Why Putrajaya has no choice but to shake up public pension, say economists

February 6, 2024

Why Putrajaya has no choice but to shake up public pension, say economists

KUALA LUMPUR, Feb 5 — Economists greeted Prime Minister Datuk Seri Anwar Ibrahim’s plan to discontinue the pension scheme for civil servants hired this year onwards with cautious optimism, calling it the first step towards fixing a pension system that has become a huge financial strain.

The plan, while yet to be formalised, comes after years of warning from economists that a ballooning pension could threaten development goals and pile up more debt, prompting calls for reform.

“The current pensions for existing retirees is RM32 billion for 2024 but this does not include the payments for current working civil servants which is RM16.7 billion so this is close to RM50 billion which must be paid from taxes and other revenue,” said Geoffrey Williams, a professor at Malaysia University of Science and Technology.

“So Malaysians without pensions are paying for the pensions of civil servants and do not have enough to save for themselves.”

The Bill for public pensions is projected to rise to RM46 billion by 2030, as a sizeable number of civil servants reach retirement age. There are currently 900,000 civil service retirees receiving retirement benefits, official figures show.

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A big chunk of the payouts is funded by tax money because investment yields from public pension managers, like the Retirement Fund Incorporated (KWAP), have not kept up with the growing bill, forcing public and private sector workers, many already grappling with little retirement savings, to subsidise the pension for retired civil servants.

The government offers what is known as a defined-benefit pension plan. Unlike the define-contribution programme in which workers rely on their own built-up retirement savings, the former guarantees annuity; the government is obligated to pay out retirement benefits regardless of its financial condition.

The security that comes with the system is widely seen as a key factor that attracts talents into the civil service, and also as a way to court political support. There are about 1.7 million government workers.

Why Putrajaya has no choice but to shake up public pension, say economists