An ageing society – is Malaysia ready?

With Budget 2024 just around the corner, the government must begin to look at tax-funded social protection for the elderly.

BASED on the latest statistics provided by the Statistics Department, Malaysia’s life expectancy in 2023 has improved by one year to 74.8 years, which suggests that Malaysia’s life expectancy is now back to the pre-pandemic level in 2019.

Female life expectancy is now at 77.4 years, while males have a lower life expectancy at 72.5 years.

By race and gender, a Malaysian Chinese female has the longest life expectancy at 80.2 years, while a Malaysian Indian male has the shortest life expectancy at 67.7 years.

In terms of district, the Petaling district in Selangor has the longest life expectancy at 80.5 years, while Kecil Lojing in Kelantan has the lowest life expectancy at birth for 2023 at 62.8 years.

Interestingly, based on projections made by the Employees Provident Fund (EPF), Malaysia’s life expectancy is forecast to increase to 82.4 years by 2060.

This is 28.8 years longer than the 53.6-year life expectancy that Malaysia had when the EPF was established in 1951.

The golden years

Based on the Statistics Department’s latest statistics, Malaysia has presently approximately 3.8 million and 2.3 million of its population aged 60 years and 65 years and above, representing 11.3% and 7.4% of the nation’s population, respectively.

By 2035, according to the Statistics Department’s estimates, Malaysia will have an ageing population of 5.6 million seniors, or 15% of the total population.

This is more than double the definition of an ageing nation by the United Nations, which defines an ageing nation as one where over 7% of the population is 65 years old.

Malaysia’s ageing society will take a natural progression as by 2050, the percentage of people over 65 is expected to hit 17%, and by 2056, Malaysia will have a “super-aged society,” with more than 20% of the population being over 65, according to the Statistics Department’s estimates.

Insufficient savings

Post-retirement at the age of 60, with about 15 years to live on average, the question is how many retirees would be able to live their lives comfortably and able to afford necessities without any financial assistance.

For those who had retired due to full-time employment either in the private or public sector, even the nest egg build-up in the EPF and the state pension scheme may not be sufficient due to the low wage structure that we presently have, as well as the lack of savings in the EPF due to withdrawals made.

The RM240,000 threshold set by the EPF for retirees to have at the age of 55 is not easily achievable by members.

This is as only 30% of its active members meet basic savings by age, while only 18% of the EPF’s total members meet the same threshold.

Statistics also show that EPF members tend to “spend” their retirement savings post-retirement, to the extent that most of them exhaust their lifetime savings in less than five years.

This brings us to the question of how retirees will live their remaining golden years comfortably.

While the family support system may assist them, not every family has the built-in social safety net to provide not only financial assistance, but for most of them, other needs too, which include healthcare.

Social protection provided by the government is common across the world with average spending of about 12% of a country’s gross domestic product (GDP).

Need for social protection

Social protection comes in many forms and this includes old age, survivors, disability, children, unemployment and in other forms.

Social protection given to the needy also helps to reduce the level of poverty with countries in Europe experiencing the greatest impact.

Globally, according to Dr Stephen Kidd, senior social policy analyst of Development Pathways, a leading global consultancy specialising in designing and developing social protection systems, there are presently 84 social security schemes offering universal coverage in low-to-middle income countries.

Asia alone accounts for some 44 of these schemes.

This is based on Kidd’s presentation at the EPF’s forum entitled “Strengthening Pension and Retirement System in Malaysia” last month.

His presentation also showed that high-income countries spend between 2% and 14% of their GDP on pension systems.

Let’s start small

With Budget 2024 just around the corner, the government must begin to look at tax-funded social protection for the elderly, which is seen as the most vulnerable group needing government assistance.

According to Kidd, one method is to start with a small percentage of just 0.3% of GDP and that will benefit elderly Malaysians.

Malaysia can start either with a RM570 monthly payout for those aged 75 years and above, or RM300 per month for those 70 years and above.

Both of these will translate to approximately RM5.4bil per annum to the government’s expenditure.

The age limit can be gradually reduced so that in time, all those above 65 years of age would receive some form of benefit and it may not even cost the government more than 1.2% of GDP per annum.

A universal pension scheme has also an added advantage in terms of redistribution of wealth as the funders are typically taxpayers, while the beneficiaries are from the poorest members of society.

In addition, a universal pension scheme has a built-in mechanism that ensures taxpayers do get something in return during their golden years as they reap the benefit of paying taxes during their working years.

It raises the level of trust in the country’s financial management as well as strengthens the social contract between citizens and the government.

All said and done, a universal pension scheme is a winner for all Malaysians, as it is a signal that the government will take care of its people when they reach retirement age.

Pankaj C. Kumar is a long-time investment analyst. The views expressed here are his own.