My Say: Social protection for all, Malaysia?

This article first appeared in Forum, The Edge Malaysia Weekly, on October 11, 2021 - October 17, 2021.
My Say: Social protection for all, Malaysia?
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Various gaps in social protection and equality factors have long been felt by the vulnerable precariat as Malaysian leaders continue to remind the public of the nation’s imminent achievement of developed or, more recently, high-income country status.

At the moment, however, barely half the Malaysian labour force is eligible for pensions or covered by the Employees Provident Fund (EPF). Even before recent pandemic-induced withdrawals, more than four-fifths of EPF members would not have received enough after retiring to put them over the poverty line!

Many Malaysians struggling to cope with pandemic-induced loss of livelihoods and incomes desperately yearn for reliable relief to cope with the crisis. Many might associate this with more comprehensive social protection. However, even this alone could not fully address the unpredictable scale and diverse impacts of the pandemic.

Khazanah Research Institute’s (KRI) report, titled “Building Resilience: Towards Inclusive Social Protection in Malaysia” and launched on Sept 23 — which emphasises advocacy of social protection over the life-cycle, from childhood to working adulthood and then aged retirement — is welcome. The report persuasively calls for major reforms to enhance social protection in Malaysia. It advocates an inclusive “social protection floor”, leaving no one behind.

As the government considers relief and recovery measures, notably for Covid-19 in the near term, it must also commit to reforming “forward for the future”, instead of concentrating on the Davos slogan of “building back better”.  As former British prime minister Winston Churchill urged, one must “never let a good crisis go to waste”.

The KRI report reiterates the need for universal provisioning of key social services and income security programmes. It also stresses economic empowerment policies promoting productive employment to ensure decent work and living wages.

Missing targets

Welfare policies in Malaysia claim to help the deserving poor, supposedly those living below the poverty line. Many different subsidies have been introduced to help such groups, for example, typically rural producers and communities.

Over the decades, disbursing subsidies became key to patronage to secure political hegemony for the ruling party and politicians. Satraps and their lackeys in local communities secured often-significant incomes from such patron-client arrangements. Many augment such clientelism with additional resources from other sources.

The official (absolute) poverty rate in 2019 was 5.6%, with the average monthly household poverty line income (PLI) at RM2,208. The official “relative poverty” line of RM2,936 — half the national median income — is RM728 higher.

This raises the population share of those deemed poor to 16.9% — by almost a sixth — suggesting a significant share of the population are living just above the PLI. As many are self-employed or have “contract” employment, their livelihoods are precarious.

An earlier 2019 KRI report suggested that almost a fifth of Malaysian households do not get enough to meet their basic needs. An additional half of the population did not earn enough to have significant savings. This means only the top 30% had some savings, although it is unclear how well they have fared during the pandemic’s disruptions.

Malaysian households have also been characterised by high levels of “financial inclusion”. Average household debt exceeded 80% of income before the pandemic. Of course, such official estimates do not include usurious informal debt involving “ah long” and others.

Poor benefits for the poor

Thus, while most households were not officially deemed poor, their situations have undoubtedly been quite vulnerable, if not precarious. Without adequate social protection, few could cope with the pandemic’s livelihood and income shocks.

The banks’ role in intermediating between savings and loans deserves greater attention. With household debt so significant, it is unclear how well banks finance productive investments — for example, the much-touted but underfinanced small and medium industries.

Over the last decade, official welfare policies have broadened from the poor to the bottom 40% (B40) of the income distribution. Social assistance schemes rose from 95 in 2012 to 137 in 2020, but spending fell from RM45.5 billion to RM25.5 billion.

Existing price subsidies for goods once deemed essential, including sugar, have been largely withdrawn, except for petroleum products. Instead, cash handouts are given to those deemed B40, gaining broad political support for the ruling regime.

Other experiences suggest efficient public provisioning in kind — for example, safe and nutritious meals in schools and pre-school facilities — deliver significantly superior outcomes.

All over the world, poverty targeting suffers from errors of omission and exclusion. Many who are deserving are left out, while others considered undeserving are selected. Administrative targeting costs are considerable, but rarely fully considered.

Many different data sets relevant to social protection are spread among many ministries and other state institutions. Thus, poor government and other data harmonisation has undermined better social protection coverage and planning.

Social protection floor

Invoking established multilateral conventions, the KRI report seeks to establish a social protection floor for all, based on a life-cycle approach for social security against well-known risks. It makes several recommendations for needed government investments to ensure a fairer society for Keluarga Malaysia.

