MIDDLE-INCOME wage earners and households feel left behind, frequently described as the “squeezed middle” and have questioned the benefits of economic policies and globalisation.
Middle household incomes in many Organisation for Economic Co-operation and Development countries have either stagnated or grown slower than average due to job polarisation and technological automation replacing traditional middle-skilled roles.
In the years to come, the rise of artificial intelligence (AI) is hollowing out the middle-class jobs by automating routine cognitive and administrative tasks performed by mid-skilled professionals.
Rising living costs, especially expenses on housing, healthcare and education have risen significantly faster than overall inflation and services inflation as well as outpaced median earnings.
Malaysia’s middle-income households has expanded in size amid moderate growth in income.
The country’s middle-income households (M40) having a monthly income ranging between RM5,250 and RM11,819, has experienced reductions from 37.6% of total national income (2.78 million households) in 2016 to 36.9% in 2020, largely due to the Covid-19 pandemic impact, before increasing two successive years to 38.2% (3.84 million households) in 2024 and 37.6% (3.16 million households) in 2022.
Why middle-income households matter?
Focusing on the middle class is essential because a strong and vibrant middle class helps to drive economic growth and investment by sustaining consumer spending and investing in education and healthcare.
It also helps foster stable social and democratic institutions.
This economic foundation is currently threatened by rising economic fracturing, leading to a splitting apart of households, with some households moving up into higher wealth brackets while a growing number face a heightened risk of sliding down into lower-income classes.
Is the middle-income household or wage earner under pressure?
The financial strain on middle-class families has become a deeply rooted economic reality, primarily driven by a structural widening gap between stagnant real income or wage growth and the exponentially rising cost of living.
The erosion of economic buffers has caused economic stress on three core pressure points.
The first pressure point is the housing market affordability as middle-income earners struggle to comfortably afford high-priced homes in major cities and suburban areas, forcing them to be trapped in rising rental markets.
Secondly, it concerns the debt load pincer and over-leveraged balance sheets.
Middle-income earners heavily rely on various forms of debt, including credit cards, housing, student, automotive, and personal loans just to maintain a basic standard of living.
The third pressure point is the retirement security deficit – high debt and persistently rising living costs has systematically restrained long-term retirement planning and restricted social mobility.
Moderate increases in income and wages have lagged behind inflation and gross domestic product growth, failing to match the rising cost of living.
Median monthly income for M40 households grew by a 4.6% compound annual growth rate (CAGR) from RM5,465 in 2014 to RM8,599 in 2024.
After adjusting for inflation, real median monthly income increased slower by a 2.8% CAGR to RM7,155 in 2024 from RM5,465 on 2014.
Wages, which made up 62.9% of household income in 2024 have grown moderately over the last 10 years.
For the period of 2016 to 2025, real median monthly wages in the manufacturing sector increased by a 3.3% CAGR to RM2,232 in 2025 from RM1,610 in 2015.
In the services sector, real median monthly wages grew by a slower rate of 2.5% CAGR to RM2,550 in 2025 from RM2,000 in 2015.
Cost of living pressures have intensified post the Covid-19 pandemic crisis.
Escalating living costs are severely straining family budgets, forcing them to reallocate their disposable income toward essential necessities and effectively stalling savings for financial safety nets or upward mobility.
The M40 household spending is concentrated in four major categories, housing, water, electricity, gas and other fuels, restaurant and accommodation services and dining out, food and non-alcoholic beverages (groceries and home cooking), and transport, which make up roughly 67% of total consumption.
The general price levels have remained elevated, with food and beverage inflation increasing by a 2.9% CAGR in 2023 to 2025, 3.9% for the restaurants and hotels, 3.3% for miscellaneous goods and 1.7% for the healthcare services.
Medical cost inflation rate rose to 15% in 2025, driven by technology, non-communicable diseases, and an ageing population. This has resulted in 30% to 50% increases in medical insurance premiums. In parallel, rising property prices have also restrained the middle-income households’ financial capacity to have a decent lifestyle.
House prices have been growing three times faster than household median income over the last two decades.
When the cost of basic essentials outpaces wages, it creates a “survival mode” trap, with the impact most burdensome, especially for families in major urban cities like in the Klang Valley, Penang, and Johor Baru.
In addition, M40 households face middle-class fragility as they are becoming increasingly financially insecure, struggling to balance rising expenses on necessities with maintaining a comfortable lifestyle.
Compounding the households’ financial squeeze is elevated household debt and high debt servicing, along with increasing cost of basic necessities that consumes a larger share of monthly budget.
How the government can help the M40 households
The traditional welfare programmes, including financial aid such as Sumbangan Bantuan Rahmah prioritise the lower-income brackets, using gross income cutoffs or thresholds of current household income of RM5,000 a month or less, have captured the lower end of the middle class.
