An ageing population is a major economic problem to a number of developed countries. It is not ageing itself that is the issue or even slower economic growth. An aged society usually has an advanced and rich economy. Further economic growth does not mean much if the society is already extremely rich. The problem comes when there is a social welfare system that depends on the young to support it. With an aged society, the system would have to distribute its resources to the aged majority with the young minority supporting contributing to the system.

Malaysia does not the demographic problem yet because the country has a very young population. The median age is approximately 26 years old. In fact, Malaysia’s baby boomer generation has just entered or just about to enter the Malaysian labor market. With a high proportion of productive population, Malaysia is set to grow in a meaningful way in the long run.

Population growth, specifically labor force growth, is important to the sustainability of a social welfare system, including the Employees Provident Fund. The EPF is a retirement fund for those working in the private sector in Malaysia. It is not a comprehensive welfare system but it is still susceptible to demographic changes nonetheless.

At the moment, words on the streets have it that the EPF has more money than it can invest in Malaysia: there are not enough Malaysian sovereign bonds for EPF to buy (this probably leads to a conclusion that I dislike: the Malaysian government can comfortably raise more debt, especially in this environment of low yield without much economic repercussion). That is a testament of how favorable Malaysian demographics is at the moment.

This is the latest population profile for Malaysia from the Department of Statistics:[1]

You can see the baby boomer generation in the lower part of the chart.

What may be of concern — some far distant future, probably in 30, 40 or even 50 years — is when the Malaysian baby boomers begin transitioning into their golden years. I give the 30 to 50 years range because the current boomers are below the age of 30; remember the population median is 26. Assuming that they will retire at 60 years, you will get an estimate. My guesstimate is somewhere between 30 and 50.

Already the 0-4 years old, 5-9 years old and 10-14 years old cohorts are individually smaller than the 15-19 year old and 20-24 years old cohorts. The profile of a boom is clearer when one compares the population profile in year 2000 against that in year 2010.

There is still possibility that the baby boomers may have more children to produce yet another population boom sometime in the future. Yet, with rising income which tends to lead to smaller families everywhere in the world, I doubt it. And average Malaysian income is set to rise (at least in the next few decades notwithstanding business cycle) — please, not because of Pemandu — it’s the population boom dividend!

I may be wrong still — we will see that within the next 40 years’ time — but I think we are seeing our only population boom. If I am proven right, then the EPF might have trouble servicing the retirees in 40 or 50 years’ time, unless Malaysia suddenly develops a greater appetite for immigration.

The problem of EPF will be the least of our concern if Malaysia institutes the so-called 1Care scheme which aims at creating a more comprehensive healthcare system, which includes universal insurance coverage.

The problem however is beyond the horizon of the current leadership, in both Barisan Nasional and Pakatan Rakyat, judging by the populism of the day.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1]Population and Housing Cencus, Malaysia 2010. Department of Statistics.

7 Responses to “[2634] Any Malaysian welfare system may encounter some problems 30 to 50 years from now”

  1. on 28 Nov 2012 at 16:12 hishamh

    I doubt EPF will run into problems – it is a defined contribution scheme not a defined benefit scheme. You only get out what you put in, unlike in most pension schemes in the West which are mostly defined benefit (demographics is one of the reasons why the US shifted to 401k).

    The biggest challenge I see with the Malaysian system as it currently stands, is really like in the US, healthcare. This is direct funded by the government, not by public insurance, so the demographic impact will largely be felt in higher taxation rather than unfunded contingent liabilities. But its still a long term threat nevertheless.

  2. on 29 Nov 2012 at 09:06 Hafiz Noor Shams

    True on defined contributions, but I’m also thinking that that’s true as long as EPF suffers no losses. The truth condition for that is looser in real terms although I’m aware that EPF returns in both nominal and real terms have been positive and probably will continue to be so in the long run as long as there is no crisis.

