Tuesday 26 Sep 2023
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This article first appeared in Forum, The Edge Malaysia Weekly on March 13, 2023 - March 19, 2023

Malaysia’s population is rapidly ageing and projected to transition from being an “ageing society” into an “aged society” within about 20 years.  Many might not be aware that the country had already attained “ageing society” status in 2021 (once the share of population aged 65 and older exceeded the 7% conventional threshold).

Given the falling fertility rate and rising life expectancy rate, the Department of Statistics Malaysia (DoSM) projects this proportion to hit 14% in 2040 — meeting the international definition of an aged nation.

Reaching retirement age may appear to be a happy milestone for many, but it could be a scary prospect if one is not financially ready for old age. Malaysia as a nation could face this same prospect, as this ageing mega­trend will present uniquely different challenges for the economy and policymaking, just as it has for aged nations such as Japan, South Korea and Singapore.

Thus, it is imperative we assess our shortcomings and start taking counter­measures now.

As with most things, having enough money or wealth is one of the most important ingredients needed for retirement. However, the Covid-19 pandemic has exposed the vulnerability of Malaysians in terms of their 

financial readiness for retirement, made worse after multiple rounds of withdrawals from the Employees Provident Fund (EPF). Its officials have suggested Malaysians will need at least RM600,000 to retire comfortably, although the reality is that around 70% of EPF members have less than RM50,000 in their accounts, while only 3% had achieved the adequate savings threshold of RM600,000. Thus, when there are renewed calls for another round of EPF withdrawal, I shudder at the thought of what lies ahead for future retirees.

Fortunately, the government is aware of this issue as it recently announced it would contribute RM500 to each EPF member aged between 40 and 54 with low savings under the recently retabled Budget 2023. That said, this measure alone is unlikely to solve the underlying retirement savings issue. So, it should be made a policy priority to encourage Malaysians to save and grow their retirement funds to avoid facing despair in their golden years.

The true picture of retirement savings for the overall population could also be more dire than it seems because not everyone is an active EPF member. Based on the provident fund’s latest estimate, active members represent only around 50% of the labour force, and is still relatively low compared with the old-age social protection coverage globally. This is because it is not mandatory for self-employed workers and informal or gig workers to contribute. If we take a pessimistic view that the practice of saving for retirement is not widespread, this means retirement-readiness could be more severe than what statistics are telling us.

Apart from encouraging more retirement savings, the country will also need to ensure there is sufficient build-up in social protection and safety nets. This build-up is especially pertinent as the current weak state of retirement savings could cause the burden of care to inevitably fall on the public social welfare system. To prevent a retirement crisis, this necessitates a ramp-up in investments in social infrastructure and services, including elderly housing and care facilities as well as expanding the cash handouts and food basket programmes for the elderly. In addition, given that healthcare needs are also expected to increase with the larger number of elderly patients, it is also crucial that more government funds for the public healthcare system be allocated to this age group.

Apart from the social and fiscal implications, the ageing trend also has a knock-on effect on the macro economy. To understand its impact on Malaysia’s growth potential, one can refer to the standard economic model called the Cobb-Douglas production function, which states that economic output (Y) is a function of the available labour (L), capital utilised (K) and economic productivity (total factor productivity, or TFP). As labour supply (L) shrinks with an ageing population, assuming other factors stay unchanged, the potential economic growth that can be achieved will decline. One oft-quoted example is the decades-long economic stagnation in Japan, as its “super-aged society” (some 20% of the population is aged at least 65) contributed undue pressure on its economy.

To offset the negative impact of the decline in the labour force, Malaysia can look into boosting the other two factors of production (K and TFP). The more straightforward option is pumping more capital (K) to drive the economy, albeit a potentially unsustainable choice, given that resources are scarce and fiscal room could be forced to divert towards old age support and welfare. The better option is to improve the efficiency and productivity (TFP) of the economy, enabling more economic output without having to scale up production inputs. The more advanced technological adoption and productivity improvement will help better manage the adverse impact of ageing and declining labour supply. The robust economy would also allow Malaysia to remain an attractive investment destination.

All said, I believe the government made the right call to deny requests for another round of EPF withdrawal because that would only delay future adversity. While I understand the urgent needs of those who are financially pressed, more targeted government aid should be better for long-term economic sustainability. On the bright side, we have taken a step in the right direction by securing savings, although that is only one small piece of the puzzle. The remaining time left until we become an aged society must be used wisely to implement a more holistic plan to tackle this megatrend and ensure Malaysia is ready in 20 years’ time.

Woon Khai Jhek, CFA, is a senior economist and head of the economic research department at RAM Rating Services Bhd

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