This article first appeared in The Edge Malaysia Weekly on February 12, 2024 - February 18, 2024

TALK of public pension reform has always drawn a heated response, mostly because of the fear of losing the privilege. It is a privilege because pension cheques arriving every month for life — even at the current minimum public pension amount of RM1,000 a month — is something very hard for the average worker to save towards because of the generally low wages in the country, even among many civil servants.

So, even though nine of 10 public pension recipients got less than RM3,000 a month in 2018, and those receiving the minimum pension could be living on less than poverty-level income after they deplete their gratuity payments upon retirement, most civil service pensioners are still better off than the majority of private sector wage earners whose statutory savings with the Employees Provident Fund (EPF) are less than the basic savings threshold of RM240,000, to have RM1,000 a month for 20 years after age 55.

As the law guarantees that those promised pensions cannot be worse off than their existing entitlement, those who joined the Malaysian civil service before Feb 1 this year and attained pensionable status need not worry about losing their pension.

That is also why Prime Minister Datuk Seri Anwar Ibrahim can only appeal to the moral conscience of former ministers and elected representatives with three or four pensions to forgo their public pension or select only one pension, like his wife, Datuk Seri Wan Azizah Wan Ismail, who was a government doctor before entering politics.

In fact, existing civil servants should be for public pension reform to improve government finances so that the government coffers can better afford the future pension payments due to them when they retire. It is the government’s fiscal space that they should be more concerned about since Article 147 of the Federal Constitution specifically states that “any pension, gratuity or other allowance granted to a member of any of the public service, or to his widow, children, dependent or personal representatives … cannot be less favourable to the person to whom the award is made”.

Put another way, if the government wants to move any pensionable civil servant from the tax-funded defined benefit (DB) to the defined contribution (DC) EPF model, where the burden to save for retirement is shared, the government would need permission from existing civil servants with pensionable status and provide them with monetary compensation that is no less than what they would receive in pension pay cheques.

As moving existing civil servants involves more complicated actuarial work and deeper levels of understanding, the government has said it does not intend to change pensionable status for those already in the civil service. Change will apply only to those coming in after Feb 1 this year.

At this juncture, fiscal improvement is far from guaranteed. There will still be those lobbying for status quo for political mileage, since new hires to the civil service start off contributing to the EPF anyway until they attain pensionable status.

With pension and gratuities paid to members of both the administration and parliament reaching RM162 million in 2022 — of which RM1.05 million went to new pensioners — not providing pension to future members of parliament and asking them to forgo existing payments may free up money for other purposes but will not be enough (see Chart 1).

Action needs to be taken fast for medium- to longer-term gains because inaction could see public pension alone take up one quarter of revenue by 2052 and one-third of revenue by 2060 at the current trajectory, our back-of-the-envelope calculations show.

According to Minister of Finance II Datuk Seri Amir Hamzah Azizan, the federal government’s annual pension bill stands to reach RM120 billion by 2040 from just over RM32 billion last year if nothing is done.

Those numbers are consistent with our back-of-the-envelope calculations using official numbers from between 2010 and 2023, which show the public pension bill reaching RM122 billion by 2040 to make up 17.4% of federal government revenue (see Chart 2).

Close to 76% of federal government revenue could go to paying just public pension, civil service emoluments and debt service charges alone by 2040 — leaving little money for everything else — if federal government revenue continues to grow at a slower rate than those three expenditures, going by the respective compound annual growth rate between 2010 and 2023 (see Chart 3).

In short, public pension reform needs to happen because there is an affordability issue: too much fiscal resources would be going towards paying the public pension to civil service retirees and their dependants, which reached 900,000 persons in 2023, up more than 50% over the past decade from about 582,000 in 2013. Former deputy finance minister Datuk Seri Ahmad Maslan said last year that the government adds about 32,000 new pensioners every year.

The public pension and gratuities bill grew from RM14.8 billion, or 7% of federal government revenue, in 2013 to RM32.08 billion, or 10.6% of federal government revenue, in 2023. These retirement charges, together with emoluments and debt service charges already took up 57.8% of federal government revenue last year.

Tight finances also mean that the government will have less ability to raise civil service wages or have enough for other forms of development expenditure or be able to widen the social safety nets unless it generates a lot more revenue.

For the rest of Malaysia, the government’s inability to meaningfully increase development expenditure or social protection could contribute to a vicious cycle where inadequate investments in education, training and healthcare result in low productivity and low wages, thus putting a drag on the economy’s long-term growth and depriving the government of tax revenue.

