The case for Malaysia to raise the retirement age — Khaw Veon Szu and Lindsey Allwright
AUG 4 — Newspapers have recently published reports that the government may raise the retirement age next year to 60, with the Prime Minister expected to make an announcement in September (source: The Star). Cuepacs has previously pushed for an increase to 60 since 1998 and MTUC have recently repeated a call for a mandatory retirement age of 60 to be set in the private sector, to ensure a standard retirement age for all (source: Malaysian Mirror).
Currently at 58, Malaysia has one of the lowest retirement ages in the world; much lower than neighbouring countries (Indonesia, Singapore, Thailand, South Korea all have a retirement age of 60 (source: The Star)), and far behind some of the developed country retirement ages which are at least 65.
Of course, developed countries have rapidly ageing populations, a problem Malaysia is not yet affected by, but with improving health, increasing life expectancy and declining fertility, it is a problem which could become considerably more significant for Malaysia in the not too distant future. This means the government has to start preparing for such a scenario now before it is too late.
Why Malaysia Must Increase the Retirement Age
Malaysia’s population will begin to get more elderly over the next two decades or so; by 2020 9.5 per cent of the population will be aged 60 years and over, up from 6.2 per cent in 2000 (source: International Development Research Centre (IDRC), Chapter 4: Ageing in Malaysia, Ong Fon Sim). The past four censuses have shown that the proportion of the younger age group (15 years and below) is decreasing while the proportion of elderly is rising and this trend is likely to persist as health and nutrition continue to improve, and fertility and mortality continue to decline (source: IDRC, Chapter 4: Ageing in Malaysia, Ong Fon Sim). This trend is a well known feature of developed countries and so there is no reason for Malaysia to be unprepared for this trend in its aspiration to become a developed nation.
The old age dependency ratio, the number of people aged 65 and over divided by the number of people aged between 15 and 65, shows how many dependent (elderly) people are supported by people of working age. A high ratio is a concern as it means there are a high proportion of economically inactive people in the population compared to economically active people. The economically active will pay more taxes; income, corporation, sales and VAT etc adding to government revenue, while the economically inactive are the major recipients of government spending, e.g. healthcare and pensions. Hence, an ageing population can have a considerable negative effect on the government’s deficit.
Malaysia’s old age dependency ratio is expected to increase to 15.7 in 2020 (source: IDRC, Chapter 4: Ageing in Malaysia, Ong Fon Sim). Although the dependency ratio is measured with dependents aged 65 and over, in Malaysia, people aged 55 to 65 who are retired will also come under the category of dependent people, therefore Malaysia’s actual dependency ratio will be higher.
With the proportion of elderly in the population increasing, it is not viable for people who can still be economically active to retire and allow the decreasing number of younger people to support them and be the main providers of economic growth. In order to sustain GDP growth and economic development the retirement age must be raised, particularly in the private sector.
Increased Life Expectancy
Longer life expectancy, increased stamina, better health and a higher quality of life, all mean that people can continue working longer. The current life expectancy for Malaysians is 70.8 for men in 2000, rising to an expected 74.4 in 2025 with women living about five years longer (source: Malaysian Mirror). The private sector retirement age of 55 is outdated and set at a time when the life expectancy age was considerably lower, lower than 55 for men in the 1950s. Malaysians still have considerable capability after 55 to continue working and contributing to Malaysia’s productivity and development.
Retiring at 55 also means there is about a twenty year gap for individuals to support themselves without an income. At the moment the majority of people in the private sector have to rely on their Employment Provident Fund (EPF) savings which usually turns out to be insufficient. Working longer in order to acquire more savings is often necessary for people to be able to live comfortably when they are elderly. With better health, people may want to work longer just because they are able to.
The modern trend is that people start having families late. This means that at the retirement age of 55, many people can still be supporting their children through school. If they are not working and therefore not earning an income, parents will have to fund this through their already inadequate savings, causing the family to have a lower standard of living when they are elderly and perhaps hindering their children’s potential. People can add a sizeable amount to their savings by working five more years and thus provide themselves and their children, if they still need supporting, with a stable standard of living when they are older.
It is a well established fact that Malaysia is experiencing a talent shortage due to the increasingly inadequate standard of education system and worsening brain drain problems. While efforts have been made in the 10th Malaysia Plan and New Economic Model to counter such shortages, another simple and less costly solution is to increase the retirement age and make use of the many senior workers who have ample experience and developed skills but are leaving the workforce too early. It is estimated that if the retirement age is increased to 60, there could potentially be close to a million more workers to boost the nation’s workforce within five years. This is a considerable amount of human capital for Malaysia to lose just because of a premature retirement age and is a waste of resources and of valuable skills and experience. It also means that employers have to keep training new sets of workers to take over the retirees’ posts. As Omar Osman, Cuepacs president says, ‘it is a waste to train a person up to a high level and then let them go early’ as quoted in the Malaysian Mirror.
Older people can still have a significant role in a company. They can have a dual role by continuing to do their normal work but also helping to mentor and train younger workers. Their wealth of knowledge from their experience is an underused valuable asset to companies as they can continue to contribute greatly by helping to develop younger workers through the transfer of knowledge.
