Cover Story: The cost of ageing

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on May 14, 2018 - May 20, 2018.
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With Malaysia set to become an ageing nation in just a few decades, its citizens may face a future of slower growth, higher cost of living and the need to save more for a longer post-

retirement life. This means Malaysians may have to alter their current financial planning strategies.

The year 2050 will mark a pivotal time in the country’s history. For the first time, there will be more Malaysians aged 65 and above than pre-working Malaysians aged 15 and below. Two decades later in 2070, the country’s population will decline for the first time, according to estimates by the United Nations.

“The immediate impact that policymakers will be concerned with is the potential increase in government spending on healthcare, social security and pensions. Those in retirement pay less income tax since they are not working. The combination of higher government spending and lower tax revenue will lead to a higher deficit,” says Adli Amirullah, an economist with the Institute for Democracy and Economic Affairs.

“And when a government does not have enough money to sustain its expenses, most of the time it will need to borrow, which is why an ageing population is an issue for economists and policymakers.”

An ageing population might also translate into a higher cost of living for everyone. “When there is a lower supply of workers, wages are pushed up, causing wage inflation. Higher wages sound good but in the long run, they will lead to higher inflation, which means prices will go higher and higher,” Adli explains.

Malaysia’s demographic change is a real concern because it is progressing at a much faster pace than that of many other countries. By 2020, those aged 65 and above will represent 7% of its population, and by 2045, Malaysia will become an aged nation — when 14% of its population are aged 65 and above. It took France 115 years to move from an ageing to an aged nation but it will take Malaysia only 25 years to do so, says a working paper by Dr Amjad Rabi, senior social policy specialist with Unicef Malaysia, published in April.

“In 2000, for every senior citizen, there were more than 16 of the working-age population to support him or her. However, in 2050, a senior will have only four people of the working-age population to support him or her,” Amjad says.

Nevertheless, the ageing trend is not limited to Malaysia. Asia is expected to be home to over 60% of the total population of people aged 65 and above across the world by the 2030s, according to Deloitte’s Voice of Asia report released last September.

The challenges faced by an ageing nation can already be observed in other countries. For instance, Japan became the oldest country in the world in the early 1990s, which could lead to a potential declining growth rate. This has also contributed to a worsening budget deficit, in part caused by rising spending on the growing number of retirees, Deloitte’s report points out.

The implications of an ageing nation depend on how policymakers and individuals respond to the issue. However, an ageing trend does not necessarily have only a negative impact on the economy. Lee Heng Guie, executive director of the Socio-Economic Research Center (SERC), cites studies that show different results.

“Empirical studies show ambiguous results. Some say population ageing can boost economic growth while others state the opposite. For example, Park and Shin in 2011 identified that there will be a sizeable adverse economic impact when population ageing is more advanced. In contrast, Gomez and De Cos in 2008 found that the process of population ageing is positively and significantly related to cross-country economic performance,” he says.

Japan, for instance, may be an ageing nation but in the past decade, its standard of living has risen and is now on a par with that of the US, according to Deloitte. A March 2017 article by the International Monetary Fund (IMF) also found that in ageing nations, national income growth most certainly slows down. But for individuals, this does not necessarily mean a decline in per capita income.

“A greying population will mean more old-age dependency, to the extent that these people do not support themselves by relying on assets or their own labour. But it may also bring more capital per worker and rising productivity and wages, particularly if government debt does not crowd out investment in capital,” the IMF authors write.

 

‘A demographic decline would hurt savings rates and labour mobility’

A key risk of the ageing trend is the limit on economic growth if labour productivity is not increased. After all, the economic expansion of many Asia-Pacific countries in the past 50 years has been driven by population growth, says a Moody’s Investors Service report released last August. But as the working-age population sharply declines, countries relying on the employment-driven model of growth will be severely affected.

Malaysia is one of those countries that are bound to see a sharp fall in their working-age population. According to Moody’s, the growth of the country’s working-age population will decrease 1.4% between 2016 and 2030, compared to the period between 2001 and 2015. The decline is much more than in many other countries in Asia.

