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The ageing conundrum

As Malaysia struggles to exit the middle-income trap, the country has to juggle a shrinking population that is also ageing earlier than previously expected.

AS Malaysia struggles to exit the middle-income trap, the country has to juggle a shrinking population that is also ageing earlier than previously expected.

To put it simply, Malaysia is getting old before it gets rich.

The fertility rate as of 2020 had dropped to the lowest level in 40 years, with the Malaysian Chinese community being the worst affected.

The country has also transitioned into an “ageing society”, and in less than 25 years, Malaysia is on track to becoming “aged” as the share of the population above the age of 65 increases to about 14%.

In comparison, the same transition from “ageing” to “aged” took France 115 years, Sweden 85 years and Australia 73 years.

Ageing is not something to be ashamed of, and in fact, is a reflection of the country’s improved longevity.

However, as the working population reduces in size due to a slower population growth, the dynamics of Malaysia’s demographic pyramid will be disrupted.

Pension costs will balloon and the smaller share of working-age Malaysians will have to support the economy. Official projection shows that pension payments are expected to reach RM46.6bil in 2030, a massive increase from RM9.88bil in 2010.

To add salt to injury, the Covid-19 pandemic and the government’s decision to allow withdrawals have wreaked havoc on Employees Provident Fund or EPF savings. Currently, almost half of EPF members have less than RM10,000 in their account.

How many of these depositors can play catch-up and attain the basic savings required to sustain life post-retirement?

And with the ever-increasing cost of living, can working children afford to support their retired parents financially?

Like it or not, amid the eventual depletion of petroleum reserves, future generations will have to pay more taxes to keep the economy alive. This is why the eventual return of the goods and services tax is almost certain.

Above all, there will no longer be a “demographic dividend” that has driven not only Malaysia, but also the entire world, for the past several decades.

This will put pressure on various industries such as housing, banking and consumerism, to name a few.

The domestic labour market will also be affected and the reliance on foreign workers will intensify, if technology adoption is not done fast enough.

Speaking with StarBizWeek, Khazanah Research Institute (KRI) researcher Nur Thuraya Sazali says that unless productivity increases faster or workers retire later, the shrinking working-age population can affect the current sources of government revenue.

“In 2021, individual income tax is estimated to account for 17.9% of the total government revenue of RM236.9bil, almost identical to the size of the indirect tax.

“In other words, a more aged society is less of an issue if Malaysia continues to grow economically with more people working, which typically leads to a higher tax revenue to facilitate this forecast future.

“However, existing data is not as encouraging. It was estimated that Malaysia had reached the tail end of the demographic dividend in 2020, which has been touted as the golden period where the economy was driven by young productive workers,” she says.

Malaysia is not the first or the only country facing the ageing population dilemma. According to the United Nations, one out of six people in the world will be over the age of 65 by 2050, up from one in 11 in 2019.

The world’s most populous country, China, is no exception.

Its working-age population had already peaked a decade ago. It was also reported that Chinese citizens aged 65 or above made up 13.5% of the population in 2020, up from 8.9% a decade earlier.

And a recent study estimated that China’s population could halve within the next 45 years, down from the current size of 1.4 billion people.

India, which is the next populous country, may also see its population shrink by 300 million in the next 80 years due to a declining fertility rate.

Countries like Malaysia, which are facing the ageing society dilemma, can learn from the experience of several nations that are now “super-aged”. These include Japan, Germany and Italy.

The World Bank said in 2020 that Malaysia’s “ageing” was happening at a similar pace to Japan’s and was following the trend of other high-income economies.

“Slower population growth and the shrinking relative size of the working-age population will account for a third of the decline in headline gross domestic product (GDP) growth by 2050.

“The ageing megatrend brings with it new challenges for Malaysia in areas such as employment, income security and aged care.

“While an ageing population has its challenges, it is not without opportunities. Serving the needs and demands of older persons can open a new ‘silver economy’,” according to the World Bank.

Early preparation needed

Economist Dr Geoffrey Williams says Malaysia needs early and good policies to prepare for the aged society situation.

Reform of pensions is a critical aspect, he says, considering that 75% of Malaysians have insufficient savings which has been made worse by the pension withdrawals during the pandemic.

“Our proposal is a four-tier social pension scheme with a Universal Basic Pension, an Income Replacement Pension, a Desired Income Pension and Non-Pension Income Alternatives.

“These would be funded by a portfolio of options, including Senior Asset Accounts and reverse mortgages to provide income in old age,” he says.

Williams also calls for more investment in healthcare for the elderly, considering that less than 0.01% of healthcare spending is on long-term care.

Echoing a similar stance, Academy of Sciences Malaysia fellow Datuk Dr Madeline Berma says the government needs to up its fiscal support in terms of healthcare, security and providing a pension.

However, she acknowledges that this would add pressure on the government’s coffers.

