Malaysia’s falling birth rates, ageing population to strain the economy

[KUALA LUMPUR] Young Malaysians are having fewer children than the generations before them. Economists warn that if this trend plays out concurrently with rising life expectancy, the country’s healthcare and pension systems, and the economy on the whole, will come under strain.

Malaysia’s fertility rate – the average number of births per woman – plummeted from 4.9 in 1970 to just 1.6 in 2023, a span of just over 50 years. The 1.6 figure, on a par with that of the United States, is a record low in Malaysia, though it is still higher than that in many other Asian countries. The fertility rate in China is 1.1; in South Korea, it is 0.7 – the world’s lowest.

Low birthrates are not unique to Malaysia. Many of its South-east Asian peers are also grappling with such a dilemma: the figure is 0.97 in Singapore, and 1.1 in Thailand.

According to the Organisation for Economic Co-operation and Development (OECD), fertility rates currently average 1.59 across OECD countries – below the ideal rate of 2.1 children per woman, necessary for maintaining a stable population size.

With Malaysia’s minimum retirement age remaining at 60, and average life expectancy going up, economists warn that a lower fertility rate will shrink the country’s population and workforce.

Yeah Kim Leng, an economics professor at Sunway University, highlighted that the country’s dependency ratio, a measure comparing the number of young and elderly dependents with the working-age population, is projected to rise gradually.

A higher dependency ratio indicates a larger proportion of non-working dependents, putting pressure on the working population to support them.

“Consequently, the country is facing a shrinking demographic dividend, raising concerns that the population is ‘getting old before becoming rich’,” he told The Business Times.

Data from the Employees Provident Fund (EPF) shows that the country’s dependency ratio is expected to rise from 44 to 45 between 2020 and 2040, and hit 51 in 2050 and beyond.

EPF’s chief executive officer, Ahmad Zulqarnain Onn, stressed the urgency of implementing interventions to address the changing demographics, and warned that a failure to do so could affect socio-economic development, leading to continued recession and poverty in old age.

The average life expectancy of Malaysians rose from 63 years in 1970 to about 74.8 years in 2022. However, retirement age policies have not been adjusted accordingly, resulting in longer retirement periods for individuals than 70 years ago.

A concerning issue is the inadequacy of retirement savings among Malaysians. Only a third of active EPF members had accumulated RM240,000 (S$68,320) in their EPF savings by the end of 2023. This is a basic savings amount needed to sustain a monthly expenditure of RM1,000 for 20 years.

In Singapore, where there is also a low fertility rate, 70 per cent of active Central Provident Fund members had savings above the basic retirement sum of S$96,000 in 2022.

Mohd Afzanizam Abdul Rashid, chief economist at Bank Muamalat, raised concerns about the future economic implications of declining fertility rates.

He emphasised that the fiscal position could be compromised with the fall in number of taxpayers over time, even as spending on healthcare and infrastructure rises to meet the needs of an ageing population.

A projected decline of 5.5 per cent in gross domestic product (GDP) growth for every 10 per cent increase in the number of senior citizens underscores the economic challenges ahead; added to this is a potential 9 per cent reduction in income tax revenue for every 10-percentage-point rise in the old-age dependency ratio.

Moreover, health spending is anticipated to surge by 33 per cent by 2030 due to age-related health issues.

Dr Yeah noted that declining fertility and population growth are typical in the development process of most countries as they make the transition from developing to developed nation.

Malaysia officially became an “ageing society” in 2020, when its aged population (defined as those aged 65 and above) crossed the 7 per cent threshold of the total population.

The aged population is expected to hit 10 per cent by 2030 and 15 per cent by 2045, marking Malaysia as an aged society by then.

This transition underscores the importance of immediate planning and policy adjustments to prevent an old-age poverty crisis in the coming decades.

Given the rising incidence of inadequate retirement savings, especially after the Covid-19 pandemic, Dr Yeah suggested re-evaluating the current mandatory retirement age of 60, to align it with policies in developed economies with ageing populations and rising pension liabilities.

He suggested that policymakers could also consider establishing minimum income floors, including monthly income transfers to retirees and the aged population, as part of post-pandemic economic restructuring efforts, he added.

Dr Afzanizam emphasised that it is equally important to tackle the low fertility rate issue by promoting family-building alongside basic infrastructure, such as daycare facilities and development of childcare talent, to ensure a sustainable population growth.