Pension tensions

Amir Isyam Abdul Rahim is IM Possible Solutions Sdn Bhd managing director and Tunku Scholar. He says stay prudent and save what you can while the details are being finalised on the new pension-like scheme.

THE government announcement on pension reforms will open a can of worms and lead to a loss of more talent to the private sector.

Civil servants receive lifelong monthly payments of a certain percentage of their last drawn salary under the current pension scheme. Unlike private retirement plans like EPF, this entitlement does not require monthly contributions from employees.

This model very much depends on the government’s ability to always have enough funds for the payouts.

Malaysia’s revenue last year was RM303.2bil, of which RM32.4bil or 10% went to civil servants’ retirement expenses. Pension expenditures are expected to reach RM120bil in 2040, raising questions about the scheme’s sustainability.

The government’s planned temporary measure of appointing civil servants on contract is not without backlash. Aside from the political uproar, it reignites the debate about the value of civil servants and their role in nation-building.

Moreover, new civil servants are now required to contribute to the Employees Provident Fund (EPF) and Social Security Organisation — similar to their counterparts in the private sector — while the matter is looked into.

Are these measures necessary?

The sustainability of the government pension scheme has long been questioned. The fund was set up in 1991 with RM500mil.

In 2007, it underwent a reform that led to the creation of KWAP (Kumpulan Wang Persaraan) — which manages the fund professionally to make lifetime pension payments more sustainable.

KWAP says 32,000 new retirees are registered every year. At present, the government spends RM31bil to pay the pensions of some 900,000 retirees.

For government revenue to be able to cover this cost, we need a robust economy with a productive population that generates income tax payments. Let’s put this in perspective:

  • KWAP’s cumulative contribution fund in 2023 stood at RM57.4bil, including RM15.3bil from the federal government and RM42.1bil from government shares, and statutory bodies and agencies. This figure will continue to climb as more pensioners get onto the system.
  • The government’s revenue last year continued to shift away from petroleum-based revenue (23%) and depend more on direct taxes (50%). Corporate and individual income tax form the bulk. A robust economy and productive population are critical to this revenue.
  • As the lifespan of Malaysians increases, more of them will live 20 years or more after retirement, extending the timeframe for pensions and resulting in higher government expenses. The World Bank says 14% of Malaysia’s population will be older than 65 by 2044, reaching 20% by 2056 (super-aged society).
  • Malaysia is now at risk of population decline due to a lower fertility rate of 1.6 children per woman aged 15-49 years old, compared to 2.1 in 2010. This will adversely affect the country’s future workforce and ultimately its economic performance.
  • The removal of GST while subsidies are continued burdens the government.

As a result of these factors, as well as rising living costs and global uncertainty, pension reforms are urgently needed. The reforms should address two key concerns:

1) Dignified retirement for all civil servants, especially the lower-income ones: EPF recommends a minimum of RM240,000 in savings by the retirement age of 55, translating to RM1,000 per month over 20 years. The fund says a more ideal figure would be RM600,000. What can we do to ensure that these amounts are achieved?

Medical costs are not included in these estimates. Given rising healthcare costs, will the government retain the pension card, which allows pensioners and their dependents to receive free treatment at government clinics and hospitals?

2) The ability of the civil service to attract and retain talent: The pension scheme has always been a key incentive for joining the civil service. The removal of pensions would make recruitment harder because of the attractive wages in the private sector.

The way forward

A total shift to the EPF is unfeasible given the similar macro trends affecting the fund today. EPF’s former CEO, now Finance Minister, Datuk Seri Amir Hamzah Azizan said last July that it is aiming for a pension-like system.

Perhaps a total cap should be implemented on the highest amount of pension a civil servant can draw regardless of their position.

In all fairness, it would not hurt top earners too much. This measure could also encourage a more prudent lifestyle and saving habits while working.

While the details are being finalised, it is wise to not speculate.

New Public Service director-general Datuk Seri Wan Ahmad Dahlan Abdul Aziz is coming in hot. We look forward to receiving comprehensive details about the pension reform and its timeline.

In the meantime, stay prudent and save what you can.

This article first appeared in Star Biz7 weekly edition.

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