This article first appeared in Forum, The Edge Malaysia Weekly on April 1, 2024 - April 7, 2024

Among the key principles in government that we have promoted have been fiscal discipline and sustainability. While we disagree with severe market-approved austerity measures that have left a trail of socioeconomic ruin in parts of the West, we believe that governments must live within their means and not burden future generations with present profligacy.

It was with this in mind that last year we called on the government of Datuk Seri Anwar Ibrahim to consider three measures which will signal not just discipline in managing the country’s finances but also in ensuring that future budgets will have more room for much-needed capital expenditure in infrastructure, health and education. The suggestions are obvious but not easy to execute. They will require political buy-in, smooth implementation and effective communication.

They are: (i) Subsidy rationalisation towards a more progressive, targeted regime; (ii) the reintroduction of the goods and services tax (GST); and (iii) the reform of our civil service pensions. Subsidy rationalisation is currently ongoing, beginning with diesel, to be followed with petrol once the onboarding process of the new centralised Padu database reaches a critical mass. The government has, so far, decided not to bring GST back and has instead focused on raising other taxes. The focus of this article is to strengthen the case for the final of the three suggestions: pension reform.

It has been two months since the government floated a trial balloon to replace the civil service pension scheme with the Employees Provident Fund (EPF) contribution for new civil servants. The suggestion was met with mixed views. Although it was clear that this would only apply to new recruits and not affect retired and existing civil servants with permanent and pensionable status, myriad arguments were presented against the suggestion. These ranged from civil service recruitment being affected since lifetime pensions are seen to be a key benefit, to the health, education and security sectors bearing the brunt with future attrition of teachers, doctors, nurses, soldiers and police personnel. The political class was not spared. A popular counter suggestion was to first remove lifetime pensions for ministers and elected representatives.

The government responded that shifting the current pension scheme to a defined contribution system will not affect the productivity of civil servants. The new civil service remuneration scheme under review will take into account the need to attract top talents in the country to join the civil service, according to the minister in charge. And in principle, the new scheme will have to be consistent across the board, applicable to politicians and civil servants alike.

The fact is Malaysia has long contemplated reforming its pension system. The writing has been on the wall since the 1990s for past governments and the time to act is now. The existing public pension scheme is not sustainable.

In 2023, pension expenditure amounted to RM32 billion, or roughly 10% of the entire federal government’s annual budget for that year. It is expected to increase to RM46.4 billion in 2030, and a whopping RM173.4 billion by 2050. The average projected increase in pension payments is nearly RM2 billion a year. That is as much as the RM2.6 billion budget allocated for various subsidies and incentives to paddy farmers and fishermen in Budget 2024.

Several factors have contributed to the increase in government pension liability. These include increased life expectancy, higher ranks and final salaries, improvement of retirement benefits, increase in staffing and time-based salary increment.

Malaysia is facing a pension time bomb as the nation is fast ageing. This government with its near two-thirds majority in parliament must have the foresight and courage to push through this reform. But first it needs to structure a convincing argument. This starts with demonstrating that the new scheme will not disadvantage new recruits into the civil service.

To provide further insight into this issue, we ran a simulation to directly compare the government pension and EPF scheme across different ranks and categories within the public sector. Our question centred on determining which of the two schemes would offer higher monthly retirement income for civil servants. Based on a presumed 5% dividend rate by EPF annually and civil service appointments in 2025, here are the four scenarios we envisaged unfolding.

For administration and support staff of Grade N19 with the government, they enter civil service at the age of 18 with a starting salary of RM1,352.00. At 58, their final salary before retirement would be RM5,493.08 (N19). With an average life expectancy after retirement of 27.2 years or 327 months in 2065, the simulation showed that average monthly retirement income under service pension will be RM4,326, versus RM7,904, or 83% higher, for an EPF scheme. The government would need to fork out RM1.41 million to support the service pension, compared with only RM250,000, or 82% less, would be needed for employer’s contribution to the EPF. The total cost for an EPF scheme, inclusive of RM468,000 employee’s contribution, would be 67% lower against the RM1.41 million total cost for the service pension.

