Should you say no to that gov­ern­ment pen­sion?

Daily Mirror (Sri Lanka) - - BUSINESS - 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 [email protected]­vo­cata.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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