Can Malaysia afford government pensions as it becomes an ageing nation?

During its peak in the past decade or so, almost half of the government’s operating expenditure went towards paying the wages of civil servants and funding the pension costs of government retirees. — Bernama pic
During its peak in the past decade or so, almost half of the government’s operating expenditure went towards paying the wages of civil servants and funding the pension costs of government retirees. — Bernama pic

KUALA LUMPUR, Nov 16 — Malaysia is heading towards becoming an aged nation by 2040 with more and more Malaysians falling under the elderly category.

This then leads to the question of whether the country can keep up with pensions for government retirees.

Here’s a quick look at the numbers, based on the Ministry of Finance’s past annual Economic Reports and Budget speeches.

How much is the bill for government retirees really?

According to a chart in the Treasury’s Economic Outlook 2019 based on Ministry of Finance figures, Malaysia’s monthly pensions and gratuities (a lump sum given to civil servants when they retire) were below RM4 billion annually for the 1990-1999 period.

But by 2000, the pension cost reached almost RM4.19 billion.

In just 10 years, the pension cost then grew by more than three times to hit nearly RM13.57 billion in 2011.

The retirement charges have only kept going up annually, growing to almost RM18.22 billion (2014) and RM18.87 billion (2015).

Government pensions and related costs breached the RM20 billion mark to hit nearly RM21.03 billion in 2016. This is within the span of just five years from 2011.

Retirement charges then grew to RM22.8 billion in 2017, and is estimated to be RM25.76 billion this year and nearly RM26.56 billion next year.

When looking at the 2000-2019 period, the sum of the Malaysian government’s annual retirement charges have grown rapidly from over RM4 billion to around RM26 billion — six times higher in under 20 years.

It’s gotten huge

The federal government’s annual Budget outlines the allocations for the money to be spent on two things: developing the country (development expenditure) and operations to run the government and country (operating expenditure).

Pension and related costs tend to hover around six to over seven per cent of the government’s operating expenditure in the past, but then grew to 8.3 per cent (2014), 8.7 per cent (2015) and has stayed at around 10 per cent in the past few years — 10 per cent (2016), 10.5 per cent (2017) and an estimated 10.9 per cent this year and 10.2 per cent next year.

Government spending to pay emoluments or the wages of civil servants have always been the single largest component of its operating expenditure, usually below 30 per cent.

But from just almost RM16.36 billion or 28.9 per cent of the operating expenditure in 2000, government spending for emoluments have gone up to RM70.05 billion (32.3 per cent) in 2015, around RM73.11 billion (34.8 per cent) in 2016, nearly RM77.04 billion (35.4 per cent) in 2017, almost RM81.33 billion (34.5 per cent) in 2018 and about RM82.05 billion (31.6 per cent) next year.

During its peak in the past decade or so, almost half of the government’s operating expenditure went towards paying the wages of civil servants and funding the pension costs of government retirees.

In particular, 2016 where emoluments and retirement charges collectively came up to 44.8 per cent, and 2017 (45.9 per cent), 2018 (45.4 per cent), although this has now gone down to an estimated 41.8 per cent for next year.

But why do the emoluments to civil servants matter?

It matters because the higher emoluments reflects the civil servants’ improved pay due to the government’s revision of their salary schemes in recent years, and also because the monthly pension to a pensioner is calculated based on the length of public service and the last drawn salary before retirement.

The government’s operating expenditure has grown over the years, from just almost RM56.55 billion in 2000 to RM107.69 billion (2006) and to nearly RM217.7 billion (2017), RM235.45 billion (2018) and RM259.85 billion next year.

But at the same time, government revenue has also grown from RM61.86 billion in 2000 to RM106.3 billion in 2005, and past the RM200 billion mark since 2012. It is estimated to be RM236.46 billion this year and RM261.81 billion next year.

It is unclear if revenue is growing fast enough as government commitments grow, but the government has also worked successfully over the years to reduce the budget deficit.

How did this happen?

So how did the bill for government pensions grow so much and at such a fast rate?

Clues could possibly be found in the government’s constant efforts to improve the pension scheme to help pensioners cope with rising living costs, including increasing the minimum monthly pension for those who had served at least 25 years from RM280 to RM720 in 2009, and then from RM720 to RM820 from January 2012.

