EPF contribution to foreign workers will benefit the economy and enhance productivity

THE decision to extend the mandatory Employees Provident Fund (EPF) contribution to foreign workers, currently enjoyed by local employees made during Budget 2025 is a long-awaited policy.

It is beneficial to the economy as well as to all stakeholders. This change will enhance overall productivity across the economy.

Employers are incentivised to prioritise short-term cost savings by hiring foreign workers, neglecting the potential for long-term productivity gain.

The current regulations do not mandate foreign workers to contribute to the EPF for old-age savings.

However, they are allowed to do so voluntarily with a monthly contribution of 11% of their remuneration, with employers required to contribute a minimal flat rate of only RM5.

On the other hand, local private sector workers must contribute 11% of their monthly income to the EPF, and employers must provide another 12%.

This disparity creates an uneven playing field for local workers performing similar roles.

As a result, employers find it cheaper to hire foreign workers even though there is a demand from local workers for the same jobs.

While capitalising on low labour costs by employing foreign workers, employers often lack the incentive to adopt labour-saving technologies.

As a result, the creation of high-skilled jobs in the economy lagged the demand from local graduates. This situation causes a mismatch in the labour market.

Many local graduates are unable to get employment suitable for their qualifications. The mismatch in the labour market is reflected in the increase in cases of underemployment in the country.

Currently, it is estimated that one-third of workers in Malaysia are underemployed.

Furthermore, the wage gap between local and foreign workers is one of the causes of the upward wage rigidity in the country.

Some employers are less interested in technological upgrades, such as digitalisation, due to the immediate benefit of low wages.

Motivation for innovation is also quite limited, especially among small and medium enterprises (SMEs)

As a result, the country's production structure is entangled in a low value-added cycle. The demand for high-skilled workers is not keeping pace with supply.

This labour market distortion is reflected in several indicators, including the low compensation of employees (COE) to the Gross Domestic Product (GDP) ratio and the increasing brain drain.

Currently, Malaysia's COE to GDP ratio stands at 32.4%, falling short of the 12th Malaysia Plan target of 40.0%.

The average COE to GDP ratio for the Organisation for Economic Co-operation and Development (OECD) countries is 44.6%.

This situation undermines the nation’s aspiration to achieve the status of a high-income nation.

From an individual perspective, the effect of this low COE ratio is evident through the increased cost of living, a growing concern for the public.

Labour mismatch in the country is also one of the contributing factors to the rising incidences of brain drain.

The lack of high-skilled job opportunities in the country along with low wages have encouraged skilled workers to migrate.

This is a loss of potential for productivity improvement to spur economic growth for the country.

The increase in incidences of brain drain among Malaysians is not coherent with the alleged shortage of skilled workers as a barrier to the adoption of high-tech production processes.

From the macroeconomic perspective, extending mandatory EPF contributions to foreign workers is expected to generate at least RM7bil additional annual savings to the economy.

This will generate additional investment to spur economic growth. The impact of investment would be greater with strong policy support on improving capital efficiency through technological improvements.

At the same time, the creation of much-needed skilled employment is expected to increase.

Eventually, faster and more sustainable economic growth can be achieved.

Concerns have been raised that this requirement may lead to inflationary pressures through cost push due to the rising wage cost.

There is a probability the cost increment will be passed on to consumers. However, if inflation does occur, it is expected to be a one-off phenomenon.

It is unwise to forgo this temporary effect by sacrificing larger and permanent long-term benefits, that could significantly enhance economic stability and growth.

However, despite the economic benefits of making retirement contributions mandatory for foreign workers, Singapore has opted to reverse its policy by discontinuing the existing requirement at the beginning of this year.

Nevertheless, Singapore's decision to suspend foreign workers Central Provident Fund (CPF) contribution cannot be directly compared to Malaysia's situation due to differing objectives and labour market settings.

The main objective of mandating EPF contributions for foreign workers is to create a more competitive labour market by ensuring a level playing field for local workers.

In contrast, the Singaporean government's decision to discontinue foreign workers’ CPF contribution does not jeopardise the local workers’ opportunities through low wages for foreign workers.

This is because the policy of no CPF contribution for foreign workers is balanced up with the minimum wage policy for foreign workers based on the relevant category.

In other words, Singapore's no-CPF contribution policy for foreign workers still maintains a level playing field between local and foreign workers.

The uniform EPF contribution policy between local and foreign workers in Malaysia is to provide a level playing field.

Furthermore, providing old-age savings for foreign workers aligns with the first Sustainable Development Goal (SDG) of eradicating poverty for all.

Adequate old age savings are essential for alleviating poverty among the elderly.

As a host country, Malaysia has a responsibility to support this important objective.

Moreover, the retirement savings facility for foreign workers not only reflects a commitment to social well-being but also contributes to increased labour productivity.

Adequate social protection for all employees is a crucial factor in enhancing labour productivity.

DR ZULKIPLY OMAR

Senior Research Fellow

Social Wellbeing Research Centre (SWRC)