Fading population dividend

TUN Dr Mahathir Mohamad once envisioned Malaysia to reach a population of 70 million by the year 2100.

The former prime minister reasoned that a bigger working age population is necessary for greater industrialisation and to have “less foreign economic and other dominations”.

However, about four decades since Dr Mahathir made that forecast, the number no longer seems achievable.

It is now forecast that the Malaysian population would peak at 46 million people in 2071 and would shrink thereafter.

In view of this, experts say Malaysia only has two options moving forward.

The country has to either embark on a giant technology and innovation leap or embrace immigration of skilled workforce.

Failing which, Malaysia could be set for a decline in long-term gross domestic product (GDP) growth or lose its lustre as a global investment destination.

ALSO READ: Demographic crisis in Asia

This would make Malaysia’s goal to escape the middle-income trap to join the likes of South Korea and Singapore more challenging.

As of 2023, the country’s population stood at 33.4 million people, which is already 73% of the estimated peak population.

Malaysia’s population growth faces pressure from the continued trend of decreasing natural increase over time, largely due to falling fertility rates across all major races.

Natural increase is the difference between the estimated births and the estimated deaths.

Fortunately, the increase in non-citizens has lent some support to population growth.

Looking at the Statistics Department’s data from 2010 to 2023, the annual growth rate of non-citizens has surpassed that of citizens for most years.

In 2023, the Malaysian citizen population rose by about 217,000 people, while non-citizens increased by about 464,200 people in line with the post-pandemic reopening of borders.

But, slowing population growth aside, Malaysia also faces an increasing number of retirees that may take a toll on the country’s welfare system.

The country attained the “ageing society” status in 2021 when 7% of its population are aged 65 and above. By 2023, eight out 13 states also reached the same status.

Yeoh: A study found that a 1% increase in the old-age dependency ratio led to an average decline in Malaysia’s GDP growth by 6.6%.Yeoh: A study found that a 1% increase in the old-age dependency ratio led to an average decline in Malaysia’s GDP growth by 6.6%.

Becoming ‘super-aged’

Malaysia is en route to becoming a “super-aged” country by 2056.

Under such circumstances, unless Malaysia raises the retirement age beyond 60 or brings in foreign workforce to fill in the gap, the country’s productivity could take a big hit.

Tricia Yeoh, chief executive officer of the Institute for Democracy and Economic Affairs (Ideas), says Malaysia’s economic development in the past five decades was achieved by harnessing its demographic dividend, a relatively high population of working-age adults.

However, the benefits of the demographic dividend are projected to end by 2027, she adds.

“A study found that a 1% increase in the old-age dependency ratio led to an average decline in Malaysia’s GDP growth by 6.6%.

“An increase in the population of the elderly will also result in a greater strain on public finances and pension funds.

“As the ratio of working adults to elderly people is expected to halve from 13.6 in 2010 to 6.0 in 2040, this will further strain pension funds, as there are fewer working-age adults who contribute to the pension scheme via taxation and mandatory contributions compared to retired adults who require support from the pension scheme,” she says.

Slower growth

Meanwhile, EMIR Research head of social, law and human rights Jason Loh Seong Wei says Malaysia must brace for a GDP growth of below 3%-4% in “perhaps 20 years’ time onwards” due to its ageing population.

While some may argue that the impact of an ageing population could be addressed if the economy becomes more reliant on services – a sector that is less labour intensive, Loh disagrees.

Instead, he says that Malaysia must avoid the trap of “premature de-industrialisation”.

“Transitioning to a knowledge economy in terms of services, such as positioning Malaysia to be the next leading financial hub, wouldn’t help to mitigate the impact of lower GDP growth.

“This depends on the flow of capital or funds where the benefits or gain of the inflow is netted out by the losses and costs of the outflow. For example, interests or dividends gained in Malaysia might not necessarily be spent domestically but repatriated.

“The extent of job creation and employment opportunities offered by the financial services sector can never outpace that of the industrial sector and manufacturing.

