A burden that will drag on


The pension liabilities will continue far into the future, and could be made worse by declining revenue collection, making pension payments unsustainable in the long run. — AZHAR MAHFOF/The Star

PLACING new civil servants under the EPF scheme instead of the existing pension scheme seems practical, but this will not reduce the burden on government finances any time soon.

The pension liabilities will continue far into the future, and could be made worse by declining revenue collection, making pension payments unsustainable in the long run.

This is because the government will have to continue paying retirees who are now receiving their pensions and those currently in the civil service who did not opt to contribute to the EPF, which is the overwhelming majority.

These retirement charges, together with government salaries and emoluments as well as debt service charges, make up 56.5% of the country’s total operating expenditure (opex), estimated at RM303.8bil in Budget 2024.

Retirement charges alone make up 10.7% of the total opex, or RM32.5bil. Set against these figures, reform of the civil service pension becomes urgent.

Another problem is, government revenue as a percentage of GDP has been falling.

From 2012 to 2022, government revenues fell by 4.6 percentage points, “one of the steepest revenue declines recorded globally”, said the World Bank’s Malaysia Economic Monitor 2023.

Revenue collection for 2024 is estimated at 15.6% of GDP, lower than the 16.4% of GDP estimated for 2023 and 16.3% of GDP collected in 2022.

According to the World Bank, Malaysia has one of the lowest revenue collection levels among comparative peers. At 12%, the tax ratio is even lower than peers in the upper-middle income bracket, which averaged 20% to 30%.

Several taxes were announced in order to raise revenue, including a low-value goods tax, a high-value goods tax and an increase in the service tax from 6% to 8%. It will be interesting to see how much can be collected with the wider tax base.

There could be other drawbacks. EPF placement for new civil servants will only burden the fund, which is struggling to pay decent dividends to all, claims Malaysia University of Science and Technology economist Prof Geoffrey Williams.

He feels that a much better option would be to create a “Malaysia Superfund” by combining public pension funds such as KWAP, LTAT, KWAN, PNB and Khazanah Nasional Bhd with total assets of RM680bil, which could grow to RM750bil in just a year or two.

This will certainly help KWAP, which manages the pensions of civil service retirees, and has assets estimated at RM185.4bil as of July 2023.

Williams believes the superfund, even with a 5% annual return on the RM750bil, could cover the RM32.5bil pension payouts. The government would also not need to have to contribute its portion of EPF payments for civil service recruits.

This savings to the opex will give the government much needed fiscal space. It will be able to retain the pension scheme and streamline government-related funds, making pension payments sustainable.

It will certainly ease the fears of those who are considering a career in the civil service, since so little has been clarified about the shift to EPF.

Under the pension scheme, civil service retirees and their dependents get decent healthcare for free, a key concern at a time of runaway medical inflation. Train tickets are also discounted.

Also, the government contributes 17.5% of the employee’s monthly basic salary to fund the retirement scheme. Under EPF, those earning RM5,000 monthly will only get a 13% contribution, which is 4.5% lower.

Then, there is the matter of salaries. Experts have pointed out that to make the move to EPF palatable, civil service pay must commensurate with that of the private sector, as the government would be contributing 12% to 13% to retirement savings versus the 17.5% under the pension scheme.

Work culture is another matter of importance. A sea change is needed in the way the civil service works. Many remain in the civil service for the pension and other benefits.

There will now be more fluidity as those from the private sector may even think of joining the civil service, if the pay is attractive enough.

Civil servants will also no longer feel compelled to stay, and they in turn will bring a better understanding of how government works to the private sector. There could be a rich cross-fertilisation of work culture.

This article first appeared in Star Biz7 weekly edition.

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