IN the coming decades, rapid ageing will be a crucial demographic trend affecting Malaysia with various challenges and implications in areas such as employment, income security and aged care.
In my previous article, I had suggested increasing the retirement age to 65 as one of the viable solutions to minimise the negative impact of population ageing. Here are some reasons on why the retirement age should be gradually raised.
Shrinking labour force
With rapid demographic changes expected in the foreseen future, the closely related labour market will experience significant changes as the ratio of the youth labour force to total population tend to decline over time. The concern is valid as Malaysia is still highly dependent on labour productivity and is expected to transition to high-income nation by 2030.
To successfully escape from the middle-income trap, Malaysia requires an uninterrupted labour supply. However, the increasing proportion of older population will likely pose distortion in the labour market and challenges to sustain the nation’s labour supply.
In the longer run, the profound impact through the labour market and employment will lead to a larger outbound capital flow. This is especially true when investors shift their preferences to younger nations where there tend to be an investment gap and consumption deficit.
Therefore, increasing the retirement age to 65 would encourage older population to remain longer in the labour market. This, in turn, reduces the risk of labour supply shortages in the event of population ageing and shrinking youth workforce.
With improvements in health and aged care facilities, a large number of older people will live healthily and independently. As such, with right policies in place, they can also have longer and more productive ageing and positively contribute to the economy and society.
Depleting retirement savings
Pension adequacy, coverage and pension sustainability in the long term are the key challenges in facing population ageing in Malaysia.
According to the Employees Provident Fund (EPF), only 60.8% of the Malaysian labour force contributes to the EPF, which is comparatively lower than high-income countries.
Almost 75% of EPF members have account balances below RM250,000 at age 54. According to World Bank estimates, this would translate to a monthly income of less than RM1,050.
EPF bldg
The “timely” move by the government to grant EPF withdrawals has only exacerbated the situation by further depleting the hard-earned savings for post-retirement.
Coupled with the withdrawal schemes, the EPF has also reduced the mandatory employee EPF contribution from 11% to 9%. With the rising cost of loving, most of the active contributors will opt for the reduced amount causing a further decline in their retirement savings.
At this juncture, increasing the retirement age will at least help the older population to partially make up fo rthe depleted savings due to various withdrawal schemes and reduction in savings rate.
Along with this, the government should also formulate adequate policies to ensure minimum income protection to all older persons by increasing the coverage and adequacy of social insurance schemes.
An increase in the minimum retirement age does not only improve the employment opportunities for older workers, but at the same time foster old-age income security.
In line with the increased retirement age, in the long term, the minimum withdrawal age for EPF could also gradually be increased to 65 via a properly planned transition process. In the long term, this could also raise the average saving balances post-retirement.
Rising medical cost
Among all other sectors, the largest impact of population ageing pre-dominantly falls on the health sector as older people tend to utilise healthcare services more than any other age group. With the rising prevalence of chronic diseases and comorbidities, the population ageing has already overwhelmed health facilities required to cater for the multidimensional needs for older people. What’s more worrying is that the rising healthcare cost in tandem with the increased utilisation of health services.
According to a recent report by Aon’s 2022 Global Medical Trend Rates report, the current medical inflation rate in Malaysia is 12%, which is approximately six times higher than the annual headline inflation rate.
Surprisingly, Malaysia is one of the top four countries in Asia-Pacific with the highest medical inflation rate.
Limited fiscal space
While public healthcare facilities remain the main choice of Malaysian people, the rising medical cost directly translates into higher government spending.
As such, another notable impact of population ageing is the increasing public expenditure.
The longer the life expectancy of the population, the larger the amount spent on healthcare.
In this regard, 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.
Budget allocation for pension schemes will balloon and the pressure will largely exert on the shrinking workforce to support the economy. In fact, government’s official projection indicates that pension payments are foreseen to reach RM46.6bil in 2030 compared to RM9.88bil in 2010.
In this regard, increasing the retirement age will directly reduce the number of workers approaching pensionable age, hence, providing the government some fiscal space. At this moment, this is also necessary as the government needs to reallocate its spending towards crucial sectors – say health sector to curb the implications arising from the Covid-19 pandemic.
With all these factors in place, the government should heed the call to gradually raise the retirement age to 65, and thereafter link it to life expectancy.
Perhaps, the government may consider increasing the retirement age to 62 now and then gradually to 65. On a bright side, World Bank’s macroeconomic projections indicates that increasing the retirement age to 65 could raise Malaysia’s gross domestic product growth by 0.3 percentage points per annum. Most importantly, there is no evidence that this policy option would negatively affect the employment prospects of younger workforce.
Manokaran Mottain has been an economist for over 30 years and he is currently the director of Rising Success Consultancy Sdn Bhd. He has been appointed as the industrial expert to Universiti Kebangsaan Malaysia. The views expressed here are the writer’s own.