(Published in MTimes 22 03 2019)
The share of the population age 60 years and above in the total population will increase from 16.1 percent in 2017 to 26.8 in 2037 and 35.2percent in 2057. The dependency ratio (defined as the combined child population (under 15 years) and population aged 65 years and over per 1,000 population of intermediate age (15 - 64 years) in a particular year) will increase from 408.0 to 529 and to over 629 the same period. Today, there are 6 employees to support a pensioner and by 2037, there will be less than 3.
This will lead to pension spending pressures, mainly reflecting non-contributory benefits provided to all citizens above age 60 (the Basic Retirement Pension, BRP) and civil service pensions. With regards to the BRP, the IMF had recommended that we re-examine limiting the BRP for those above a certain income threshold (means-testing), increase the age of BRP eligibility and index the retirement age to life expectancy, accompanied by such social assistance programs as to protect the vulnerable groups and not increase poverty rates. These measures would have helped to contain the the explosive path of expenditure projected in the BRP; over long term, increasing age of BRP eligibility would have a substantial impact on fiscal sustainability.
The failed attempt at targeting in 2004 was due to that the benefit went from 100 percent to zero above a certain threshold, which distorts incentives around that threshold and was perceived as being unfair. A gradual phasing out of the benefits should address this problem. If combined with the increase in the eligibility age, it would reduce BRP expenditure meaningfully by around 8% of GDP by 2050. Including other measures at reforming the civil service pensions and the NPF , this phase-wise reform agenda could go a long way towards containing the projected rise in the costs of pensions.
Government seems to be aware that it has to ensure the long term financial sustainability of the pension system for future generations while providing for a decent, adequate and secured pension income for pensioners so that they do not fall into poverty. In Budget speech 2016-17, mention is made of the setting up a high level Committee to look into the issue of pension, to hold wide consultations and come up with recommendations. It was meant to add to the long list of d “effets d’annonces“ of the budget that ensured the cheers of government MPs but not its implementation. After some initial consultations and discussions, the committee on pension reform was dissolved.
With the priority shifting to crowd-pleasing packages and a generous scattering of handouts, we could not expect this government to be serious about a bold reform of the pension system that would have secured less drastic future changes and fairer outcomes. But with the projected decline in the workforce and an increase in dependency ratio, the increase in pensions spending will pose fiscal risks or crowd out other priority expenditures. Sooner or later, we will have to confront the hard choices that we have not prepared ourselves for.