“This is so since the manufacturing sector, comprising finished goods and capital goods will always be labour-intensive relative to the former even when under the conditions of digitalisation.”


Fewer babies born

In 2022, Malaysia’s total fertility rate (TFR) fell to the lowest level in five decades, hitting 1.6. In fact, the country’s fertility rate has fallen below the replacement level of 2.1 since 2013.

The replacement level refers to the average number of babies per woman aged 15-49 needed in a lifetime to replace herself and her partner.

The TFR of the Chinese ethnic group was the lowest in Malaysia at 0.8 in 2022, which was not far off from the world’s lowest fertility rate held by South Korea at 0.78.

The Indian ethnic group’s TFR was recorded at 1.1 in 2022, followed by the Malays at 2.1.

Fertility rates of all ethnic groups are expected to continue declining, going forward, as couples decide to have smaller families and many young people skip marriages.

Socio Economic Research Centre (SERC) executive director Lee Heng Guie says that slower population growth is typical of developing economies that transition into high-income economies.

“It is estimated that 2.1 live births is the rate needed to sustain a labour force in industrialised countries and 2.3 in developing nations.

“Slowing population growth will affect the share of the population of working age (15-64 years old), which in turn affects the size of the labour force, and dampens national output and productivity,” he says.

It is noteworthy that the working age population group, which is about 70% of the total population, increased by 0.7% per annum in 2020-2023.

In comparison, the working age population had grown by an average of 1.5% per annum in 2013-2019.

“The change in demographic trends accompanied by the rising retirement in both public and private sectors and longer life expectations will impact on the country’s output, productivity and the future budget burden.

“This comes in the form of ageing workforce dampening overall productivity; higher retirement charges for public retirees; higher healthcare expenditure and elder care expenses.

“Inadequate retirement savings also impacted households and standard of living,” says Lee.

Lee: The public and private sectors must build housing, transport and entire cities more user friendly for an ageing society.Lee: The public and private sectors must build housing, transport and entire cities more user friendly for an ageing society.

Immigration helps?

Looking ahead, Lee says if Malaysia’s birth rate continues to decline, it is not surprising that immigration will augment Malaysia’s population growth.

Emeritus Professor Datuk Norma Mansor also agrees that encouraging immigration is a way to deal with slowing population growth and to raise productivity.

Norma, who is the director of Universiti Malaya’s Social Wellbeing Research Centre (SWRC), however, says that the government needs to be cautious in promoting immigration as it may result in social problems.

“That said, for a country that is ageing, immigration in the skilled sectors will be beneficial.

“But, we must treat the immigrants equally like our own nationals by imposing the same standards as provided by the 1955 Employment Act.

“This would ensure they enjoy the same benefits and the cost of hiring them will be similar to hiring a Malaysian.

Norma: For a country that  is ageing, immigration in the skilled sectors will be beneficial.Norma: For a country that is ageing, immigration in the skilled sectors will be beneficial.

“Indirectly, this would discourage employers from choosing a foreign worker over a Malaysian to save costs,” she says.

As much as people migrate in search of better pay and social conditions, it will be more difficult to attract foreign talents in the future, considering that more countries are ageing faster.

After all, even the world’s most populous countries like India and China are seeing falling birth rates.

China’s fertility rate fell to a record-low of 1.09 in 2022, while India’s fertility rate dropped below the replacement level in 2021 to 2.0.

The greater economic growth in countries that used to supply Malaysia with workers will also discourage migration out of those countries.

This, in turn, could leave countries reliant on foreign workers – including Malaysia – to scramble for alternative options if the businesses do not embrace automation and mechanisation fast enough.

A Malaysian employer in the construction industry tells StarBizWeek that it has gotten tougher to source Indonesian workers.

“The wage in Indonesia for construction workers has risen similar to the levels in Malaysia and with the country increasing infrastructure projects like the one in Nusantara, the workers who were once trained in Malaysia prefer to work in their home country,” he says.

