This article first appeared in The Edge Malaysia Weekly on June 10, 2024 - June 16, 2024

PUTRAJAYA needs to take the “realistic approach” in tackling issues that are cropping up as a result of population ageing, Prime Minister Datuk Seri Anwar Ibrahim said in his opening speech at the International Social Wellbeing Conference 2024 (ISWC2024) in Kuala Lumpur on June 4, noting that Malaysia is ageing faster than countries that are more prepared for a greying society.

“We need to actively seek reform in the Malaysian pension framework to ensure that every generation in Malaysia will be able to look forward to growing old with dignity. New solutions are needed to make sure no one is left behind and that every layer of society benefits from social protection.

“Expanding EPF (Employees Provident Fund) coverage in phases so that more of the working age population will become part of the EPF ecosystem will ensure that more Malaysians can accumulate adequate retirement savings for their old age. 

“It is time for Malaysia to embrace serious reforms in its pension and retirement framework to enhance its coverage, adequacy and sustainability, and ensure financial security and equity for all Malaysians in their later years and contribute to positive long-term economic growth,” Anwar said, with only a brief mention of the introduction of a suitable retirement pension system for all, starting with the civil service.

With Malaysia already an ageing society since 2020 (7% of the population aged 65 and older) and projected to turn aged (14% of population aged 65 and older) by 2033 and super-aged by 2057 (21% above age 65), and a general lack of retirement savings, what is clear is the need to bring every Malaysian under some form of old-age income security coverage.

Putrajaya also needs to not only find the money to fund that expanded coverage, but also put in place a system that works alongside the government for the betterment of the people and country. It is worth noting that the gross domestic product (GDP) growth rate is projected to decline about one-third between 2020 and 2050, owing to population ageing.

In his talk titled “Pension reform: Journey Towards Enhanced Prosperity for Malaysia” at the ISWC2024 on June 5, Dr Amjad Rabi, visiting expert at the Universiti Malaya Social Wellbeing Research Centre (SWRC), highlighted that only 40% of the country’s 23.946 million working age population (aged 15 to 64) either have a civil service pension or are formal sector wage earners who make statutory contributions to EPF.

Amjad described the remaining 60%, or 14.285 million people of working age, using what he calls the “three gaps” in old-age income security coverage (see graphic).

The first gap is the 7.157 million, who are economically inactive, some of whom may well be students or homemakers who are not in the labour force, despite being of working age. The second gap is the 612,000 unemployed persons. The third and final gap is the 6.517 million who are self-employed, or on the informal side of the workforce, or gig economy, who can make voluntary contributions to EPF but are not currently compelled by law to do so.

The third gap, Amjad says, can be reduced by getting more people in the informal sector and their employers to come into the system. Still, he rightly pointed out that there are limits to encouraging voluntary contributions via schemes with matching grants such as EPF i-Saraan for the self-employed and i-Sayang for spouse contribution.

After all, even among the 40% of the workforce already under formal old-age coverage, the debt burden may be an issue, alongside the adequacy of retirement savings.

Half of EPF members aged 54 have less than RM50,000 saved up while nine in 10 civil service pensioners received less than RM3,000 a month in 2018, Amjad said, citing data familiar to everyone who has been paying attention to the state of retirement-readi­ness.

What is unknown is how many people are drawing the current minimum civil service pension of RM1,000 a month, which is challenging for the average private sector wage worker to save towards because of generally low wages in the country, even though contributions to EPF total as much as 24% for those earning below RM5,000 a month (11% by employee and 13% by employer).

Raising wages goes towards higher statutory retirement savings, which is perhaps why Anwar mentioned the progressive wage policy and the upcoming civil service remuneration revision in relation to old age.

For Amjad, the best way to ensure that no one is left behind is to give a basic universal old-age pension to everyone aged above 65. “We cannot just focus on those who are working and contributing [to EPF, who cannot be pressured to pay more] and are shrinking in size [as the population ages].”

He says Malaysia can afford to give a universal old-age pension of RM500 a month to 1.42 million people aged above 70 — which he estimates to cost RM8.76 billion a year, or 0.4% of GDP in 2025 — by rolling back blanket fuel subsidies of some RM50 billion. By 2033, doing the same would cost RM15.34 billion, or 0.45% of GDP, to benefit 2.1 million old people (see chart).

At RM500, the amount gives “a little bit of dignity” to old people while it does not discourage work or individual savings towards a better quality of life.

A universal allowance of RM50 a month for children and teenagers under 18 can also be introduced at a cost of RM4.54 billion, or 0.21% of GDP, for 7.38 million beneficiaries in 2025, according to data appended in a working paper titled “Towards Equitable Transition: Safeguarding Welfare Amidst Subsidy Reform in Malaysia”, which Amjad co-authored with SWRC director Professor Datuk Norma Mansor and that was published in May.

Money for universal old-age pension and children allowance can also come from reintroducing the broad-based goods and services tax (GST) or value-added tax (VAT) consumption tax, Amjad says.

Noting that Malaysia’s tax-to-GDP ratio of 11.8% is not only below the Asia-Pacific average of 19.8%, global average of 23.3% and Organisation for Economic Co-operation and Development (OECD) average of 34.2%, Amjad notes that the country is also the only one that he has come across where tax-to-GDP levels have fallen even as the overall income level goes up.

“The problem is not direct income taxes,” Amjad says, noting that Malaysia’s taxes on income and profits at 8% of GDP is at the global average. At only 3% of GDP, Malaysia’s taxes on goods and services are among the lowest in the world, far below the global average of 9.8%, and “below Africa”.

“We all know [GST/VAT] is not popular politically, but we can make it popular to get buy-in from the people. GST is regressive but we can make it progressive [with cash transfers],” says Amjad, who also co-authored the paper “Resurrecting Goods and Services Tax (GST): The Case for a Comeback” with Norma. At 6%, Malaysia’s GST rate — introduced in April 2015 before being cancelled in June 2018 — is way below the global average of 17% and OECD average of 19.2%.

According to their estimate, a VAT rate of 6% could bring in RM66.49 billion in revenue (3.23% of GDP) for the federal government. At 10%, the potential revenue is RM110.81 billion (5.38% of GDP) (see Table 1).

“Therefore, reintroducing the VAT in Malaysia has an enormous upside potential to generate a revenue stream that can be channelled for [an] inclusive growth path,” the paper read, arguing for a phased reintroduction, coupled with a structured system for periodic tax refunds or cash transfers to the people, be it families with children or senior citizens. “Ultimately, the combined impact of VAT and the above system of tax refunds [cash transfers] can serve as a progressive social tool while generating sizeable revenues to increase social investment in the future productivity and prosperity of Malaysia.”

There is indeed a growing need to take care of the aged and support their caregivers (see “Heart-wrenching old-age reality bites from lack of planning, social safety nets”).

Considering Malaysia’s current average life expectancy of 77 years, and the fact that many EPF members who withdraw their entire savings at age 55 spend all of it within five years, it remains to be seen whether Putrajaya will push ahead with suggestions to stop lump-sum EPF withdrawals for those who have yet to enter the workforce, just as there are plans to stop the defined benefit pension for new civil service joiners.

A well-communicated universal basic old-age income scheme as well as targeted support for the lower- and middle-income groups could well provide the avenue Putrajaya needs to gain buy-in for the retargeting of fuel subsidies and perhaps public pension reform. Apart from cash transfers, there is also a rising need to invest in public infrastructure to make Malaysia aged-ready as well as invest in public healthcare to deliver better geriatric and palliative care. Whoever takes Putrajaya should know the problem grows the longer it is left unresolved. 

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