LIKE other countries in Asia, Malaysia is experiencing rapid demographic transition with a profound effect on the age structure of the nation.

       This is evident by the increasing number of older people as well as the decreasing share of working population.

       According to the latest statistics, the number of older people in Malaysia has substantially increased at a rate of 4.1% per annum between 1980 and 2020.

       This is comparatively higher compared with the 2.3% per annum growth in the general population over the same period.

       The United Nations projects that people aged 60 years and above in Malaysia will reach 5.2 million (14.3% of total population) in 2030 from 3.5 million in 2020 and the number is expected to increase to 9.6 million (23.6% of total population) in 2050.

       This indicates that Malaysia will be an aged nation by 2030 and thereafter super-aged by 2050.

       Issues and challenges

       Population ageing is poised to be a significant demographic phenomenon that affects nearly all segments of the society and economy. One of the most direct impacts of this phenomenon is the decline in the share of the working age population.

       It is also argued that ageing may represent a drag on labour productivity growth.

       Population ageing will result in lower labour force participation and savings rate, therefore raising concerns about slower economic growth.

       It is known that market seeking investors would go to the nations with a higher youth dependency rate, where there tend to be an investment gap and consumption deficit.

       As Malaysia gradually moves towards an aged nation, the investors will likely shift their focus on younger nations, resulting in change to the economic landscape.

       While population ageing may be associated with a lower capital stock in the home country and less foreign direct investments, the effects to the labour market and employment also tend to generate larger outbound capital flows.

       An ageing population will also rapidly transform the economy by shifting demand for both goods and services due to the changing needs of older cohorts.

       As the composition of goods and services consumed varies over the life cycle, the aggregate demand structure is likely to change when the population is ageing.

       Another notable impact is rising healthcare costs and consequently the increasing public expenditure. The longer life expectancy of the population, the higher the number of pensioners.

       In this regard, the current pension scheme may not be sustainable in the long run. There is little doubt that ageing will put more pressure on the already limited fiscal space in Malaysia.

       On the revenue side, a shrinking working age population and lower economic growth rate will lead to a narrower tax base.

       On the expenditure side, an ageing population will necessitate accelerated spending on healthcare, aged care and civil service pensions.

       Translating policies into practice

       There are several measures to alleviate the negative impact of population ageing.

       First, the existing labour force should be productively employed.

       The increasing share of workforce in the population raises productive employment in the economy, which will boost economic growth.

       Nonetheless, it is important to ensure that the labour growth is higher than the population growth to support per capita growth.

       In this regard, a suitable policy environment is imperative for the nation to adapt to the changing demographic pattern, thus to secure higher labour growth by stimulating both job supply and employment demand.

       In addition, increasing the female labour participation rate will partially reduce the downward pressure on labour following population ageing.

       Appropriate policies and programmes ranging from flexible working arrangements, provision of quality childcare facilities, skills training and entrepreneurship programmes will improve the opportunity of demographic through their participation of both current and the next generation in the labour force.

       Notably, a study by Moody’s shows that closing the gap between female and male labour participation by 50% tend to offset approximately 1.7 percentage points of a slowdown in the labour force.

       Besides, encouraging lifelong learning in the society is another important policy to be considered.

       The quality of education should be improved to match the available skills set with the requirements of the modern labour market.

       Skill upgrading should be promoted across every life cycle to keep working people productive.

       Human capital development policies are equally essential to developing better human resources.

       The government needs to design systems that lead to the competitive labour market to transform human capital into higher income growth. Encouraging older workers to remain longer in the labour market is often cited as the most viable solution related to population ageing.

       It is necessary to rethink the retirement norms beyond the legal retirement age of 60. Along with that a gradual retirement and re-employment opportunities are possible solutions.

       In the gradual retirement phase, older workers may choose to work fewer hours yet remain longer in the labour market.

       As for the reemployment opportunities, the government may consider incentivising the employers who hire older workers by giving special employment credits and wage subsidies.

       This is practised in advanced nations such as Japan, Singapore and the UK.

       The gradual retirement and re-employment opportunities will be also beneficial for workers through continuous Employee Provident Fund (EPF) contribution and for the nation through tax revenue collection.

       Pension adequacy, coverage and pension sustainability in the long term are the key challenges in facing ageing population in Malaysia.

       To minimise the negative implications, it is of utmost importance to ensure minimum income protection to all older persons by increasing coverage and adequacy of social insurance schemes.

       One way to accomplish this is by broadening EPF coverage to cover more self-employed and informal sector workers.

       Increasing the average EPF balances at retirement requires a longer term approach such as the gradual increase of the minimal EPF withdrawal age linking it to life expectancy.

       In view of the shrinking labour force, the government may also consider raising the retirement age to 65.

       Potentially, the EPF contribution rate could even be reduced once the withdrawal age has been adjusted, and coverage and average balances have increases.

       Manokaran Mottain has served the industry as an economist for over 30 years. He is director of Rising Success Consultancy Sdn Bhd. He has been appointed as industrial adviser for Universiti Kebangsaan Malaysia for two years effective Oct 11, 2021. The views expressed here are the writer’s own.