Pressure to raise taxes anticipated

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PETALING JAYA: Pressure to raise taxes to improve the government’s fiscal position in the medium term may be inevitable, as corporate Malaysia faces depleting retirement savings.

Economists and analysts agree that a shortfall in retirement savings could also affect consumption trends in the medium to long term that may have some knock-on effects on economic growth.

RAM Rating Services Bhd senior economist Jason Fong told StarBiz that in the absence of meaningful and continued social and healthcare reforms, the lack of sufficient retirement savings would constrain the government’s fiscal space and adversely affect consumption patterns over the medium term.

To improve the government’s fiscal position, it would need to raise taxes to boost its coffers, he added. According to Fong, the government revenue over the years has been on the downward trend (see graphic).

“Rising social and healthcare costs will have to be borne by the government, as more people enter retirement with inadequate savings.

“For example, the demand for public sector-led geriatric healthcare is anticipated to increase in line with the number of impoverished retirees.”

Fong said this will divert Malaysia’s already-limited fiscal resources from other key development objectives.

“Currently, the public healthcare sector capacity and funding have not necessarily kept up with the country’s gradual demographic change over the years.

“Compared to the global average, Malaysia’s total healthcare spending as a percentage of gross domestic product (GDP) is underfunded,” he noted.

On retirement savings, Sunway University economics professor Yeah Kim Leng said three Employees Provident Fund (EPF) assistance packages have been utilised by some groups to date and the latest package of up to RM10,000 has been allowed to members to be withdrawn from the EPF account.

“Over the long term, will this not spark a retirement savings crisis for the country?” he asked.

To take care of the aged poor, Yeah said it was inevitable that the government would need to increase social and welfare spending.

Without a boost to government revenue, Yeah said it would have to either reduce spending in other areas such as education, health and defence or increase borrowing that would further elevate the already high debt-to-GDP ratio.

He said the government would need to accelerate fiscal reforms to diversify revenue sources and broaden the tax base and simultaneously improve spending efficiency and plug leakages and wastages.

“The various digitalisation initiatives to transform the delivery of government services are a step in the right direction to enhance cost savings and improve administrative efficiency.

“That in turn will generate positive spillovers on the economy in the form of lower regulatory burden and a more attractive investment environment,” Yeah noted.

In terms of the fiscal impact, OCBC Bank economist Wellian Wiranto said in the near term, the rounds of EPF withdrawals may implicitly contribute to the increase in debt servicing costs by the government, given that the EPF is an important anchor investor of the Malaysian government securities (MGS) market.

Apart from the near-term debt servicing cost, he said there is a possibility that the government’s social safety net might have to broaden further.

This, he said, is to account for the fact that more Malaysians would need help in the future to have a respectable retirement, now that their personal EPF accounts are depleted.

“This comes at a time when there are other large fiscal challenges such as already high debt-to-GDP ratio, revenue dependence on petroleum, higher expenditure outlays to combat medium-term issues such as climate change mitigation, etc.

“To some extent, if the Malaysian economy can engender a sustainable growth recovery in the years ahead, such fiscal challenges can be mitigated somewhat. But, in such an uncertain global environment, it will require a lot of stars to be aligned,” Wellian said.

RAM’s head of corporate ratings Thong Mun Wai said with the population above 65 years expected to double over the next 20 years, there is an urgent need for the government to implement policies to enable and encourage people to save more, as well as to help them replenish their depleted retirement savings.

Based on EPF’s latest data, only 20% to 30% of its members have achieved basic savings levels that correspond with their age. There are also 6.1 million contributors who have less than RM10,000 in their EPF accounts.

As to whether inadequate retirement savings may lead to the government facing a higher debt-to-GDP ratio, RAM’s Thong said the causal link between inadequate retirement savings and government debt-to-GDP is not definite, as debt cannot be used to fund the government’s operating expenditure, under current fiscal rules.

“The government may have to increase taxes in the future to meet rising social and public healthcare costs of an ageing populace.

“In turn, the tax burden will fall on a declining proportion of the working age population, which is not tenable if productivity and income levels remain stagnant,” he said.

Economist Shankaran Nambiar opines that insufficient retirement savings could worsen as the nation moves into an ageing society and as life span increases.

“Not only will we have to consider increasing the retirement age, but we also need to mull over discarding age as a criteria for the non recruitment of senior citizens.

“Safety nets of various sorts will have to be seriously considered. Some of the policies that require urgent attention include healthcare financing, unemployment insurance and insurance against natural disasters.”

Shankaran, who is the head of research at the Malaysian Institute of Economic Research, said public healthcare facilities will have to be expanded.

“Alongside these strategies, more awareness should be created on financial planning and the need for retirement savings,” he said.

Centre for Market Education CEO and Institute for Democracy and Economic Affairs (Ideas) senior fellow Carmelo Ferlito said shortfall in retirement savings could lead to higher household debt-to-GDP ratio.

He said the main concern of the government should be to address high household debt rather than granting further debt to favour home-ownership.

“A nation with a high household debt and lack of savings (coupled with a high marginal propensity to consume and poor financial literacy) is a fragile nation, which will struggle to navigate through the economic cyclical fluctuations.

“Firstly, We need a sound economic strategy able to generate true growth, which means not a GDP growth induced by consumption and government spending, but by private investments. Secondly, more effort should be put on financial literacy to educate households to be more attentive to the way in which they spend their money,” Ferlito said.

Household debt-to-GDP ratio fell to 89% as at end-2021 from a record 93.2% a year ago.