Economists Say Growing Government Pension Costs Are Putting Malaysia’s Economy At Risk

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Economists have described the government's proposed revamp of the civil service retirement scheme as a vital structural reform

According to the New Straits Times, the shift is seen as crucial to preventing rising pension liabilities from undermining the country's long-term fiscal health.

The government is currently refining the proposed mechanism, known as the "contributory permanent appointment" scheme, to balance long-term fiscal sustainability with the need to attract and retain top-tier talent.

Sunway University economics professor Dr Yeah Kim Leng said the current pension framework is entirely unsustainable on its present trajectory

Projections show the national pension bill rising to RM46.36 billion by 2030, equivalent to about 2 or 3% of the country's Gross Domestic Product (GDP).

Setting aside such a large share of revenue each year to fund past services creates a fiscal trade-off, leaving less room for productive public investment like infrastructure and development, said Yeah.

University of Cambridge Fellow of Finance Dr Lim Kim-Hwa echoed these concerns, saying the current system has become increasingly costly as civil servants live longer, which naturally raises long-term costs.

To address the issue, Yeah said a shift towards an Employees Provident Fund (EPF)-style system, where both the government and civil servants make regular percentage contributions, could be a viable reform, provided it is introduced gradually

While traditional pensions are often favoured for their lifetime security, Yeah said the new system could replicate that safety net through annuity-like features. Instead of a lump sum, retirees would receive a monthly income stream over time.

"Under this model, the private and public sectors will converge. It becomes neutral whether you work for the government or the private sector, as both pathways will guarantee minimum income security upon retirement," he added.

A key advantage of a contributory system is improved career mobility

Under the current framework, civil servants who resign before completing the minimum service period may forfeit their retirement benefits.

Yeah said a portable, EPF-style retirement scheme would allow employees to move between the public and private sectors without losing accumulated savings, supporting career flexibility and long-term civil service reform.

Addressing concerns that the change could deter recruits, Lim said the private sector already attracts top-tier talent without guaranteed pensions.

He added that similar pension reforms have been adopted in other countries as part of broader efforts to modernise retirement systems.

Yeah said while recruits will transition to the new framework, the government must still brace for the immediate financial burden of existing staff

"For existing pensioners and current civil servants on the old scheme, the government has no choice but to continue honouring those liabilities.

"This means increasing allocations for the current pension fund so it can grow at a rate capable of meeting future withdrawals. It is unavoidable, but stopping the influx of new liabilities means the system will eventually reach a sustainable equilibrium," he added.