‘Ageing Malaysia needs stronger fiscal planning’  

SINGAPORE (MNTV) – By 2045, the old-age ratio is expected to double in Malaysia, and by 2060, it is projected to become a post-aged society, with 14.8 % or more of the population aged 65 and above, say AMRO Asia experts.

Malaysia became an aging society in 2021, with more than 7 % of the population aged 65 and above and the demographic shift is accelerating, said Dek Joe Sum and Prof Norma Mansor in a blog. 

They said that as life expectancy increases and birth rates decline, the demand for healthcare and social protection is rising. While considerable attention has been given to expanding the coverage and adequacy of the social protection and health systems, far less has been devoted to strengthening the fiscal framework needed to ensure their long-term sustainability.

Managing public spending on social protection and health presents considerable challenges due to several factors, the authors said.

Basic income security and access to medical services are widely regarded as fundamental rights. This makes reform efforts politically and socially sensitive, as they often face strong public resistance. Such fiscal rigidity limits the government’s ability to reprioritize spending, especially as the aging population exerts increasing and sustained upward pressure on public finance. 

Malaysia’s predominantly tax-financed public healthcare system has faced persistent resistance to reform, despite growing concerns about its long-term sustainability. 

In addition, rising social protection and health spending can further constrain fiscal flexibility, especially when programs are embedded in legislation. These programs are more difficult to adjust compared to discretionary spending. While this constraint is less pronounced in Malaysia at present – since major tax-financed social protection and health schemes are not legislated – this could change as the country moves toward institutionalizing these schemes, in line with global best practices. 

Fiscal rigidity, gaps in the system

Fiscal rigidity may also increase with the introduction of new initiatives, such as the widely proposed social pension designed to address the countries’ retirement savings gap.

These challenges are not unique to Malaysia, the authors said and added that the fiscal impacts vary depending on how well the programs are designed, financed, and managed. Given that such expenditures are typically long-term and non-discretionary, robust fiscal planning tools – such as medium-term expenditure frameworks and sustainability assessments – are critical. 

They said a sound public financial management (PFM) framework that integrates future health and social protection spending into a forward-looking fiscal strategy is essential to maintaining fiscal discipline while meeting rising fiscal commitments.

They added that their study identified several gaps in Malaysia’s PFM framework that could undermine the long-term fiscal resilience of social protection and health systems.

Although the government publishes a Medium-Term Fiscal Framework (MTFF) as part of the annual budget, it is presented only at an aggregate level, covering total revenues and expenditures over a three-year horizon. 

The MTFF lacks sector-specific projections and does not include estimates of future spending needs for areas like social protection and healthcare.  It also does not account for medium- to long-term resource requirements associated with population aging or other emerging social risks. 

While more detailed projections may exist internally, the absence of publicly disclosed sectoral information limits the MTFF’s role as a transparent forward-looking planning tool.

Malaysia’s fully funded, defined-contribution Employees Provident Fund (EPF) system has helped contain fiscal risks often associated with pay-as-you-go defined-benefit schemes. 

However, retirement adequacy remains a key concern. Only 36% of active formal EPF members met the basic savings target of 240,000 Malaysian ringgit ($57,600) by age 55, the minimum level required for a dignified retirement. A sizable portion of the workforce falls short of this threshold, raising the prospect of increased reliance on tax-financed support in the future. 

Furthermore, the EPF scheme permits multiple pre-retirement withdrawals and full withdrawal at age 55, both of which may contribute to insufficient retirement savings. Addressing these pressures through more strategic policy development would enhance preparedness and resilience.

Malaysia has yet to endorse a comprehensive national aging strategy to guide an integrated, cross-sectoral response to population aging. A coherent framework would provide the foundation for anticipating and managing future fiscal demands of social protection and health systems. Discussions to develop such a blueprint are encouraging and should incorporate reforms aimed at supporting long-term fiscal sustainability and alignment with social policy goals.

They said that Malaysia should strengthen its PFM framework by systematically integrating social protection and health spending into a medium- and long-term fiscal strategy. This includes: 

1. Enhancing the MTFF to include sector-specific expenditure forecasts linked to demographic trends, actuarial assessments, and evolving policy objectives
2. Aligning the MTFF with broader national development strategies such as the Malaysia Plan, and potentially with a future National Aging Strategy, would reinforce its critical role as a strategic tool for fiscal planning
3. Institutionalizing analytical tools like demographic projections, fiscal sustainability assessment, and cost-benefit analyses to guide decisions on program expansion, design, and reform, such as adjustments to retirement age or contribution rates.