Hence, Norma highlights the need for the government and businesses to invest more in research and development (R&D).

“We must increase the pace before we (Malaysia) get too old,” according to her.

Official figures show that Malaysia’s gross expenditure on R&D (GERD) has been declining in the past several years, even before the Covid-19 pandemic.

In fact, the country’s GERD per GDP dropped to just 0.95% in 2020, which was the lowest since 2010.

For comparison, countries like South Korea, the United States and Japan spent 4.81%, 3.45% and 3.26% of their GDP in 2020 for R&D, respectively.

Notably, China’s GERD per GDP stood at 2.4% in 2020, significantly higher than Malaysia despite having an almost similar GDP per capita.

It is noteworthy that Malaysia is well behind its GERD per GDP target of 3.5% by 2030.

Loh: Transitioning to a knowledge economy in terms of services, wouldn’t help to mitigate the impact of lower GDP growth.Loh: Transitioning to a knowledge economy in terms of services, wouldn’t help to mitigate the impact of lower GDP growth.

Handling the aged

To better handle the slowing and ageing population situation in Malaysia, Ideas’ Yeoh says Singapore, Hong Kong and Japan are good starting reference points.

“In Singapore, they took the initiative in reviewing the financing system for long-term care, raising the re-employment age, and building more centres where seniors can get physiotherapy or participate in physical activities.

“Singapore has also increased the re-employment age from 65 to 67 and subsidised the work skill courses for those over 40, and set up a fund called Silver Volunteer Fund by a mix of government funds and public donations to support older people in social interactions, physical capabilities and even in financial terms under the actions plan for successful ageing.”

Learning from Singapore, Yeoh says Malaysia can consider offering options for part-time work or reduced hours as well as increase the retirement age.

In Hong Kong, she notes that the healthcare needs of the elderly are addressed through the provision of Elderly Healthcare Vouchers.

First launched in January 2009, eligible seniors receive a 2,000 Hong Kong dollar (RM1,215) voucher that can be used with private primary care providers including physiotherapists, general medical practitioners and Chinese medicine practitioners. This is on top of other allowances.

“However, Hong Kong primarily views ageing as a medical issue around chronic illness and social care, and has yet to adopt a whole of society approach to ageing,” she says.

EMIR Research’s Loh says Malaysia is well-prepared, to a certain extent, to handle the effects of an ageing population on the wider economy via general macroeconomic policy frameworks.

“But in terms of the fiscal and monetary policy strategies and the coordination between the two, there’s much space for consideration.

“To meet the challenges of an ageing population, the government needs to accumulate wealth in the form of reserves which can be tapped into for the purposes of helping to meet the financial, social and economic needs of our elderly population,” he adds.

SWRC’s Norma says the government must put in place measures to prevent old-age poverty.

“About 42% of our old-age population is in relative poverty and it may worsen. So, we can’t wait to improve our social protection,” she says.

Norma recommends for the Employees Provident Fund (EPF) withdrawals to be tweaked, whereby a portion of the savings will be ring-fenced and only allowed for monthly withdrawals.

“We must also have a tax-funded social protection system for those who have no post-retirement savings and then for those with little savings.

“Based on our calculations, if the government pays RM500 monthly to individuals aged 70 and above, it would only amount to RM8.8bil, which is a fraction of the fuel subsidy bill,” she adds.

In order to support Malaysians’ EPF savings, SERC’s Lee suggests that the EPF can consider giving an additional dividend of 1%, for example, on the first RM50,000 of the accumulated EPF savings for employees aged 50 years and above.

“The employers may also pioneer a flexible private retirement scheme, which allows employees to reduce working hours and claim part of their pension while continuing to accrue further pension entitlements for when they fully retire.

“Adequate financial protection and health caring programmes are needed to provide financial security and decent health support services for the elderly society.

“Both the public and private sectors must build housing, transport and entire cities more user friendly and livable for an ageing society,” he says.

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