This article first appeared in The Edge Malaysia Weekly on January 31, 2022 - February 6, 2022

GOING by its trajectory over the past five years, the civil service emoluments, pensions and gratuities bill — which takes away RM49 out of every RM100 earned by the government — could reach 56% of federal government revenue by 2030 when 15% of the population will be at least 60 years old.

The bill could reach 60% of federal government revenue by 2035 and 70% by 2045, our back-of-the-envelope calculations show. That’s based on a five-year compound annual growth rate (CAGR) of 4.24% for pension and gratuities and 2.35% for emoluments versus only 1.2% on revenue. The bill would grow even bigger and faster if the 10-year CAGR were used.

Projected at RM28.1 billion for this year, or 12% of federal government revenue, the bill for public pensions and gratuities alone has doubled in just a decade — having grown at an average of 7.14% a year for 10 straight years — from RM14.1 billion in 2012 (6.8% of federal government revenue).

Going by news flow over the past fortnight on lawsuits taken against the government, the public pensions bill looks set to get bigger.

On Jan 13, the Court of Appeal declared an amendment to the Pensions Adjustment (Amendment) Act 2013 to be unconstitutional, ruling in favour of pensioner Aminah Ahmad and 56 other civil servants who had filed suit in 2017. As an annual 2% increment could result in a less favourable position to the appellants and new pension schemes cannot be less favourable than the old, judge Darryl Goon said the 2013 amendment to Section 3 and 7 of the Act violated Article 147 of the Federal Constitution, the freemalaysiatoday news portal reported.

Last Wednesday, theedgemarkets.com reported that a group of retired senior judges and their dependents were suing the government over adjustments to their pensions and benefits. While the legal suit claims that adjustments to Section 15B(2) of the Judges Remuneration Act 1971 violate a different section of the Federal Constitution, the claimants were essentially seeking a higher than 2% annual adjustment to their pensions and other benefits that they say had been altered to their disadvantage.

Last Friday, freemalaysiatoday reported that a group of 12 former senior military officers, led by former armed forces chief of staff Nawi Alias, is seeking legal advice and had asked to meet the defence minister to correct “a pension anomaly” that disadvantages some 200,000 veterans who retired before 2013 following changes to the Pensions Act in 2013. The “anomaly” results in a warrant officer 1 who retired before 2013 getting a pension of RM2,000, half of what those in the same rank who left after 2013 receive.

To be sure, the claimants likely have valid grounds. The lawsuits also speak of the challenge the government faces in reforming public pensions, even if there is political will to tackle a vastly unpopular move.

Yet, there is no denying the need for fiscal reforms to happen in terms of revenue as well as expenses for the government to be able to sustainably fulfil its obligations. The public pensions bill was estimated at RM300 billion in 2018 when The Edge wrote a Cover Story on the need for reforms on both fronts in September 2019. [See Cover Story: “Public pension reform painful, necessary, overdue” in Issue 1285 of The Edge dated Sept 23, 2019.]

Not only has the civil service retirement bill since burgeoned, the Covid-19 pandemic further eroded the government’s fiscal position. At the same time, the need for Malaysia to expand its social safety net to counter the threat of severe old-age poverty grew because the savings of private sector wage earners fell after RM101 billion was taken out from their retirement kitty.

Old-age poverty was already a real threat before the pandemic. Only one in five EPF members aged 41 to 55 had the minimum level of savings the Employees Provident Fund thinks they should have at their age at end-2020 — that’s before the unprecedented withdrawals from EPF Account 1 (previously off-limits until age 55) last year. EPF’s basic recommended savings was only RM240,000, which means RM1,000 a month for 20 years — below the “living wage” of RM2,700 a month that Bank Negara Malaysia deems one should have. Then, there are the self-employed, gig workers and homemakers who are not covered by EPF or the public pension system.

If it continues to grow above 4% a year, the public pensions and gratuities bill is set to double from RM28 billion to more than RM56 billion by 2039 — that is one-fifth of federal government revenue, if it does not grow much faster than it did on average over the past five years, our back-of-the-envelope calculations show. Together with emoluments, the tally could reach RM65 out of every RM100 that the federal government earns, based on similar assumptions. Policymakers need to act fast to avoid being caught unprepared with only eight years to go before Malaysia is deemed an ageing society.

No country that aspires to continuously invest in its people and strategic capacity to move up the value chain can afford to have more than half of its revenue going towards salaries and pensions alone.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.