The State of the Nation: How Malaysia can afford a universal basic pension
06 Dec 2021, 04:00 pm
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This article first appeared in The Edge Malaysia Weekly on November 29, 2021 - December 5, 2021

JUST as Malaysians are reminded of how millions here not only cannot afford to retire but will also likely face old-age poverty in the absence of public or third-party aid, at least two economists offer hope by saying the country stands to lose more if it does not alleviate old-age poverty.

In fact, Geoffrey Williams, economist and professor at Malaysia University of Science and Technology, says that “a modest universal basic pension (UBP) — RM1,000 to B40 (bottom 40%) households — can cost as little as 0.7% of government spending”. He illustrated this in a slide titled “Financing a Universal Basic Pension is easy” during a presentation at the 9th International Social Wellbeing Conference (ISWC) 2021 in Kuala Lumpur last Tuesday.

“The idea would be to create a Malaysia SuperFund combining the main pension schemes — Employees Provident Fund (EPF), Retirement Fund Inc (KWAP) and Armed Forces Fund (LTAT). These have assets under management of around RM1.17 trillion, made up of EPF (RM1.02 trillion), KWAP (RM140.8 billion) and LTAT (RM9.6 billion),” Williams tells The Edge, adding that additional funds could also be obtained from the National Trust Fund (KWAN) — RM19.5 billion less RM5 billion post Covid Fund withdrawal — as well as “unclaimed assets of people who have passed away, estimated at RM90 billion”.

“Taken together, this could be a significant fund of RM1.28 trillion. Of course, there must be discussions about how this consolidation can be done in ways that protect the interests of existing pension accountholders,” Williams explains.

“Many people object [thinking] that a UBP would be very expensive and could not be funded. So my calculations try to show that [the government can afford it] either from a Malaysia SuperFund or from a combination of direct government payments, income from a new pension fund or redistributive taxes.” He adds that 0.7% of government spending to provide RM1,000 UBP to the bottom 10% of pensioners “could be found from existing funds, with no explosion of cost or debt in government finances”.

“This is very limited, of course, and to expand the scheme, we would not rely only on government finances but a portfolio of funding sources and this is the discussion that I’m trying to encourage about what sort of pensions we want and how we can fund income in old age. It needs thorough research,” Williams adds, noting that tax estimates for T20 households are for illustration purposes and need to be further researched with detailed data.

“The point of the exercise is that relatively small tax increases on the T20 households can help fund a new retirement income system, which they would benefit from. I’m not suggesting that this is the only or even the main source of funding but only that it can be part of the [funding] mix,” he says.

Williams advocates universal pension coverage — even for new forms of work and those who do not work — to prevent old-age poverty, noting that Malaysia has institutions that deliver strong investment returns.

He did not say how public and private funds can be pooled in the Malaysia SuperFund.

At the forum, Williams said a return of 5% per annum on a fund size of RM1.2 trillion would yield RM60 billion, “which could cover a living wage for 70% of retirees”.

RM60 billion would be enough to give 1.85 million retirees RM2,700 a month (RM32,400 a year), being the “living wage” recommended by Bank Negara Malaysia. Alternatively, RM60 billion could give five million retirees RM1,000 a month (RM12,000 a year), our back-of-the-envelope calculations show.

There are four million people above the age of 60 in Malaysia in 2021, a number set to grow to 5.8 million by 2030. There are reportedly about one million government retirees, including non-pensionable armed forces veterans.

Investment income boost

A government fund that yields RM60 billion a year would make a major difference to federal government finances, given that the fiscal deficit of 6% of gross domestic product for Budget 2022 is RM97.5 billion. The Edge had previously suggested that investment income be a new revenue pillar for the government, similar to how Singapore’s annual budget has been enjoying what it calls a net income return contribution since 2020. (See “Investment income as a new revenue pillar for the government”, Issue 1286, Sept 30, 2019).

As it is, Khazanah Nasional Bhd and Bank Negara Malaysia contribute to the national budget but Petroliam Nasional Bhd (Petronas) remains the most significant contributor on this front.

It is not immediately certain if Williams is suggesting that government-funded defined-benefit (DB) pensions for retired civil servants and armed forces personnel be converted into a defined-contribution (DC) scheme like the EPF, whose funds belongs to EPF members and not government or public funds like KWAP or KWAN.