Earlier this week, Malaysia’s retirement system was ranked third in Asia and 23rd globally under the 2021 Mercer CFA Institute Global Pension Index.

Malaysia’s scores were well above the Asian average in each of the three sub-indices, namely, integrity, sustainability and adequacy.

Despite this, Malaysian Economic Association (MEA) president Prof Datuk Norma Mansor does not agree that Malaysia has an adequate support system for an ageing population.

“There are two aspects of retirement support, namely, coverage and adequacy.

“The formal sector employees have better protection but for the majority of them – due to low and stagnant wages since the Asian Financial Crisis – the amount of savings is very low.

“In addition, with the withdrawal under i-Citra and i-Lestari, 46% of EPF members below the age of 45 have savings of less than RM10,000 and according to the Malaysia Ageing and Retirement Survey (MARS), respondents aged 60 years old and older do not have any savings, and the self employed and informal workers are not covered by the EPF or the civil service pension.

“To improve, it should be made mandatory for every Malaysian adult to be a part of the national social protection system,” she says.

Norma suggests the implementation of a basic pension to Malaysian seniors when they reach a certain vulnerable age.

Meanwhile, Nur Thuraya says the Mercer CFA Institute Global Pension Index highlighted several challenges in the context of Malaysia such as participation in the retirement system and workforce, as well as the issues of low savings and high household debt.

These challenges have been reiterated in the past decade.

She says that many of the EPF’s good schemes are only voluntary at the moment.

For example, the option for retirees to opt for periodic or monthly withdrawals, although the pick-up rate is low. “In my personal view, we need to move away from “volunteer to join or opt-in” to “volunteer to exit or opt-out” for existing retirement schemes.

“This of course comes with administrative or potentially legislative headaches (such as how to enforce contribution and penalise errant individuals), but if we can allow for early withdrawals (i-Sinar,i-Lestari and i-Citra), we should be able to find ways to do this too.

“Although I have to admit, I don’t think these will be very popular,” she says.

Madeline points out that the Covid-19 pandemic has exposed the gaps in Malaysia’s support system.

“We notice many Malaysians in the lower income category are not supported. In the future, we need to establish a system for this group such as micro-insurance and must educate Malaysians on the importance of insurance and savings.

“Studies have shown that many Malaysians fall below the poverty line six years after retirement because they use up all their savings and investment. We need to improve the system to prepare for an ageing population,” she says.

With more Malaysians going into retirement in the future, there is a huge concern on how the national productivity will be affected.

Already, the country’s labour productivity growth has been slowing down substantially over the past three decades.

Madeline concurs that labour productivity could take a further beating, especially in the manufacturing and services sectors.

However, she says the problem is not insurmountable.

“Apart from greater technology adoption, those above the age of 60 must be reskilled or upskilled, and we must foster the concept of lifelong learning.

“This can ensure those above the age of 60 can continue to contribute to economic growth, if they are capable, so that their talents are not wasted,” she says.

However, Williams opines that the “grumpy old men” should leave the senior positions and open up opportunities for the younger generation.

“If they hold on to their positions, growth and productivity potential will be held back because younger, vibrant and innovative leaders will not have the opportunities they deserve.

“This is why it is important to fix the old age income problem so that older people can leave work and enjoy their retirement to free up opportunities for the young,” he says.

Also, Williams believes that an ageing Malaysia may not necessarily see an increased reliance on foreign workers.

“There is a significant under-employment problem in Malaysia with around 19.8% of the workforce unemployed or under-employed. So, there is a pool of talent available.

“Around 800,000 graduates are outside of the labour force, so again, there is a significant talent pool there. Female participation is also relatively low and provides a talent pool too,” he adds.

Ageing not necessarily bad

An ageing society presents opportunities of its own, which if tapped properly, would unleash value addition to the economy.

MEA’s Norma says that if healthy individuals above 60 years old are hired, they can contribute about 1% to GDP under the current wage structure.

“The baby boomers above 60 years old are highly educated and highly experienced. They should be hired with flexible working arrangements.

“Their contribution is not only to a productive economy, but also to be less dependent on their children and prepare Malaysians to save and accumulate assets to achieve greater independence during retirement,” she says.

Williams, on the other hand, says there will be huge growth opportunities for elderly care professionals, care homes, healthcare and long-term care providers, financial planning providers and old age lifestyle industries.

“This is one of the positive outcomes of global megatrends that is overlooked in the discussion on Industrial Revolution 4.0.

“Social and personal skills will be in high demand in jobs that resist automation. This is where education as well as technical and vocational education and training or TVET should be focusing,” he adds.

Meanwhile, KRI’s Nur Thuraya says the country’s abilities to “harness the benefit” of an ageing society will depend on how well it manages the risk of deteriorating income, health and social support that comes with ageing.

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