PEFI instead, he’ll end up with 90, 407 shares of the mutual fund after 18 years:
If Juan redeemed his shares on 15 May 2013 when the NAVPS was 35.8884, he would have received P3,244,562.58 (90,407 x 35.8884). Three million! That’s a whopping 863% return of investment. With SSS, Juan’s monthly pension will add up to an equivalent amount only after 42 years of retirement (if he’s lucky enough to live that long).
TL;DR: If no threat of jail time, then mutual funds over SSS, hands down. Of course, one shouldn’t redeem one’s mutual fund shares in one go — having millions upon retirement is useless if one is just going to gamble them away the next day. (That’s another advantage of the SSS — controlled release. If you squander this month’s pension, hey, at least you’ll still receive another next month, and the next, and the next…)