Many M40 families earn slightly above this limit, completely locking them out of direct cash assistance.
Many M40 and even lower-tier T20 families are still heavily burdened by housing loans, children’s education, healthcare costs, childcare, elderly parents’ support, and rising urban living expenses.
Urban middle-class households right on the border of these income thresholds face the steepest cost of living increases.
Public policy often polarises around two contrasting economic strategies, focusing on relieving either the lowest-income populations through welfare programmes, sometimes leaving middle-income households without targeted policy advocates.
The government can pivot away from simple cash handouts toward targeted structural cost exposure.
> Reforming personal income tax band and review tax relief thresholds
> The issue: The marginal tax rate between the taxable chargeable income band is still steep.
The jump from a 6% marginal tax rate (for between RM35,000 and RM50,000) to 11% (for between RM50,000 and RM70,000) and then up to 19% (for between RM70,000 and RM100,000) reflects the accelerated progressivity of taxation.
> The 25% tax rate applies to a relatively low threshold income band, starting between RM100,000 and RM400,000 resulting in many middle-income earners facing an early high tax burden in their career progression.
The bracket leaps from 11% to 19% between RM50,000 and RM70,000 and again to 25% for between RM100,000 and RM400,000.
> Some tax relief thresholds have not been adjusted in line with the rising cost of living with some remaining largely unchanged for more than a decade.
In particular, reliefs related to the dependents and household support structures have not kept pace with evolving family expenditure patterns and higher care-giving expenses.
Proposed measures: Reduce income tax rate for the chargeable income band between RM70,000 and RM100,000 from 19% to 15% to 16% to smoothen the steep rates.
> Restructure the threshold chargeable income band between RM100,000 and RM400,000 by introducing a lower sub-tier band between RM100,000 and RM200,000) at 20% to 22%, instead of the current 25% to smoothen progression and increase disposable income of the middle-income earners.
> Increase personal tax relief from RM9,000 to RM10,000 and RM12,000 (last revised in 2010, from RM8,000); increase spouse relief under combined assessment from RM4,000 to RM6,000 (last revised in 2016, from RM3,000); increase relief for unmarried children below 18 years old from RM2,000 to RM3,000 and RM4,000 (last revised in 2016, from RM1,000).
> Healthcare, childcare and elderly care costs
The issue: Middle-income households face a severe financial squeeze as simultaneous costs for childcare, elderly care, and healthcare consume a major share of disposable income.
Proposed measures: Introduce a standalone tax relief for retired parents aged above 60 years old at RM2,000 per parent, replacing previous alternative relief structure under medical expenses for parents (RM1,500 per parent for 2016-2020).
> Increase individual tax relief for life insurance (currently RM3,000) and medical insurance (currently RM4,000) premiums by RM1,000 and RM2,000 each to reflect rising insurance premium and expanded dependent coverage eligibility.
> Increase individual income tax relief of up to RM5,000 per year (from RM3,000) for childcare, kindergarten, daycare, and after-school transit fees.
> Expanding “retirement security” account
The issue: Rising expenses and heavy financial burdens are growing faster than long-term savings, triggering a major retirement security challenge for the financially squeezed middle income households.
Proposed measures: Increase the Employees Provident Fund (EPF) contribution relief from RM4,000 to at least RM5,000, reflecting higher income levels and rising statutory contributions (median monthly salary for formal employees at RM3,167 in December 2025, equivalent to about RM4,180 annual EPF contribution).
> Shifting the retirement strategy from lump-sum withdrawals to a lifelong monthly income stream protects against outliving one’s savings.
> Increase voluntary contribution to the EPF up to an aggregate cap of RM150,000 per year from the current RM100,000 cap.
> Establish universal social protection safety nets
The issue: Rising costs for housing, transport, healthcare, and education outpace stagnant wage growth, leaving them vulnerable to employment and income shocks.
Proposed measures: Implement a targeted framework of tiered healthcare protections and regulated caps on essential childcare and private education fees to prevent downward wealth mobility.
> Strengthening public healthcare, affordable housing options, and retirement safety nets for the middle class.
> Upskilling and reskilling
The issue: Middle-income earners face the risk of employment displacement due to technological displacement and structural shifts like artificial intelligence automation, organisational downsizing, and business restructuring disruptions.
Proposed measures: Implement a mix of workers’ skills transformation and upskilling programmes, and targeted mobility incentives to help mid-career professionals to pivot smoothly as industry demands evolve.
> Continued funding of the Technical and Vocational Education and Training, digital skills programmes, and certifications matching current market demands.
> Productivity-linked wages to boost long-term earnings resilience through industrial upgrading and skills training.
> Provide direct financial incentives or temporary wage subsidies to corporations that specifically hire unemployed or displaced mid-career professionals.
Lee Heng Guie is the executive director of the Socio-Economic Research Centre. The views expressed here are the writer’s own.
