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Understanding the SSS Contribution Table and why you should not depend only on SSS for your retirement


Just recently I saw a Facebook update from Philippine Social Security System on the pension (or retirement) benefits one can avail for a certain amount of SSS contribution. 

The amount shocked me that it lead me to investigate further the math (or computation) behind the said values. 

As part of our Global Campaign for Financial Literacy, it is very important to understand what benefits we are getting for what our money is paying for. Thus, today, let us dissect and understand the SSS contribution table (as of 2017) and learn why we should not depend only on SSS for our retirement. 
We should not only depend on our SSS for our retirement
We should not only depend on our SSS for our retirement
This is the image uploaded by the Philippine Social Security System (SSS) in their official Facebook Account: 
SSS Contribution and Benefits
SSS Contribution and Benefits (source: SSS Facebook Page)
Now looking into the values:

Juan contributed every month 110.
Every year that's 1,320.
Thus, for the next 20 years of contribution that would be 26,400. 

While Pedro contributed every month 1,760. 
Every year that's 21,120.
Thus, for the next 20 years of contribution that would be 422,400.

Thus, Pedro contributed 16x more than Juan. 

Now, before we proceed with the shocking part, let's us understand first the SSS contribution table (data as of 2017).
SSS Contribution Table 2017
SSS Contribution Table 2017 (source: www.sss.gov.ph)
For a Range of Compensation (monthly salary) there is an equivalent fixed Monthly Salary Credit. 

The current SSS contribution rate is 11% of the monthly salary credit not exceeding P16,000 and this is being shared by the employer (7.37%) and the employee (3.63%).

Self-employed and voluntary members pay the 11% of the monthly salary credit (MSC) based on the monthly earnings declared at the time of registration.

For OFWs, the minimum monthly salary credit is pegged at P5,000.

For the non-working spouse, the contribution will be based on 50% of the working spouse's last posted monthly salary credit but in no case shall it be lower than P1,000.

Now, going back to the above image, after 20 years of contribution, both Pedro and Juan applied for retirement and will be receiving the following pension benefits:


Juan: 2,400 per month or 31,200 per year.
Pedro: 6,700 per month or 87,100 per year.
Pedro contributed 16x more than Juan BUT Pedro receives ONLY ~3x more than Juan.
I don't know how that is computed. But dissecting further:

If Juan is receiving 31,200 per year, using the concept of living on interest


Lump Sum Retirement Money = Annual Income x 10
31,200 x 10 = 312,000
Where:
312,000 invested at 10% interest per year =
31,200 per year divided by 12 months (+ 13th month on December)
= 2,400 per month in pension.

While Pedro is receiving 87,100 per year, again using the concept of living on interest:

Lump Sum Retirement MoneyAnnual Income x 10
87,100 x 10 = 871,000

Where:
871,000 invested at 10% interest per year =
87,100 per year divided by 12 months (+ 13th month on December)
= 6,700 per month in pension.

Therefore:

Juan's total contribution for 20 years of 26,400 became 312,000 while Pedro's total SSS contribution for 20 years of 422,400 just became 871,000.  

That is a whopping 1,081% growth for Juan's money in 20 years while only 106% growth for Pedro's SSS contribution.

Determining the interest rate:
Juan and Pedro's SSS contribution interest rates computation
Juan and Pedro's SSS contribution interest rates computation
Now, using basic excel skills to determine the interest rates of Juan and Pedro's SSS contribution: 

For Juan's yearly contribution of 1,320 (a total of 26,400 for 20 years) the interest rate to achieve 312,000 lump sum retirement benefit to give the the necessary pension therefore is 20.41% interest per year! 

While for Pedro's 21,120 per year (a total of 422,400 for 20 years) the interest rate to achieve 871,000 retirement lump sum to give the necessary pension is just 6.48% interest per year.

What do you think of this computation? 

While the interest rates are certainly higher than the inflation rate, as financially educated members of IMG, we believe in getting value for our money where we know we can invest our money that grows more than 10-12% per year. 

Thus, having an SSS account is good, but if we want to maximize our money for higher and bigger retirement money, then investing in other financial vehicles is a must. 

Disclaimer: The views and the computation are based on the author's point of view and do not represent the views of SSS. This article is for informational purposes only. 

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