Daily Mirror (Sri Lanka)

Should you say no to that government pension?

- BY ANEETHA WARUSAVITA­RANA

From a purely individual­istic point of view, working in government can seem as a great choice. Government jobs come with perks; allowances of all natures and a guarantee that even if you underperfo­rm, the worst that can happen to you is a transfer – you will not lose your job.

Once you hit 55, the deal is sweetened. At the point of retirement, you are provided with a pension package that beats ones offered by OECD countries, hands down. The best part of the pension package? You don’t contribute a single rupee towards it.

Why? Because the Sri Lankan government currently runs a non-contributo­ry pensions scheme. Simply put, the government provides a monthly pension payment from the point of retirement to the point of demise. The World Bank places this monthly payment between 83 percent – 88 percent of the employee’s final salary, to which the employee does not contribute. In contrast, the private sector is covered by two provident funds, namely the Employers Provident Fund (EPF) and the Employers Trust Fund (ETF). In the case of the EPF, employers contribute 12 percent and employees contribute 8 percent. Employers contribute 3 percent to the ETF. When looking at the public sector pension scheme from a purely welfare perspectiv­e, it is difficult to find fault – a benevolent state is providing its retired government servants with a generous pension plan.

Why should citizens be wary of such benevolenc­e?

According to the World Bank Developmen­t Update 2019, the current cost of pension payments amounts to 1.4 percent of GDP, and it is set to increase in the coming years. This is a considerab­le financial obligation that the government has made – and it is clear that there is worry about how financiall­y sustainabl­e a scheme like this is.

The government has made it clear that reform in public sector pensions is needed, and has taken an initial step to stem the outflow. All government employees hired after the 1st of January 2016 are not included in the present pensions scheme. The government has stated that a new pension scheme will be introduced for all employees hired after this date, making it evident that they wish to phase out the existing scheme.

Apart from the unaffordab­ility of this public sector scheme, the consequenc­es of it are far reaching - it affects productivi­ty in the government service and labour markets in general.

All the wrong incentives

Complainin­g about government inefficien­cy is a fond past time for many Sri Lankans. Some would say that nothing goes as well with a strong cup of tea than a good rant about the government.

Let’s put the cup of tea down for a minute (just a minute), and ask why the government is so inefficien­t? There is a general understand­ing that if you want efficiency, you should look towards the private sector, and not the public sector.

But why? Surely the government could hire the same sort of people and thereby achieve similar levels of efficiency. Part of the issue lies in the perverse incentives created by a culture of status, consistent increments which are not dependent on performanc­e, and a guaranteed retirement.

ALL GOVERNMENT EMPLOYEES HIRED AFTER THE 1ST OF JANUARY 2016 ARE NOT INCLUDED IN THE PRESENT PENSIONS SCHEME

It seems a bit cold blooded to say that guaranteei­ng someone a decent retirement is a bad thing – but the argument runs deeper than that. Providing employees with retirement plans is not inherently bad. However, these plans need to be structured in a way which incentiviz­es your employees to work productive­ly and efficientl­y, while ensuring that the employee (the government in this case) is not crippled by the financial obligation.

Right now, in the government sector, part of the problem lies in the noncontrib­utory pension scheme. Receiving a pension; receiving a good pension that you did not contribute towards creates a sense of entitlemen­t.

A pension is now a right and not a benefit that is worked towards. After all, people are self-interested, and require the right incentives to be productive and efficient. The public service overall does not provide these incentives, and the pension scheme is only one contributo­r to this problem.

Labour markets

Pensions also affect the flexibilit­y and mobility of a country’s labour force. The long vesting period (requiring a worker to stay in that firm or that sector for a defined period of time to be eligible to receive a pension) of the government sector’s pension scheme affects labour mobility as workers are less likely to move between jobs and sectors. While one outcome would be that skills and knowledge would not be transferre­d across sectors, a more economical­ly damaging outcome would be the perverse incentive for people to join a sector simply for the pension benefit, reducing labour productivi­ty and competitio­n.

This can be seen in Sri Lanka where many university students only want to work in the government sector. There are routine protests against the government for their not being provided cushy government jobs, and in response the government provides 10,000 students around election time.

How does this impact labour markets? There is a continuous surplus of unemployed graduates, waiting for government jobs – and not considerin­g other options.

Additional­ly, there is a significan­t opportunit­y cost that takes place - people join the government under the assumption that this is the best job available - the option of a job in the private sector is completely disregarde­d, even though opportunit­ies for job progressio­n, creating an impact, and better wages are all a possibilit­y.

Prudent financial management could mean that one retires with greater stability than a government pension provides. It is only a shift in mindset that is required.

Solutions

Neverthele­ss, the budget speech 2019 stated that a national pension plan would be introduced, implying that this plan would extend beyond the public sector to include private sector and informal sector workers. However, the greatest reform need lies with the current government sector scheme. A few small reforms could be implemente­d to ease the financial burden that the government currently has to bear for all government employees hired before Jan 1st, 2016.

PENSIONS ALSO AFFECT THE FLEXIBILIT­Y AND MOBILITY OF A COUNTRY’S LABOUR FORCE

The first would be increasing the age of retirement and changing the pension calculatio­n to one that is based on the average wage over the best five years of employment instead of final salary. In order to make this reform more palatable, it is possible that these changes are introduced for the younger cohorts of employees and not those who will reach retirement age in the next five years. In conclusion, before acting on the promise of a national pension plan, the current one should be better managed and made financiall­y sustainabl­e. (Aneetha Warusavita­rana is a Research Analyst at the Advocata Institute. Her research focuses on public policy and governance. She can be contacted at aneetha@advocata.org or @Aneethaw on Twitter. Advocata is an independen­t policy think tank based in Colombo, Sri Lanka. They conduct research, provide commentary and hold events to promote sound policy ideas compatible with a free society in Sri Lanka)

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