“A demographic decline would hurt savings rates and labour mobility with adverse effects on capital formation and productivity. In Malaysia’s case, there may be implications for growth, given the employment-driven nature of the economy so far,” says Anushka Shah, vice-president, sovereign risk group, at Moody’s Investors Service. Labour mobility refers to the ability to move between industries and geographical areas.

The Moody’s report observes that in an ageing nation, domestic savings tend to decline as well, negatively affecting the country’s ability to invest in new capital, both human and physical. The government might then have to rely more on foreign borrowings, thus resulting in a weaker current account position and capacity to adjust to shocks. In addition, a lower savings rate will translate into an increase in household debt.

“Household debt has been moderating at a gradual pace, albeit from relatively high levels. High household debt presents risks to financial stability from the banks’ exposure to vulnerable borrowers. It also points to increased systemic risk from an income or interest rate shock. This would then have economy-wide spillover effects,” Anushka says.

Along with slower economic growth, there will be a strain on government finances. A smaller pool of working adults means a smaller taxable population, which leads to a fall in government revenue. SERC’s Lee says the government may also have lower revenue from consumption tax as consumption patterns over a lifetime tend to follow lifetime earnings or income patterns.

“The lifetime earnings pattern of working individuals shows that income tends to rise in earlier working years, peak in the middle-to-late working years, and decline towards the retirement years. Correspondingly, personal income tax yields of individuals rise steadily but then fall again, from the earlier to later working years. More retired people with lower earned income would result in low consumption tax yields, such as those from the Goods and Services Tax,” he explains.

Slower growth and lower government revenue could mean that Malaysians face higher taxes in the future, with working adults having to pay more to support the elderly. According to the Department of Statistics Malaysia (DOSM), the old-age dependency ratio — the number of old-age Malaysians over the total number of working-age adults — may triple from 7.4 in 2010 to 21.7 in 2040.

“As the population ages and private savings generally decline, there will be increasing pressure on governments to meet key social needs, putting pressure on the sovereigns’ fiscal strength. Governments may respond to these pressures in various ways, which may include raising taxes to avoid ballooning fiscal imbalances,” says Anushka.

The government’s financial burden of providing medical services may be especially heavy in a country like Malaysia with its public healthcare system. Old-age-related diseases such as hypertension and cancer, which are becoming more common, also require a higher cost of care and lifelong treatment, according to a report by Khazanah Research Institute in 2015.

“Malaysia National Health Accounts’s preliminary estimates show that total healthcare expenditure reached RM52.6 billion in 2015. The substantial rise of 4.5-fold over the period of 2000 to 2015 suggests that rising healthcare costs are unavoidable and will continue to escalate in the future,” Lee says.

Malaysians will have to ensure that they have enough savings to tide them over in longer retirement years. According to DOSM, the average life expectancy in Malaysia in 2017 was about 74.8 years.

“Malaysians are generally not financially prepared to ensure their quality of life is kept at a satisfactory level when they retire and exit the workforce. Their retirement savings may not be enough to last the rest of their lives, as the increasing healthcare cost and elderly-related expenses would eat into their life savings,” Lee says.

 

Invest in human capital to offset ageing impact

Economic growth can be driven by an increase in labour force participation or labour productivity. To counter the effects of an ageing nation, there should be an increase in the labour force participation rate. This can be done by extending the retirement age, bringing in migrant workers or creating a more inclusive job market.

One of the common solutions for ageing nations is to increase the female labour participation rate. According to Moody’s, across Asia-Pacific emerging markets, a 50% reduction in the gap in female labour force participation will offset the labour force growth slowdown by between 0% and 1.7% from 2016 to 2020. Introducing skills training for women, parental leave, childcare and flexible workplaces are common steps that some countries in the region have implemented to this end.

