GTAP Resources: Resource Display
| GTAP Resource #1447 |
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"Reforming the Sri Lankan Employee Provident Fund – A Historical and Counterfactual Simulation Perspective" Authors: Kanakaratnam, Arjuna and Ya Ping Yin Abstract Developing countries in general and Asia in particular are ageing rapidly. Modern economic development is marginalising the role played by the family as a source of informal old age support while exerting greater reliance on formal systems of old age support. Many countries have adopted parametric or marginal reforms, such as decreasing the replacement rate, increasing the contribution rate and increasing the retirement age. Yet, increasing fiscal pressure and the rapid ageing of the region’s populations might require more than parametric reforms. Recently, the view that retirement income provision should become the mandated responsibility of individuals rather than part of the tax transfer arrangements of governments is attracting much attention. The focus of this paper is on the provision of mandatory funded retirement income in Sri Lanka, which is largely provided by the Employee Provident Fund (EPF). Provident funds were created by the British in several former colonies and currently operate in about 20 countries such as Singapore, Malaysia, Mauritius and Kenya. This paper first of all seeks to reveal the deficiencies in the Sri Lankan EPF system from both a micro and a macro perspective. The micro perspective focuses on the financial liquidity of the fund and various other commonly adopted criteria for assessing the adequacy of a pension fund such as income replacement, longevity, inflation and coverage risks. The method is to use accounting based numerical simulations on the basis of information from actual EPF accounts. The results of such simulations have raised serious concerns with the adequacy of the EPF. From a macro perspective, the paper aims to examine the fiscal implications and income replacement ratios at the macro level. The paper employs “historical” simulation methods using a computable general equilibrium (CGE) model that integrates essential demographic and labour market trends, actuarial features of the EPF as well as the conventional neoclassical economic growth mechanism. The database for the macro simulation model is an extended Social Accounting Matrix for Sri Lanka that has incorporated the EPF data and related actuarial data (e.g., retirement lump sum payments and annuity income streams). For conducting the historical simulations, the model is constructed and the sectoral labour productivity growth rates are calibrated in such a way as to reproduce the historical annual growth rates of real GDP as derived from the official Sri Lankan National Accounts. To our knowledge, the use of such a simulation framework for examining the EPF is the first rigorous approach to the study of Provident Fund type pension systems in the literature. The historical simulations have also revealed serious problems with the EPF in terms of the fiscal burden and the inadequate and falling income replacement ratios at the macro level over time. The second objective of the paper is to use the CGE model to evaluate various options for reforming the EPF through “counterfactual” simulation methods. Such options typically include parametric reforms (e.g., changing the EPF contribution rates, improving the investment performance of the EPF) and the “clean-break” strategy for the government. The paper examines the implications of introducing reform scenarios for the design of the “counterfactual” simulations and evaluates the effects of the reform strategies on macroeconomic performance and income replacement ratios. Preliminary simulation results show that parametric reform programmes are inadequate and the “clean-break” strategy seems to be the only viable option. |
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Public Access  Reforming Sri Lankan EPF (77.1 KB) Replicated: 0 time(s)Restricted Access No documents have been attached. Special Instructions No instructions have been specified. |
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Last Modified: 4/30/2026 12:56:16 PM