These include a universal child benefit (UCB) to ensure children’s cognitive and physical development is not compromised. Improving their life prospects not only equalises opportunities for all children but also brings longer-term economic and other benefits.

Broadening mandatory coverage of extant social insurance schemes to all in the labour force is its second major prong. The self-employed, contract labour and others in informal employment are currently excluded from these schemes. While some may not be able to work because of disabilities, society needs to better value care work, including services not paid for. Existing social insurance schemes were never designed for non-standard employment.

As savings for old age for most in Malaysia have been grossly inadequate, allowing EPF account withdrawals to cope with the pandemic has further eroded such personal provisioning for old age. 

Widespread savings inadequacy requires inclusive arrangements to ensure income security for the elderly to live out their lives in dignity after retirement. The report proposes a social insurance pension (SIP) for the elderly to provide basic income security for old age.

Expanding social security

To support these major thrusts, the KRI team makes several recommendations, keeping feasibility and efficacy in mind. Recognising the pandemic’s fiscal demands, more time should be allowed to ensure adequate financing to build institutional capacities and capabilities.

From the outset, the proposed UCB would cover children until age 12. It would then rise yearly to achieve broader coverage to cover teenagers before they come of age under Malaysian law.

The report proposes expanding social security to cover all Malaysians of working age. It recommends meeting minimal standards first before improving coverage over the longer term. It also recommends beginning SIP for income security for the aged from 2025 or soon thereafter, after the UCB covers all children.

If the SIP is delayed, government investments required for child benefit and working-age schemes are around RM16.4 billion in the first year. They expect savings from consolidating existing programmes to lower needed additional annual expenditure to RM2.4 billion.

To ensure fiscally, economically and socially sustainable social protection, they propose supplementing employer and employee social security insurance contributions with government funds. In effect, it envisages government contributions for the unpaid (for example, homemakers), unemployed and workers in informal and “non-standard” employment.

The report proposes establishing a national social security institution with a unified registry to expand existing social institutions’ role in managing more comprehensive social security programme, with no one left out.

In sum, the report calls for comprehensive social protection for at least minimal provisioning to cope with various risks over the life cycle. The recommendations incorporate social solidarity principles of risk pooling and collective funding.

Besides averting poverty, it also seeks to limit precarity by addressing socioeconomic shocks, other vulnerabilities and related risks. Comprehensive social protection should induce a virtuous cycle, strengthen the social contract, foster trust in government and enhance government revenue.

More targeted social assistance may still be needed, notably for those coping with disabilities. Charitable and other organisations could contribute to achieving higher social and cultural aspirations. But their vision of social protection involves institutionalising a basic floor or minimum, not relying on charity or shifting short-term political whims.

Building on a legacy

The report acknowledges that, with existing institutions, Malaysia has achieved much. It appreciates the role of contributory social insurance in managing life-cycle risks for formal sector employees, while noting coverage gaps. It notes that the EPF and Socso (Social Security Organisation) have speedily provided relief during the pandemic.

The EPF was set up in 1951 by the British as part of a package of reforms to win the hearts and minds of the locals but made little headway during the first three years of the Emergency from mid-1948. Wanting to spend as little as possible on its colony, the British-conceived EPF depended on employer and employee contributions, with no state funding. But the scheme left out the vast majority then,  who were not in formal employment.

Contributing is legally mandatory for all (including part-time) employees in the private sector, including state-owned enterprise employees. Yet, many do not participate, especially those with contracts “for”, rather than “of”, labour — popularly referred to as contract workers. At most, only two-fifths of the labour force were thus covered.

Later, as prime minister Tun Abdul Razak sought to recraft the Malaysian social contract, following the May 1969 racial riots, he promoted the Rukunegara and the New Economic Policy. The NEP sought to end poverty and reduce inter-ethnic disparities to achieve “national unity”, but it did not pay much attention to special challenges faced by Sabah and Sarawak.

A crucial part of his vision was the establishment of Socso to provide social protection in nine areas. Mindful of constraints then, it began in 1972 with two, with the rest to be realised later. Sadly, his ambition died with him, and no other national leader has pursued it since.

This report takes up the challenge laid down almost half a century ago by Tun Razak. It makes a compelling case that so much more must be done as the nation aspires to be a high-income developed nation. After all, a nation is judged not only by the lifestyle of the elite but also by how it treats the poor and lower-income groups.


Jomo Kwame Sundaram, a former economics professor, was United Nations assistant secretary-general for economic development. He is the recipient of the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought. He is also senior adviser to KRI. 

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