However, extending the retirement age in the incredibly bloated civil service could have a negative effect on efforts being made to right-szie it. The later retirement of older civil servants may mean that the government will find it harder to reduce the number of civil servants as it has to keep them longer and yet still find it difficult to fire them.
Raises Gross Domestic Product (GDP)
Undoubtedly, working for longer contributes to GDP. As the current retirement age is quite low, workers between 55 to 60 years old are still a great deal productive and so would be able to continue contributing significantly to GDP if they worked beyond the retirement age of 55. Currently, Malaysia loses about 400 000 workers a year due to this implied retirement age in the private sector (source: Malaysian Statistics Department’s Labour Force Survey Report 2008). It is evident that these 400 000 workers could have a considerable effect on GDP growth and the private sector maintaining a retirement age at 55 is an overlooked opportunity for increasing the GDP growth rate to the high target of 6 per cent in the 10th Malaysia Plan.
However, It should be emphasized that for a rise in the retirement age to add to GDP, it is essential that the private sector is persuaded to extend its retirement age as well as it is the main driver of economic growth, in 2008 it was 160 per cent of GDP (source: Worldbank). An increase in only the public sector won’t be sufficient to push up the GDP growth rate as envisaged.
Helps to Reduce the Government’s Deficit
By working longer, workers pay more income and other taxes adding to government revenue. Working longer also means the government can delay paying out pensions and therefore reduce government spending.
As Malaysia’s government only pays a pension to civil servants (the private sector and informal sector are not covered by the government), increasing the retirement age will not have much effect on reducing government spending and will probably increase it because of the additional years of salary they will have to pay to the civil servants. If however, the private sector raises its retirement age too, a large number of people will continue to pay taxes and will have a positive effect on increasing the government’s revenue.
Poorer workers often have a lower life expectancy than average income workers as they do more physically demanding work and have poorer health because they can’t afford adequate nutrition and medical care, among other things. Higher income workers usually enjoy their work more and are well paid, so don’t mind working longer anyway. Raising the retiring age, therefore, can benefit higher income workers more than poorer workers in terms of their standard of living.
A large proportion of workers in Malaysia are manual labourers and cannot continue working for as long as office workers. However as they are poor they may also need to work longer than higher income workers. Therefore when raising the retirement age it is important for the government to monitor the effects on these types of workers and provide adequate social welfare support.
Difficult For the Elderly to Find Employment
Employers are reluctant to hire older workers for employment or even keep them in employment as their productivity is perceived to have declined and they are relatively expensive compared to younger workers. Many firms have pay structures where they pay below a worker’s productivity at the beginning and pay more than a worker’s productivity as they get older and have more experience at the firm. Making workers work longer can therefore hurt a firm financially and may lead to elder workers being unemployed anyway. Also elder workers are often under-employed for their skill level as because of a perceived decline in their ability or productivity they may be demoted i.e. they may be employed as a shop assistant rather than in management.
As the Malaysian retirement age is well below the rest of the world’s standard of what is an elderly worker (60 years and over), it is quite unlikely that employers would view their workers as too old to work and fire them over a belief in their decreasing productivity. However, as Malaysia’s retirement age has been 50 years old since independence, it may take awhile for mindsets about elder workers to change, both by workers and employers. It is important that Malaysian employers and workers adapt to what is a worldwide standard.
Reduces Employment of Younger Workers
It has been observed that increasing the retirement age causes firms to reduce their hiring’s of young workers which may be a particular problem for Malaysia which has high graduate unemployment. However, Cuepacs finds that since the retirement age rose two years ago in the civil service, there has been no evidence of any deprivation of jobs to younger workers (source: Cuepacs). It has also been suggested that the younger generation should be innovative enough to create employment or entrepreneurship opportunities for themselves rather than to wait for people to retire at a few top posts (source: Dr. Jariah Masud, Gerontology Institute quoted in Malaysian Mirror). With Malaysia still developing, the labour market should not be so saturated that young workers can’t develop and create suitable employment or entrepreneurship opportunities for themselves.
Many of the positive effects from raising the retirement age will only accrue if the private sector is also encouraged to increase their retirement age as well. Therefore it is important for the government to work on promoting the increase in the age of retirement in the private sector, the designated engine of growth as proclaimed in the 10th Malaysia Plan.
In order for employers to adapt to a modern mindset that 55 is too young to retire their workers, the government may need to provide some incentives such as subsidies for employing older workers. Malaysia also needs a comprehensive and well-planned retirement benefit scheme which enables people working in the informal sector, (Informal sector is economic activity which is not taxed or monitored by the government and is not included in GNP or GDP calculations. Malaysia’s informal sector was 31.1 per cent of GNP 1999/2000 (source: Amnet)), to save for a pension as well and provides a more stable fund for people to live off when they are elderly.
More importantly, it is better for Malaysia to prepare for this global aging phenomenon and all the socio-economic problems associated with it now than later.
* Khaw Veon Szu is the executive director of Sedar Institute.
* This is the personal opinion of the writer or the publication. The Malaysian Insider does not endorse the view unless specified.