Malaysia: Weighing the Tradeoffs between Social Pensions and

Social Assistance

Mark Dorfman

The World Bank

Symposium on Social Pensions

vs. Social Assistance

Slide 2 April 3, 2013

Organization

1. Demographic profile

2. Co-residency

3. Work profile

4. Poverty profile by age & household status

5. Social pensions & social assistance programs

6. Policy options considered

Slide 3 April 3, 2013

1. A rapidly aging society

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2010 2015 2020 2025 2030 2035 2040 2045 2050

Old AgeDependencyRate

Age60/Total

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

Working Age and Total Population

Working Age Population Total Population

Old Age Ratios

Source: World Population Projections, 2010 revision.

Slide 4 April 3, 2013

2. With high co-residence rates

2/3 of elderly married

¾ live with non-elderly working adults

7% live alone

Slide 5 April 3, 2013

3a. Most work well past retirement age

Source: HIS 2009.

Slide 6 April 3, 2013

3b. But shift from wage to self employment

All Elderly Men with Income Those Elderly Men with < Median Income

Source: HIS 2009.

Slide 7 April 3, 2013

4a. Most households (& those w/elderly) incomes close to PLI threshold – Low

incidence of absolute poverty but much higher vulnerability to poverty

All households Households with elderly

Poverty line close to concentration of income distribution, & sensitive to assumptions. Potential sensitivity more acute for households with elderly

Source: HIS 2009.

Slide 8 April 3, 2013

4b. Poverty profile acc. to household composition

Shares of poverty

76% in working age and children

20% in ‘three generation households’

Under 1% in elderly only households

Poverty Rates

Source: HIS 2009.

Slide 9 April 3, 2013

4c. Poverty incidence lower amongst elderly according to three measures

• Elderly Headed Households

– 3.0% (non-elderly headed 4.0%)

• Households that Have Elderly Members

– 3.5% (without elderly 3.9%)

• Elderly Individual Rate

– 4.0% (non-elderly 5.9%)

Slide 10 April 3, 2013

4d. But the risk of poverty increases as men and women get older

Source: HIS 2009.

Slide 11 April 3, 2013

5a. Each approach has tradeoffs

Universal Social Pension to individual elderly on a test of age High fiscal cost

Limited targeting efficiency

Low disincentives for work for individuals and households

Means-tested Social Pensions to individual elderly on a test of age and income (or proxy) Lower cost

Better targeted (subject to errors)

Individual disincentives possible – depending on targeting design

Social assistance to low income/poor households (all low income) Lowest fiscal cost

Better targeted (subject to errors)

Highest admin cost (subject to design)

Individual & household disincentives

Slide 12 April 3, 2013

5b. Household composition effects of options

Potential gains from elderly co-residence?

Effect on women’s labor supply (childcare)

Effect on schooling of children

Income of elderly can help household avoid poverty

Potential risks to elderly co-residence?

Household level means-test (social assistance)

Demonstrate potential effects

Arithmetic re-estimation of poverty if elderly lived

separately (34% a vs 4%)

Slide 13 April 3, 2013

6. Existing social pension & social assistance programs

Small, weakly targeted social assistance program for the

very poor.

Small, weakly targeted social pension targeted at

poorest elderly without income support.

Substantial untargeted consumer subsidies (housing,

food, fuel)

Slide 14 April 3, 2013

7a. Policy option considered

1.Strengthen the targeting system

2.Replace untargeted subsidies with household-based social assistance initially targeting the bottom decile + other subsidies at bottom 1-4 deciles.

3.Replace categorical targeted social pension with household-targeted social assistance.

4.Consider benefit supplements for the very old as the population ages.

and..

Monitor household composition & poverty profile as population ages + reevaluate with any policy changes to provident fund.

Slide 15 April 3, 2013

7b. Considerations in the household-based SA option

High co-residency (& potential incentive effects of individual

targeting)

Concern over incentives to work.

Elderly poverty profile