Teachers (DG29) beginning their career at 22 will start with an RM1,844.44 salary. For 38 years of service and retiring at 60, their last drawn salary would be RM8,869.44 (DG40). Consider 25.2 years or 303 months of life expectancy after retirement in 2063, the average monthly retirement income under service pension for this group will be RM6,837, against RM9,806, or 43% higher, for an EPF scheme. The cost to the government under an EPF scheme would be 84% lower at RM329,000, compared with RM2.07 million for service pension. Adding a projected RM624,000 of employee’s contribution, the total cost for an EPF scheme is 70% lower compared to a service pension.

Government IT Officers (F41) at 23 will receive RM2,315.00 in their first payslip. After 37 years of public service, their final salary is projected to reach RM11,580.00 (F48) when they are 60 years old. Consider 25.1 years or 302 months of life expectancy after retirement in 2062, their average monthly retirement income under service pension is expected to be RM8,918, against RM12,182, or 37% higher, under an EPF scheme. The cost to the government between service pension and EPF scheme will be RM2.69 million and RM423,000, or 84% lower, respectively. Meanwhile, total cost under an EPF scheme is expected to be 70% lower at RM808,000, inclusive of RM385,000 of employee’s contribution.

Doctors (UD41) in government hospitals start out with a salary of RM2,947.00 at the age of 25. After 35 years, their final salary when they retire at 60 is RM20,595.31 (JUSA/Special Grade A). Take 24.9 years or 299 months of life expectancy after retirement in 2060, the average monthly retirement income under service pension for the doctors is RM15,819, against RM21,857, or 38% higher, for an EPF scheme. The government is expected to incur a cost of RM4.73 million to sustain their pension, while an EPF scheme would require 82% less at RM849,000. Combining RM777,000 of employee’s contribution, the total cost for an EPF scheme stands at RM1.63 million or 66% lower than that of service pension.

The numbers in these four scenarios demonstrate that the EPF scheme is a clear winner. The average monthly retirement income is higher and the financial burden for the government will be significantly reduced. Although our simulation shows new recruits will be better off in retirement, we would like to end by laying out a couple of caveats which must be considered as the government fine-tunes its policy proposal.

First, there is a key assumption that EPF will continue to declare a dividend rate of 5%. Although it has paid out more than 5% in dividend in every year over the last decade, there is no guarantee that this will continue indefinitely. While any future downturn would affect all EPF contributors, will the government design a mechanism where it would step in to bridge the difference for civil servants if dividends fall drastically? That’s a policy consideration that needs to be discussed.

Second, when we presented the above simulation on an episode of our podcast, Keluar Sekejap, we received the obvious feedback that in the current scheme, the government bears the entire cost of the pension. In an EPF model, the civil servant will have to pay for their employee’s contribution. So even if the EPF model gives them a better retirement income, some of it came from their own contribution.

This is probably the toughest argument to address. For us, this goes to the heart of reform. It must present a new order to things, otherwise things will not change. In this case, the new deal is that all workers — both in the private and public sectors — contribute to their own retirement. But we do understand that the government may want to still cushion the disruption to some civil servants. In our simulation we noted that the savings for the government will be significant. Some of these savings can be used to subsidise employees’ contributions for selected categories of civil servants — those who earn the least and those in critical sectors such as health, education and security. These are details that need further deliberation.

Finally, in a strange twist to end this article, we would like to suggest the government considers using some of the savings from shifting from the existing scheme to the EPF, which is a defined contribution model, to introduce a basic universal pension for all in their old age. We will make our case at another date but we need to acknowledge that around 40% of the labour force in Malaysia, in particular informal workers, have no retirement coverage. More heartbreaking is that only 20% of our old age population receives any pension. We can and must do better. But we need to have the means to do so. Restructuring the present civil service pension scheme will free up funds for the government to look after more Malaysians into their golden years.

Khairy Jamaluddin is a former cabinet minister. Shahril Hamdan was economic director at the Prime Minister’s Office. They co-host Malaysia’s No 1 podcast, Keluar Sekejap.

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