“In Malaysia’s case, there is scope to improve the labour force participation rate, which is currently a little over 68%, when the OECD (Organisation for Economic Cooperation and Development) total is 71.7%. Efforts to improve productivity are already a policy thrust. These efforts would be further strengthened by technological innovation or increasing adoption of robotics, in turn partially offsetting demographic pressures on growth,” Anushka says.

The Unicef report points out that Malaysia currently has the lowest female labour force participation in the region and in comparison with countries at the same level of economic development.

Utilising technological innovation is another solution to improve productivity in an ageing nation. The transition away from a labour-intensive economy will require workers to have higher-order skill sets and utilise modern technology in their jobs. The quality of education should be improved to match available skill sets with the requirements of the modern labour market, and lifelong training should be offered to the ageing workforce, according to Unicef.

“The human resource departments of organisations should adopt appropriate solutions and mechanisms to provide the necessary training support as well as continued learning during the transition period. This helps to ensure that the knowledge and experience of older workers are not lost to the organisations. This calls for a rethinking of retirement norms beyond the legal retirement age of 60 and encouraging them to work longer,” Lee says.

Adli suggests that policymakers offer the private sector incentives to provide their employees with pensions and healthcare plans.

In terms of government policy, some ageing nations have lowered tax rates to increase the incentive to work longer. For instance, Australia and Denmark have introduced earnings tax credits for older workers, according to Deloitte. Others have extended the retirement age.

As for Malaysians, the government will have to actively support the older workers to ensure that they remain employable and have sufficient savings, Lee says. This could be done by making employers increase their Employees Provident Fund (EPF) contribution for elder employees.

“The EPF could consider giving an additional dividend, for instance, 1% on the first RM50,000 of the accumulated EPF savings for employees aged 50 and above. The employers may pioneer a flexible private retirement scheme, which allows employees to reduce their working hours and claim part of their pension while continuing to accrue further pension entitlements for when they fully retire,” Lee says. He adds that there should be changes to health insurance and critical illness policies to cover higher risks as people age.

Adli, on the other hand, suggests liberalising the labour force to the Asean market gradually.

“By liberalising the labour force gradually, we will have enough highly skilled workers to compensate for the reduction in the labour force when the population ages,” he says.

 

No rest after retirement

Retraining mature workers and extending the retirement age can solve the worker shortage problem, remarks Ryan Carroll, country director of Randstad Malaysia, a global human resources service provider. Doing so will also provide retirees with a source of income.

“In many countries, we see an ageing population and a lack of people who meet job requirements. You also have a willingness of mature workers to stay in employment or re-enter the workforce,” Carroll says. While one group of mature workers are embracing retirement, others want to continue working because they have not saved enough.

Mature workers are defined by Randstad as anybody above the age of 40 who is looking for a job or is currently employed. Staying employable, however, may require upskilling on the part of mature workers.

According to the latest Randstad Workmonitor, a quarterly survey on work trends, more than half of the employees around the world believe mature workers can only remain employable if there is sufficient support from the government (62.7%) or employers (74.8%). Support could come in the form of development and training programmes for mature workers.

The expectation is even higher in Asia, where 80.9% hope to depend on the government and 85.5% depend on employers to stay employable. Most help is needed for workers in Malaysia, who have the lowest expectation in the region of support from the government (76.1%) and employers (80.8%).

“In Asia, employees are more likely to stay quiet about some of the challenges they are facing and there is less awareness of the support out there for them to latch on to. We also see in Asia a higher trust in the government, therefore mature workers are more likely to lean on the government for support as opposed to the private sector or non-profit organisations,” Carroll says. In Malaysia, this might be partly due to the low visibility of training programmes available for mature workers.

“We were looking for what is out there in Malaysia in terms of training opportunities, but all roads seem to lead to Singapore, so there wasn’t a great deal out there available in Malaysia. If there are schemes and programmes, they are probably not getting enough air time. They are probably not as visible as they could be in other countries,” Carroll says.

From his observation, in some Western countries, such as the UK and the US, there are obvious channels for mature workers if they want to remain employable after retirement. There are training opportunities offered by the private sector, educational institutions and non-profit organisations.

