Can we afford a Pencen Madani

 

It is rare for economists to come to a consensus because we have genuinely different views about how the economy works and what are the best options to choose when formulating economic policy.

One area where economists do agree on is that there is a pension crisis with millions of people headed for retirement with no obvious means to cover the cost of living in their old age.

In November, Prime Minister Anwar Ibrahim made this clear.

Around 6.3 million EPF members, or 48% of those under the age of 55, have less than RM10,000 in retirement savings.

This will provide less than RM42 per month over a normal retirement period of 20 years. This is nowhere near enough to live on.

Most of these are bumiputera savers, many of whom emptied their EPF accounts during the Covid-19 crisis and have made little progress in rebuilding their savings because of persistently low incomes.

In addition, millions more have no formal retirement savings at all, with 7.4 million people outside of the labour force, and almost as many people in informal work as in formal private sector employment.

According to the Department of Statistics Malaysia (DOSM) there are currently 2.5 million people over 65 years old and 3.8 million over 60 years old.

Can Malaysia afford to provide a national pension for these people or not? The answer is yes.

Excluding civil servants and armed forces retirees who already have a pension and those wealthy enough to have a good retirement income, around 2.5 million people over 60 years old might be eligible for a universal basic pension (UBP), which could even be called Pecen Madani.

For these 2.5 million people a UBP of RM100 per month would cost RM3 billion per year. At RM200 per month it would be RM6 billion and at RM300 per month it would be RM9 billion.

Although these are small amounts, combined with other existing welfare support they offer a good start to a UBP or Pension Madani and is affordable within current budget plans.

For example the government will save RM4 billion from diesel rationalisation and about the same from electricity subsidy rationalisation.

This RM8 billion almost covers the cost of a RM300 per month UBP from the outset.

Two other alternatives are currently on the table. The first is to consolidate some of the smaller GLICs into a Malaysian Superfund and use the investment returns to fund pensions for everyone.

A second option is to introduce an e-payments tax (EPT) which is a tiny tax on all electronic payments.

According to my latest calculations a 0.5% EPT can provide a RM500 UBP for everyone over 65 years old.

A 1% EPT would give the same to everyone over 60 years old and a 1.5% EPT can fund the current civil service bill completely.

This would release RM32.4 billion currently committed to civil service pensions which can be redistributed as a RM1,000 per month UBP for everyone else.

Of course all of these can be run together as part of a structured scheme to fund a non-contributory pension.

As the returns from the Malaysian Superfund rise they will replace the income from subsidy rationalisation and taxes.

The UBP would provide the baseline which could be topped-up by existing contributory schemes such as EPF as well as private retirement schemes (PRS) for those who can afford it.

The challenge for the government is to reconcile the consensus that there is a pension crisis that is with us now with the claim that there are no solutions.

In fact with new thinking and political will possible solutions are available and must be considered. - FMT

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.