The Long-Term Financial Sustainability of the Civil Service Pension Scheme in Malaysia*

Sheila Rose Darmaraj () and Suresh Narayanan ()
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Sheila Rose Darmaraj: School of Business INTI International College Penang 11900, Penang, Malaysia and School of Social Sciences Universiti Sains Malaysia 11800 Minden, Penang, Malaysia
Suresh Narayanan: School of Social Sciences Universiti Sains Malaysia 11800 Minden, Penang, Malaysia

Asian Economic Papers, 2019, vol. 18, issue 1, 155-178

Abstract: The civil service pension scheme (CSPS) in Malaysia is a defined benefit (DB), non-contributory system directly funded from the budget. An aging population, rising life expectancy, and ballooning pension payments underscore the need for reform. An annual pension deficit model was used to estimate the pension deficit over a period of 75 years under eight scenarios that compare the current scheme with changes in the pension deficit when three policy variables—retirement age, contribution rate, and replacement rate—are manipulated. We found the current scheme will not be financially sustainable. By increasing the retirement age, introducing employee contributions, and reducing the replacement rate, it is possible to delay the emergence of deficits and lengthen the period of sustainability of the scheme. However, a radical makeover is necessary to be fully sustainable and this might not be politically feasible.

Date: 2019
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