Bankrupt pension systems: What say you? — Saleh Mohammed


Source: The Malay Mail Online


SEPT 8 — Bankrupt Pension Systems: Crisis in Modern Society, that was the title of an article written by Tom Pu-chih Hsieh, the executive editor of The China Postlast week.

According to a recent study by Allianz, pension systems in most Asian countries are “fragile and unstable”. Also, there is a gap of US$78 trillion (RM318.5 trillion) in pension funds among the 20 richest countries in the world.

In Taiwan, the pension issue is severe. Taiwan is the most populous non-United Nation state and the largest economy outside the UN. Civil servants are protesting government’s plan to cut their benefits, while a smear campaign accuses them of causing the pension system’s woes in the first place. But over there, the average monthly pension for civil servants is at least three to four times higher than that of those in the private sector.

It is estimated that Taiwan’s pension system for civil servants will be depleted in about 10 years if no drastic changes are made. The government is preparing to alter its Income Replacement Ratio, which is currently the highest in the world. 

How about us?

Pension scheme for civil servants in Malaysia extends pension benefits to a deceased pensioner’s dependants. Types of pension include Service Pension (monthly payment); Service Gratuity (lump sum payment); and Cash Award in lieu of leave.

The financing of the scheme by the Government is a cause of concern in view of the large absolute amount of expenditure on pension benefits and the rising trend of such expenditures. The current scheme sees the government placed with a liability amounting to some RM300 billion.

It is to be noted that funds for civil servant pensions are derived primarily from taxes paid by companies and non-public sector employees. Indeed, the difficulties faced in the recession years of 1985-86 led to the proposal of the government to abolish the scheme. This was met with objections by civil servants and trade unions. The proposal was later withdrawn.

Malaysia’s civil service relative to population is huge, at more than double the average in the Asia-Pacific region. We have about 1.6 million civil servants or around 11 per cent of the working population. If more retired people receive pension payouts and fewer working people contribute to the fund, the system is doomed to fail.

This is already happening in developed countries. Baby boomers are now at retirement age but find their pensions shrinking because fewer people are contributing.

Let us take a look at the wages bill of the Malaysian government.

The budgeted ‘emoluments’ for the civil service have been increasing from RM42.2b in 2010 to RM70.5b in the 2016 budget.

This is about 67 per cent increase in six years or a compounded annual growth of 9 per cent per year. Not many establishments in the private sector enjoy this rate of increase especially under current market conditions.

For 2016, it is equivalent to 33 per cent of the operating budget.

In reality, budgets are usually made with the primary intention of re-election and include advantages for certain key regions and groups.

Greece had issues with the civil service. They too have allegedly large numbers of civil servants, lack of adequate meritocracy, strong ties of a significant portion of public employees with political parties and the clientelism that this relationship incubates. The Civil Service payscale is also controversial given the conditions before the financial crisis that made being a civil servant a dream job.

We need systematic reforms. Besides, a good and responsible government should always be fair to all. Irresponsible politicians may seek to divert public attention by producing good historical numbers but the consequences may be catastrophic in the long run.

Reforms may include delaying pension fund contributions until retirees reach a certain age, lower payouts and controversially, higher monthly contributions from working people.

Pension scheme also depends on economic and demographic factors. Higher revenue means higher taxes. Life expectancy and mortality rates are also important as it directly determines the size of pension payouts. However, inflation would create pressures.

Retirement age exerts a crucial influence on the cost of the pension scheme. Lowering it means increasing number of years pensioners receiving benefits. Increasing it means higher salaries and more funds neeeded to finance the pension benefits.

The financing of pension benefits has grown at a rate much higher than the growth of GNP.

The introduction of the privatisation programme in 1983 was supposed to help reduce the growth rate of public sector employment – did it help?! That is another topic for discussion.

It cannot be denied that a pension scheme could provide effective financial protection for civil servants but we also need to balance it with productivity and national income. Would it be fair to tax others (including non-governmental retirees) just to keep public sector happy with minimal contribution to productivity. Remember the compounded annual growth of 9 per cent in emoluments?

While I have pity on the older retirees whose salaries were quite low, with higher salaries now, civil servants with higher salaries should learn to start saving and investing. After a rationalisation programme, civil servants now earn a minimum monthly salary of RM1,200 – well above the national minimum wage. If the reason given that there is not enough, then there are structural weaknesses in the system.

It is disturbing to note that a deputy minister said the ability of the government to provide a pay rise and Hari Raya bonuses for 1.6 million civil servants in the country despite the global economic downturn proves that Malaysia is in good hands. Is he aware of this thing called GST?

I am encouraged when the Chief Secretary to the Government said the government was very much concerned over the welfare of civil servants. How about non-civil servants?

The prime minister said he had no regrets over the unpopular decisions like implementing GST and likens tough decisions to antibiotics; they are good.

I think he, also as the Finance Minister, should also make tough decisions to reduce government expenditures… unless it is for political expediencies. This sort of action is akin to a very effective antibiotics to treat bacterial infection.

I am fully aware that the pension scheme will not be easily terminated as it is a law enacted in Parliament and protected by the Federal Constitution.

If the government and Cabinet could convince 31 million Malaysians to help the country and pay GST, surely it is easier to convince around 2.3 million (current civil servants and pensioners) to sacrifice a bit on the pension benefits!

What say you?