    At the same time, I’m thinking about funds size and its effect on returns and against its operations. By the time the baby boomers are at the height of their career, the size of funds would be so big that EPF will have to expand considerably. That means higher operational cost. By retirement time, the size of funds will shrink and so less earnings, there might be some issue with operational cost (which gonna be sticky).

    I think the more important point is that as EPF shrinks during boomers’ retirement, they will have to withdraw from the equity market and that will create a downward pressure on their returns as well on the overall market. With such a large fund, there ought be to some price impact on the equity market with all else being constant.

    Still, I admit, hard to think EPF getting negative returns.

    Finally, I was also thinking about the size of funds and returns, trying to draw parallel from findings about companies size and their performance. I did some readings about fund size-performance yesterday, and I thought there were a positive correlation. Apparently, that’s still under debate.

    In any case, yea, this is a very long term problem although still in our life-time (hopefully?).

  3. on 29 Nov 2012 at 11:39 hishamh

    I don’t know that increasing fund size necessarily means increasing operational costs – fund management isn’t exactly like manufacturing. There’s greater opportunities for economies of scale in services. One individual fund manager could manage RM100 million just as easily as RM1 million. The problem with larger funds is more on the returns side (less likelihood of alpha) than on the cost side.

    More to the point, EPF currently has a substantial surplus of assets over liabilities due to contributors – I think its something on the order of 40% or so. So there’s a considerable buffer before they have to drop returns. In any case, EPF is only legally required to return 2.5% to contributors.

    One other thing: think about what happens when contributors start withdraw funds from EPF. I don’t think it goes into FD, as they have to think about using those savings to fund their retirement. In practice, I suspect it will end up being just a change in the identity of the fund manager, and not a net withdrawal from the market.

  4. on 09 Dec 2012 at 11:44 moo_t

    When hishamh say fund size doesn’t matter to fund manager, I just ROFL.

    In real world, the REAL INCOME of 90%+ “fund manager” is not “adding value”, but get commission cut by trade frequently. The remaining, are relying on “bonuses”, which create many rogues merchant/fund manager that wipe out billions of fund that they take care.

    So if the fund management world take “prudent” way mentioned by the blogger, expansion traps is unavoidable.

  5. on 09 Dec 2012 at 23:03 hishamh


    You seem to be confusing a fund manager with something else. Fund managers don’t earn commissions from trading, they have to pay brokerage fees and commissions just like any other investor. Most funds earn their income from management fees and service charges, not trading – any proceeds go directly to the investor. Hedge funds usually also take a cut of any profits made from trading, but they take on greater risk.

  6. on 11 Dec 2012 at 14:54 HY

    Interesting topic. I read somewhere most fund manager find it tough to manage a larger size fund compare with a smaller one, i think EPF is deemed large. Thus the problem may not limited to operational cost. Another odd practice, why the government allow the withdrawal from EPF to invest in mutual fund? What is the the logic and justification?

  7. on 11 Dec 2012 at 16:16 hishamh


    What you’re referring to is known in the investment community as “alpha” – the excess return that a fund manager gains from superior investment strategy or skill. The larger the fund size however (in relative terms to the market), alpha is harder to gain as the universe of fundamentally under-valued securities or arbitrage opportunities becomes smaller, and as the actions of the fund manager will in itself reduce these opportunities both for him/herself and for others. Therefore as the fund size increases, the return on investment will tend towards the average market return (AKA “beta”).

    As for the unit trust withdrawals, its a strategy by the Securities Commission to help develop the domestic unit trust industry. The release of funds from EPF would increase the available liquidity for smaller fund managers, as well as introduce greater options for investors to diversify their investment risks and returns. For example, if you’re younger and willing to take on more risk, you could take some portion of your EPF contributions and invest in a higher yielding (but riskier) equity growth fund or commodity fund. It’s all about choice.

    From EPF’s point of view, this is also desirable as it reduces the pressure on them to find solid investments to put contributors money into – last year EPF contribution inflows averaged about RM1 billion a month. There’s just not enough good quality liquid investments to go around, hence EPF’s venture overseas and into property.

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