The recent proposal by the Interim Government to reduce the retirement age from 60 to 55 is a positive step given the socio-economic scenario of Fiji.
Fijis economic growth, on an average, has been low by developing country standards over the last two decades and one of the causes, amongst others, has been the poor performance of the public sector in terms of resource allocation to support the private sector.
A large proportion, 80 per cent (see Table 1), of the public sector resources have been tied up in Governments operating expenditure, in particular, salaries and wages and debt servicing thus leaving a very small proportion of the resources to raise the productive capacity of the economy.
In such a scenario, the private sectors performance, growth and expansion are held back by the poor state of public sector resources such as infrastructure and public utilities. In this paper, I argue that government must immediately engage in ways to reduce its wages and salaries bill in the least painful way.
To search for solutions, we must first examine why our salaries and wages bill have increased so much over the years.
Firstly, over the last two decades, successive governments have used recruitments as a means of building their political base around the country.
A simple descriptive statistics of employee appointment and head of section/department/ministry will reveal that employee origin will strongly correlate with the origin of the head of the section/department/ministry.
Because of this, government employees have been increasing despite the fact that a number of public entities have been corporatised and privatised.
Secondly, COLA payouts, made on an annual basis, have raised the overall wages and salary levels significantly.
While Government resisted, trade unions have strongly argued for COLA payouts and were successful in receiving the awards.
The primary objective of COLA payouts is to ensure that those employees whose productivity has not fallen, that their wages and salaries purchasing power are at least kept constant.
However, COLA awards in a number of years have been over and above the inflation rate thus further raising wages and salaries levels and thus the overall bill. Thirdly, following the raising of the retirement age from 55 to 60 in 2001, the Government has, indirectly, retained a large number of civil servants on its payroll, whose salary and wages are on the top scale.
All the above issues make one thing very clear: that the large wages and salaries bill is Governments own making and therefore, reducing this will rest fairly and squarely on Government alone.
Given that the move to reduce the wages and salaries bill has to be initiated by Government, what options, if any, does government have?
One option, a more direct one would be to make a certain proportion of public servants redundant. With this move, while solving one problem, Government will create a much bigger problem a social crisis.
The public sector cant and should not send wrong signals to the rest of the employers in the country.
A second and equally painful way is to reduce civil servant wages and salaries across the board by a certain percentage.
Or the cut could be progressive in nature with lower level employees having a smaller proportion cut while the top level subject to a larger proportion cut. Both of these would certainly be opposed by our vocal trade unions.
The third option is to reduce the retirement age from 60 to 55.
The proposal by the Interim Government is a move in the right direction. However, this move has not gone down well with two prominent unions, the FPSA and FTA. It seems the leaders of both of these unions are not able to comprehend the total impact of such a policy change.
Various commentators have only highlighted a single benefit arising from such a move, and that is employment creation for young graduates who are desperately trying to secure employment.
They are certainly on the mark. Apart from school leavers, there are over a thousand graduates from various tertiary institutions who are in search of employment.
A large proportion of them have undertaken their studies by taking financial assistance from financial institutions or individuals and are now under pressure to pay back these loans.
Parents have withdrawn their social security in the belief that investing in their childrens education is a form of social security.
However, a child without a job or income earning capacity cannot be a substitute for any formal social security that a parent may otherwise have.
A second and equally more important issue that most critiques of this proposal have alluded to is the expenditure savings by the Government from this move. At a time when the Government is trying to look into avenues to cut down on its operating expenditure, this is one move that will significantly reduce Government operating expenditure.
All employees between the ages of 55 to 60 are earning wages and salaries on the top salary scale.
If they are replaced by new graduates, these graduates will start at the bottom of the scale. My rough calculation reveals that simply replacing them will bring a one-off reduction on the wages and salaries bill by $F16million. Then there are other additional payouts such as FNPF and COLA. For lower wages, FNPF and COLA payouts are a smaller amount relative to a higher wage and salary. All these plus other administrative, travel and communication costs and allowances will be saved.
The third argument for this move is that there are a number of workers who have crossed 50 years and are not able to make career progression because of limited opportunities at the top level. Therefore, the proposed move will provide some opportunity, though limited, for people to make some career progression.
The critiques arguing against the above proposal have based their argument on two issues, one an economic one while the other a moral one. Firstly, that it will be difficult to replace the experienced workers with recent graduates.
Secondly, that this move will bring hardship to these families as they have financial obligations.
Both these arguments are flawed. With the first argument, there are numerous problems. It is not correct to say that the young recruits will be replacing the experienced one. Instead, it will be the ones immediately below the age of 55 who will be moving on and assuming roles of these experienced ones who will be leaving the service. So this argument is flawed in itself.
Furthermore, we cant say that the young (new) graduates should not enter the work force as they are not as experienced.
The oldies were also young and had just come out of the tertiary institutions some 35 years or so ago.
If we follow the arguments of these critics, no new graduates will ever be able to enter the labour market.
We need new and young graduates to enter the labour market on an annual basis to ensure we maintain a reasonable dependency ratio in Fiji.
Given the high operating component of Government budget, Government has no choice but to reduce the wages and salaries bill. It can do so by making people redundant, or making an across the board cut in wages and salaries or reducing the retirement age. The third option seems to be the least painful as those retiring will source the livelihood from their superannuation funds deposited at the Fiji National Provident Fund.
However, that wont be sufficient. A fourth option, that of vertical cuts but via corporatisation and privatising of public sector entities must be pursued.
This will have substantial impact on Governments wages and salaries bill and is the most effective option for substantial immediate reduction of the total wages and salaries bill.
Government, by making vertical cuts will not only save on wages and salaries, but on all the other operating costs that are required to run public entities.
Furthermore, the Government, by doing so, will hedge against possible bailout in times of fiscal crisis of the entity.
While Government engages in these policy options to reduce its operating expenditure, it must simultaneously work with the private sector to create employment opportunities for those coming out of the tertiary institutions.
The long term sustainable strategy is to ensure that the economy grows at potential level thus creating new jobs in the private sector. However, something needs to be done immediately to address the unemployment crisis.
There are few options that could be pursued.
A more widely used and popular option is to provide tax credit to firms employing new graduates or subsidise the employment of new graduates.
Fiji introduced a 150 per cent tax credit scheme in 1990. Under this scheme, first- time employees were to be covered and it had a life length of first two years of employment.
Sixteen hundred employees from 54 companies were covered in the scheme.
PNG used the subsidy alternative for generating new employment in the manufacturing industries.
The subsidy had a life time of five years and was applicable to each full time employee.
In the first year, the subsidy was equivalent to 40 per cent of the prevailing wage rate, with 30, 20, 15 and 10 per cent in subsequent years.
Under this scheme, while government will be sharing the wages and salaries bill, this will be only partial and for a limited period.
In the case of Fiji, government is stuck with a bloated civil service and it does not have much choice but to act decisively now before its too late.
Some of the measures stated above must be pursued with commitment to ensure that public sector resources are channelled towards raising the productive capacity of the economy.
Policy making must be done with thorough research rather then in haste as it could lead to implementation of longer term irreversible policies implemented to deal with short-term problems.
The raising of retirement age from 55 to 60 in 2001 is a case in point.
The views expressed in this article are those of Dr Mahendra Reddy and does not necessarily reflect those of his employer, the University of the South Pacific.