How to resolve burden of civil service pensions within 5 years

 

Civil service pensions have become a heavy burden in Malaysia, taking RM32.4 billion or 10.5% of revenue in Budget 2024 and predicted to reach around RM46 billion by 2030.

The problem is that the civil service pension fund Kumpulan Wang Persaraan (KWAP) is too small at only RM185 billion, and the 6% average annual returns are insufficient to cover the pension costs. The government has to cover the shortfall from operational expenditure (OE).

One solution is to increase the fund and increase the returns. To do this the government can combine KWAP with Kumpulan Wang Amanah Negara (KWAN), Armed Forces Fund Board (LTAT) and Khazanah Nasional Bhd to create a fund with assets of RM337 billion.

The historical average return of 6% can build a RM500 billion fund within seven years, enough to cover current costs but not projected future costs.

Changing the strategic asset allocation (SAA) to allow a higher overseas allocation could deliver 10-15% returns.

At 10% the RM337 billion fund would be RM500 billion in four years and RM750 billion, enough to pay RM46 billion, in eight to nine years. At 15%, it would reach RM500 billion within three years and RM750 billion in six years.

Adding the RM343 billion assets in Permodalan Nasional Bhd (PNB) would start with RM680 billion and grow to RM750 billion in just over one year.

Once the fund has reached its required size it can be refocused on domestic markets at 6-7% or RM45-52 billion per year. This would fund the civil service and armed services pensions and release the same amount from government OE.

This can double public health spending, quadruple higher education spending to end student loans or triple social welfare spending, eradicating poverty for millions of people. In any combination the social benefits would be life-changing for millions of Malaysians.

Some economists who should know better, along with unemployed politicians who do not know any better, have suggested that the civil service pensions scheme should be replaced with EPF contributions.

This does not work. First it only affects new hires into the civil service and so the outstanding liability remains. Second it will cost more with the current 17.5% salary contribution rising to 24%, covering 13% from the government and 11% from the civil servants themselves. Salaries might have to rise to compensate for this.

Third EPF is not a pension scheme and final retirement benefits are not guaranteed as under the current system so many civil servants will be worse off

Another undesirable suggestion is to leave the system essentially as it is but raise the money to pay for it from higher taxes. Yes, you guessed it, the obsession with GST.

This also does not work. Poor people with no pension will be paying for civil servants who have a generous pension.

Everyone, rich and poor alike, will be paying higher taxes to pay retired civil servants. The extra tax revenue will be ring-fenced for pensions leaving other priorities underfunded.

Any low-entry GST rate will balloon to the 20% rate normal in other countries that pay pensions from taxes. So, funding pensions from a new consolidated fund is a much better option.

Civil servants and their union Cuepacs should jump on this scheme as the solution to their longstanding pensions problems.

Ordinary Malaysians should support this scheme as a defence against higher taxes and to release funds to be spent on everyone.

The government should also be keen to adopt this scheme as a solution to their pensions headache.

They might even offer a word or two of thanks to their friendly neighbourhood economist who suggested it.

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.