Civil servants under a DB scheme do not need to save for retirement because the government bears the burden of paying for civil service pensions. KWAP is created to one day be able to take over the government’s public pension burden but funds in KWAP are essentially government funds and not savings from pensionable civil servants. At least RM14.5 billion has been “withdrawn” from KWAP to help pay civil servants’ pension and gratuities bill, starting with RM4.5 billion in 2018. KWAP also contributed RM5 billion to the federal government budget in 2020, 2021 and 2022. KWAP’s 2019 annual report had not been released at the time of writing but its 2018 annual report showed its asset size to be RM136.5 billion.

Estimated at RM28.07 billion in Budget 2022, the bill for public pension and gratuities is 12% of federal government revenue. That’s double the RM14.08 billion required a decade ago in 2012, when the sum was 6.8% of federal government revenue.

Public pension reform had previously been discussed by economists and explored by policymakers as an avenue to boost fiscal sustainability. The obstacle to this change, however, may be just as difficult politically as reintroducing a broad-based consumption tax like the goods and services tax (GST) or value-added tax (VAT), observers have said.

In any case, there is no denying the need to broaden the government’s revenue base to be able to expand its capacity to provide a wider social safety net for the people. Even before Covid-19 hit, close to 99% of federal government revenue was already spent on operating expenses. Debt service charges alone are projected to rise to RM43.1 billion in 2022, 18.4% of federal government revenue.

Fiscal reforms to cut inequality

Having additional fiscal space would enable the government to play a bigger role when it comes to social protection and reducing inequality.

Nobel laureate Professor Joseph Stiglitz says the public sector, essentially the government, needs to step in to bring balance, cut rent-seeking activities, drive down prices and provide better alternatives for the people — especially in essential areas like healthcare, education, affordable housing and social protection, which have “strong cross-generational” impact.

“Many in the financial system look at how they can exploit retirees, illustrating the difficulty of relying just on the private sector,” he said, speaking at the forum virtually from the US. He added that in the 21st century, voluntary behaviour cannot be relied upon for social protection and called for strong government direction and regulation to create a more equal society.

“It is not just about redistribution, though that is important. It is about improving the distribution of market income or pre-distribution.”

As it is, “Malaysia’s fiscal policy does little to reduce income inequality, in part because of low spending on the social safety net,” says Kenneth Simler, former senior economist at the World Bank’s Global Knowledge and Research Hub in Malaysia. He notes that large chunks of personal income and consumption are currently exempted from tax and the government’s revenue collection trails comparable countries by a large margin.

A broad-enough social safety net, he adds, will make it possible for people to realise their full potential. “Poor people are more likely to have their plans interrupted, more likely to face income loss and more likely to be afflicted by food insecurity [when crises such as the pandemic hit],” he says, noting that there is strong evidence that inequality increased during the pandemic, especially with the digital divide hurting low-income families more.

When speaking on the social contract for recovery and resilience, Hawati Abdul Hamid, deputy director of research at Khazanah Research Institute, highlighted the importance of having an inclusive social protection system for Malaysia’s economic development. “It is not just about helping the deserving but building a system that makes everyone resilient,” she told attendees, noting benefits from better productivity and higher-value activities.

Can Malaysia fund a UBP to solve old-age poverty?

Scott Santens, founding member of the Economic Security Project who spoke on the universal basic income (UBI), asked forum attendees if governments can afford not to provide aid. “There is a big difference between someone getting help they don’t need and someone needing help they don’t get. The former can be considered wasteful, but the latter can prove fatal. It’s always better to get and not need than need and not get.”

The rationale, he says, is similar to how aeroplanes need to be built with redundancies so that they will not fall from the sky when one engine fails, and brakes for elevators still work even if power is cut off.

In the same vein, Stiglitz had earlier likened a country’s need to build enough capacity to ensure resilience when a crisis like the Covid-19 pandemic hits, with a car having a spare tyre.

Whether or not UBI or UBP is implemented in Malaysia, it is clear that the country needs fiscal reforms that will ensure it can broaden its capacity to cater to growing needs for better social protection.

 

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