Civil service pension reform in developing countries

Abstract

This work is published under the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect those of the OECD, its Development Centre or of their member countries. This document, and any map included herein, are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

Sustainability of the Public Servant’s Pension Scheme in Sri Lanka

“…Public service systems create a large fiscal burden, particularly when the tax base is limited, and public-sector pension reform is an issue of political importance in many countries (Rusconi & Pick, 2020). This is particularly the case for non-contributory plans, in which government employees get paid in retirement without having contributed during their working years.…”

“…This is particularly the case for non-contributory plans, in which government employees get paid in retirement without having contributed during their working years. These obligations pose a long-term risk to the government's finances, and there are considerable financial and political difficulties in relieving this risk (Grimm & Holzhausen, 2021;Palacios & Whitehouse, 2006;Rusconi & Pick, 2020;Whitehouse, 2016). While Sri Lanka's public pension system has remained reform-resistant for many years due to political sensitivity, there are many lessons that can be learnt from international experiences of pension reform.…”

“…For instance, India switched from an unfunded defined benefit scheme to a funded defined contribution system by closing its unfunded Civil Service Pension to new entrants in 2004 while expanding social protection coverage to all Indian citizens, including previously unprotected informal sector workers. This new system helped strengthen social protection in India though building institutional administrative capacity to improve service delivery continues to be a challenge, and further pension reform is required to improve the benefit levels and pension coverage for the poor (Asian Development Bank, 2015;Rusconi & Pick, 2020). The reforms in Chile, which integrated public and private sector pensions by replacing their public PAYGO defined benefit scheme with a privately funded mandatory defined benefit scheme such that systematic advantages for public servants were eliminated, are also considered a success (Hujo, 2014;Rusconi & Pick, 2020).…”

“…However, on distinct timelines, men would be able to retire at 67 in 2020, while women would have to wait until 2040 (OECD, 2013). Brazil combined increases the retirement age from 53 to 60 for men and from 48 to 55 for women with the removal of incentives for early retirement by reducing benefits by 3.5% -5% for each year before the retirement age, changing the pension base from the worker's final salary to 80% of their highest salary in the period prior to retirement, and switching from wage indexation to price indexation (Hujo, 2014;Medici, 2004;Rusconi & Pick, 2020).…”

“…While the role of informal intergenerational transfers is declining, the importance of employment and pensions appears to be growing, with public expenditure on pensions accounting for over 2% of GDP in 2015, compared to the average of just over 1% for the rest of South Asia (Asian Development Bank, 2019a;ILO, 2016a;Shyama & de Silva, 2022;World Bank, 2021). Similarly, the average spending on civil service pensions for developing countries is 6% of government revenue (Rusconi & Pick, 2020), while in Sri Lanka, it is 18.7% (Central Bank of Sri Lanka, 2020a).…”