Having new civil servants contribute to the EPF could mean the funds in Kumpulan Wang Persaraan (Diperbadankan) (KWAP) — which reportedly stood at RM185.4 billion as at July 2023 and are essentially federal government funds, since the public pension burden is fully borne by the government with tax money with no contribution from civil servants themselves — could be redeployed or repurposed. This is an area that Putrajaya may want to provide clarity on as more details are provided on the reform of public pension and civil service wages that is being studied.

Citing the fact that Putrajaya had not only neglected to put enough money to grow the KWAP funds but also took money out of it in recent years to help fund annual spending when finances became tight, some critics question whether the government has the money and discipline to continue to make monthly contributions to the EPF for new civil service hires, on top of funding its existing pension and emoluments bill.

The short answer is that contributing the employers’ portion to the EPF while the civil servant is in active service is much cheaper for the government in the long run, going by how a civil servant who retires at the age of 55, after 30 years of service, could live for at least 21 more years, with the average life expectancy at 75 years in 2023.

A new civil servant who cannot command higher pay may well be better off in the existing public pension system if he or she lives much longer than the average Malaysian lifespan. With the government setting Feb 1, 2024, as the cut-off date, however, any new joiners know they are not guaranteed a pension upon retirement and will need to decide whether an improved salary scale is attractive enough.

Assuming a 20-year-old starts with a basic monthly wage of RM1,500 (with 11% employee contribution and 12% employer contribution to the EPF from the government) and a 3% annual salary increment and 5% annual EPF dividend, he or she would have RM240,000 in savings with the EPF by age 43, about RM410,000 by age 50 and RM587,000 by age 55 — assuming zero withdrawals throughout this period.

That RM587,000 saved up at age 55 — even though the last drawn monthly salary would be only RM4,098 at a 3% annual increment over 35 years — is largely thanks to the power of compounding interest and decent dividends from the EPF, with the government’s actual contribution being only 22.2%, or about RM130,000, while the employee saves up 20.4%, or about RM120,000, simple calculations show. The RM587,000 works out to RM2,447 a month in savings available for monthly expenditure over 20 years post-retirement, excluding any dividends from the EPF.

A public pension cheque (1/600 x 360 months maximum service x last drawn salary), subject to maximum 60% of last drawn salary, would have given the civil servant as much as RM2,459 a month for as long as he or she, or his or her eligible dependants, is alive — and there is a high likelihood of this being more than 20 years. In the 20 years alone, the pension bill would have come up to RM590,160, which is 4.5 times the government’s employer contribution to the EPF at the 12% rate. The government would still have savings even if it provided a higher contribution rate of up to 19%, our back-of-the-envelope calculations show.

Existing civil servants are also entitled to cash in lieu of accumulated leave (gantian cuti rehat, or GCR) as well as gratuity payments (7.5% x length of service x last drawn salary), which made up about 24% of the government’s RM30.3 billion pension bill in 2022. GCR was RM832 million in 2022 while gratuity payments reached RM6.2 billion. In 2013, GCR was only RM235.8 million while gratuity payments stood at RM2.1 billion. Pension payments for new pensioners had also grown from RM346 million in 2013 to RM839 million in 2022 (see Charts 4 and 5).

The amount of future savings from setting that Feb 1, 2024, cut-off date for public pension eligibility — so as not to add on to an already heavy pension burden — plus ongoing revenue and expenditure rationalisation efforts could go towards improving the government’s fiscal standing to provide a wider and better-funded social safety net for the old and vulnerable as Malaysia’s society ages.

As for whether the government will lose good talent to the private sector, the government should not rely on just the pension to tie people down in the first place.

Are there really that many young people — millennials born after 2004 — aspiring to join the civil service purely to secure tax-funded pensions for their old age? Getting pension status can be a long arduous journey that requires at least 10 years of active service even though they can be confirmed for pension status within three years. Movements would also free up positions in the public service for younger ones to move up the ladder. It is understood that those who rejoin the civil service in permanent positions after 2012 can count previous years of service towards attaining pensionable status.

For top-tier young civil servants who can command high wages and senior positions in the private sector, the old system meant leaving the public service would be harder as the years of service towards that pension cheque could go to naught if one served less than 10 years but, say, more than five years without having statutory savings with the EPF. Civil servants who have not been confirmed have to contribute to the EPF, with their (employee) portion of contribution returned to them with dividend after he or she attains pension status within the first three years.

Cancelling the pension for new civil service hires may be politically unpopular to the uninitiated but is among the fiscally responsible moves necessary to ensure long-term sustainability of the country’s finances and growth. Rather than succumb to fearmongering, civil servants should be aware of their rights and be supportive of the move towards greater fiscal sustainability. Better fiscal health should also boost confidence in the country’s growth prospects and currency strength.

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