“Non-profit organisations can [provide] support with training, counselling, writing or coaching on how to do an interview. It’s not just about making sure you’ve got the skills but a lot of non-profits in Western countries address the confidence to be able to get yourself back into the workforce,” Carroll says.

“We need to raise the fact that mature employees play an important part in the demographics of a working population. It hasn’t probably been addressed with that level of focus just yet. [Right now] it’s a lot of talk about the millennials and how do we adapt to bring the millennials into the workforce. But in fact, Malaysia is an ageing population and we have a lot of jobs that aren’t being filled.”

Apart from training, companies have to also be willing to hire mature workers. Some of the issues that mature workers may face are the company’s bias against hiring them, Carroll says, and this might be because mature candidates command higher salaries and thus are seen to be more expensive to hire.

In this case, the government could introduce tax incentives to entice employers to take on mature workers. The raising of the retirement age to 67 in Singapore last year and the inclusion of age discrimination in the UK’s Equality Act are two other solutions Carroll takes note of.

“In Hong Kong, there is the Hong Kong Society for the Aged. It has hosted a number of job and career expos exclusively for mature workers to bridge the gap and give a bit more exposure to companies that are willing to employ them. It’s probably a more comfortable environment for a mature candidate as opposed to queuing up next to hundreds of graduates at your regular job expos.”

On the other hand, mature workers also have to understand they might not get the same deal as they would when they were younger.

“Employees also need to take up some responsibility and understand perhaps they’re not seen as an employee for the next 15 to 20 years, but they can still add value in the short term. So they should be open to short-term contract type of engagement instead of just looking for permanent roles,” Carroll says.

 

Keeping retirees active and healthy

One organisation that is trying to ensure that the ageing population upskills itself is the University of the Third Age (U3A) under Universiti Putra Malaysia (UPM).

The organisation offers many subjects in culture, exercise, arts and skills training for retirees. For RM120, participants can take three subjects with 12 hours’ worth of classes that will be spread out throughout the year. The classes are held in UPM and other locations.

“Our intention is to create independent seniors. Now the mindset is when you get old, you take care of your grandchildren. They forget that they will be living longer now. Children also no longer have the means to look after their parents, which is why independence is very important. We give them education now and we give them possibilities of getting more income,” says U3A president Shuib Dahaban.

Since the programme started in 2007, the number of enquiries about it has grown, says Shuib.

“The interest is phenomenal. This is actually one of the greatest challenges that U3A must face. The product is good for our customers but our present capacity and capability have limited our progress.”

The government included U3A in its 11th five-year plan from 2016 to 2020, with goals to spread the programme throughout the country.

“I hope the government will implement this plan soon. U3A members are looking forward to being part of this noble design to equip our older people with the right knowledge, skills and substance to fit the future of an aged nation that Malaysia will soon become,” Shuib says.

The classes are social in nature, which he says is important for the elderly so they do not feel lonely and fall ill. Some of the classes offer nutrition tips, money management lessons and exercise routines. Ballroom dancing, for instance, is a popular class that combines art and exercise. Other classes equip participants with new skills such as cooking, sewing and batik painting. “In the entrepreneurial section, quite a number of our graduates opened up their own outlets and bakeries,” Shuib says.

He is also working on improving the facilities for the ageing population, which he says are lacking. One thing he noticed after being consulted for opinions on creating aged-friendly facilities is that there are great business opportunities for companies creating solutions for the aged in Malaysia.

Moving forward, Shuib hopes U3A can obtain support and funding from other stakeholders such as universities and community colleges to promote the idea of lifelong learning.

“We are making the country better. If you have more than 15% of people who are in this particular section (ageing population), you have to open more hospitals, your medical facilities have to increase, all the infrastructure has got to be rebuilt and transformed into an aged-friendly place. Now we are training a small group of people and this group will go back home and start talking with members of the community [about healthy and active living],” he says.