Pressure to raise early taxes
PETALING JAYA: Pressure to raise taxes to improve the government’s fiscal position over the medium term may be inevitable as Malaysian businesses face depleting pension savings.
Economists and analysts agree that a shortfall in retirement savings could also affect medium to long-term consumption trends, which could impact economic growth.
RAM Rating Services Bhd’s senior economist, Jason Fong, told StarBiz that without meaningful and continued health and social reforms, the lack of sufficient retirement savings will limit government fiscal space and affect negatively on consumption habits in the medium term.
To improve the government’s fiscal position, it should raise taxes to bail out its coffers, he added. According to Fong, government revenue over the years has been on a downward trend (see chart).
“Rising social and healthcare costs will have to be borne by the government as more and more people retire with insufficient savings.
“For example, the demand for public-sector-led geriatric health care is expected to increase with the number of poor retirees.”
Fong said this would divert Malaysia’s already limited fiscal resources from other key development goals.
“Currently, the capacity and financing of the public health sector has not necessarily kept pace with the country’s progressive demographic evolution over the years.
“Compared to the global average, Malaysia’s total health expenditure as a percentage of gross domestic product (GDP) is underfunded,” he noted.
Regarding retirement savings, Yeah Kim Leng, professor of economics at Sunway University, said three Employees Provident Fund (EPF) assistance programs have been used by some groups so far. and that the latest scheme of up to RM10,000 was allowed for members to withdraw from EPF. Account.
“In the long term, won’t this trigger a retirement savings crisis for the country? He asked.
To care for poor elderly people, Yeah said it was inevitable that the government would have to increase social and welfare spending.
Without an increase in government revenue, Yeah said he would either have to cut spending on other areas such as education, health and defense or increase borrowing which would further increase the already high debt-to-GDP ratio.
He said the government should accelerate tax reforms to diversify revenue sources and broaden the tax base and simultaneously improve spending efficiency and eliminate leakage and waste.
“The various digitization initiatives aimed at transforming the delivery of government services are a step in the right direction to increase cost savings and improve administrative efficiency.
“This will in turn generate positive spillover effects on the economy in the form of reduced regulatory burden and a more attractive investment environment,” Yeah noted.
In terms of fiscal impact, OCBC Bank economist Wellian Wiranto said that in the short term, rounds of ETH withdrawals could implicitly contribute to higher debt servicing costs by the government, given that EPF is an important anchor investor of the Malaysian government. securities market (MGS).
Apart from the cost of servicing short-term debt, he said the government’s social safety net may need to expand further.
This, he said, takes into account that more Malaysians would need help in the future to have a respectable pension, now that their personal EPF accounts are depleted.
“This comes at a time when there are other significant fiscal challenges such as an already high debt-to-GDP ratio, revenue dependence on oil, higher spending to tackle medium-term issues such as mitigation climate change, etc.
“To some extent, if the Malaysian economy can generate a sustainable growth recovery in the coming years, these fiscal challenges can be somewhat mitigated. But, in such an uncertain global environment, it will take a lot of stars to align,” Wellian said.
RAM’s head of corporate ratings, Thong Mun Wai, said with the population over 65 set to double over the next 20 years, there is an urgent need for the government to implement policies to enable and encourage people to save more, as well as to help them. rebuild their depleted retirement savings.
According to the latest data from EPF, only 20-30% of its members have reached basic savings thresholds corresponding to their age. There are also 6.1 million contributors who have less than RM10,000 in their EPF accounts.
On whether inadequate retirement savings can lead the government to face a higher debt-to-GDP ratio, Ram’s Thong said the causal link between inadequate retirement savings and government debt-to-GDP ratio n is not certain, because the debt cannot be used to finance the operating expenses of the government, according to the current budgetary rules.
“The government may need to raise taxes in the future to meet the rising social and public health care costs of an aging population.
“In turn, the tax burden will fall on a decreasing proportion of the working-age population, which is unsustainable if productivity and income levels remain stagnant,” he said.
Economist Shankaran Nambiar believes that the retirement savings gap could worsen as the nation moves towards an aging society and life expectancy increases.
“Not only will we have to consider increasing the retirement age, but we will also have to think about rejecting age as a criterion for not recruiting seniors.
“Safety nets of all kinds will have to be seriously considered. Some of the policies that need urgent attention include health care financing, unemployment insurance, and natural disaster insurance.
Shankaran, who is the head of research at the Malaysian Institute of Economic Research, said public health facilities will need to be expanded.
“Along with these strategies, there needs to be more awareness about financial planning and the need to save for retirement,” he said.
Carmelo Ferlito, CEO of the Center for Market Education and senior fellow at the Institute for Democracy and Economic Affairs (Ideas), said a lack of retirement savings could cause household debt-to-GDP ratios to rise.
He said the government’s main concern should be tackling high household debt rather than granting new debt to encourage home ownership.
“A nation with high household indebtedness and a lack of savings (coupled with a high marginal propensity to consume and low financial literacy) is a fragile nation, which will struggle to navigate through economic cyclical swings.
“First, we need a sound economic strategy capable of generating real growth, meaning not GDP growth driven by consumption and government spending, but by private investment. Second, more effort should be put into financial literacy to educate households to be more mindful of how they spend their money,” Ferlito said.
The household debt-to-GDP ratio fell to 89% at the end of 2021, from a record high of 93.2% a year ago.