Retirement planning for all

The Finance Ministry has unveiled plans to remove pension anomalies from 500,000 retired public servants from next month with Rs. 12 billion earmarked for the change. The Government policy, which clearly targets upcoming elections, shows how difficult it is to link productivity to pension reforms. 

Government officials themselves estimate that paying salaries, allowances and pensions of public employees will cost the Government close to Rs. 1 trillion for 2019 alone. This multiplied across decades is a serious cost to bear, especially given that Sri Lanka has a rapidly aging population. Public servants do not contribute a penny for their pensions and this is one reason why public sector jobs are highly sought after but it is also one of the reasons why the public sector is underproductive.  

According to World Bank estimates, by 2030, one in every five Sri Lankans will be over the age of 60. This means that each family could well have more than one retired person. With fewer younger people to support a larger ageing population, it is essential to have income security for the elderly to ensure they remain independent and have access to a decent quality of life.

In 2012, 13.2 million of the population were 15 to 59 years old. Of these, 7.6 million were economically active. However, only five million workers were eligible for pensions under various employment-based pension schemes. Of those, only 2.3 million workers were enrolled in a pension scheme. Even then all enrolled were not effectively covered. 

Only the public sector pension scheme covers the total eligible population. This is also one reason why State employment is so sought after but whether this pension keeps pace with inflation remains a concern. The estimated coverage for other pension schemes fluctuates between 18% for the self-employed pension schemes to 64% for the farmers’ pension scheme. However, the effective coverage is estimated to be much less, possibly as little as 11% for the self-employed and 38% for farmers due to non-payment of dues in the contributory programs. Only an estimated 1.7 million were effectively covered by a pension scheme

Unfortunately, all informal sector pension programs define benefits in nominal terms. The real value of these benefit amounts will be much less when the pensions are received. For example, the pension scheme for self-employed promises a Rs. 1,000 pension benefit at retirement. The real value of this benefit for a person aged 40 today will be Rs. 471, assuming 5% inflation. This has been observed in the public pension scheme as well, where those in less lucrative public jobs find it difficult to make ends meet and rely heavily on their families. This is also one reason why the Government introduced preferential interest rates for fixed deposits and savings accounts for senior citizens.

The pension burden becomes even more daunting when the health costs of an ageing population are factored in. Pensions are one area that need urgent reform to allow equitable treatment for public and private sectors so that merit-based systems are created to link pensions to productivity and retirement planning broadened so reliance on tax payer-funded pensions are reduced. Making the existing pension scheme more fiscally viable will also ease the financial burden on the Government.