The minimum pension payment for the same group of government retirees was then increased to RM950 from 2016, and then to RM1,000 in 2018 which will benefit over 50,000 retirees.

On top of that, the government has also implemented an automatic annual increase of two per cent to the monthly pension sum paid in 2013 onwards. (In comparison, the government’s review of civil servants’ pay is typically carried out every five years.)

The government has also been giving special cash assistance annually to pensioners since 2010, initially at RM500 and at RM250 in recent years.

Another thing is the growing number of government retirees. (The retirement age for civil servants was raised from 55 to 56 in 2001, with the option then given in 2008 to retire at 58 and subsequently extended in 2012 to 60).

Official figures are hard to come by, but the Ministry of Finance’s annual Economic Report has shown the number of pensioners steadily going up from 590,000 in 2010, to 617,637 (2011), 657,000 (2012), 660,000 (2013).

The number has only continued to grow to 700,000 in 2016 (according to the Budget 2016 speech) and around 780,000 in 2017.

The Ministry of Finance estimates that there are around 812,000 pensioners and beneficiaries as of 2018, with this figure expected to grow to 836,000 in 2019.

The number of retirees is bound to go up further, as the size of the civil service has also been increasing from 1.24 million in 2010 to 1.27 million for both 2011 and 2012, and 1.4 million (2013) and then to 1.6 million in recent years.

Time to trim the civil service?

Critics have long argued that Malaysia has a bloated civil service with a relatively higher ratio of civil servants to the population, but the public servants’ trade union Congress of Unions of Employees in the Public and Civil Services (Cuepacs) had in the past defended itself by noting that Malaysia’s civil service includes the police, armed forces, health and education personnel unlike other countries.

Perhaps mindful of such criticism, the Treasury’s Fiscal Outlook 2019 took pains to mention that about 67 per cent of the estimated RM82 billion in emoluments “are allocated to the Ministry of Education and Ministry of Health to remunerate about 834,000 civil servants in both ministries comprising mainly teachers, doctors and nurses.”

The economic reports had in recent years said the size of the civil service will be maintained at 1.6 million to contain the growth of the emolument bill, while seeking to improve efficiency.

Possible solution for an ageing country?

Then there’s also population ageing to consider, with the Department of Statistics Malaysia’s revised population projections for 2010-2040 showing that the percentage of those aged 65 and above in Malaysia is expected to increase from five per cent in 2010 to 7.2 per cent in 2020 and 14.5 per cent in 2040 as life expectancy rates increase and fertility rates decrease.

(If non-citizens are not taken into account, the number of Malaysians aged 65 and above were 1.38 million in 2010, and is estimated to be around 1.95 million and 2 million in 2017 and 2018, and is further projected to be 2.34 million in 2020 and almost 5.24 million in 2040, DOSM’s data from its reports on the 2010-2040 projections and the current population estimates for 2017-2018 show. )

The government’s Economic Outlook 2019 noted that an ageing population would result in higher government expenditure, as pension payments are expected to increase as the population — including pensioners and their beneficiaries — have longer life expectancy.

“Therefore, the current pension scheme may not be sustainable in the long run as it will pose a larger financial burden to the government’s fiscal position,” the report said.

The Economic Outlook 2019 said the government should seek ways to reform the pension scheme ahead of the expected future financial burden in an ageing Malaysia.

“Currently, the civil service pension scheme is adopting the unfunded arrangement (pay-as-you-go) where it is disbursed directly from the Federal Government’s budget.

“Therefore, to ensure a sustainable fiscal position in the long run, the civil service pension scheme could be improved and modernised by introducing the defined-contribution scheme for new recruitments in the civil service,” it said.

The government pension fund KWAP’s then CEO Datuk Wan Kamaruzaman Wan Ahmad was last July reported telling local finance weekly The Edge that the solution may be to move towards a defined contribution scheme for civil servants, but also indicated that this was ultimately for the government to decide.

But the Finance Ministry had in a March 21, 2017 parliamentary reply said that the government had no plans yet to implement a contribution-based pension scheme for civil servants, explaining instead that they were currently allowed to either choose the pension scheme or to contribute to the Employees Provident Fund after their position is confirmed at the end of three years.

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