There was a proposal to the Prime Minister Datuk Seri Anwar Ibrahim during the Labour Day celebration that employers' contribution to the Employees Provident Fund (EPF) be increased to 20 per cent from the current 13 per cent for employees earning RM5,000 and below.
From the employees' perspective, this move could not have come at a better time, as the Covid-19 pandemic had reduced the savings of EPF members to a worrisome level, especially to those who had no other option than to tap into their retirement savings.
EPF had reported that the four withdrawal programmes during the pandemic amounted to RM145 billion.
The increase in employers' contribution rate will boost members' retirement savings. This is certainly welcomed for the low-income contributors, since this group forms the majority of those that subscribed to the four withdrawal schemes.
Furthermore, a higher contribution rate would lead to strong capital accumulation for the country that would be translated into investments and future growth of the country.
Regrettably, from the employers' perspective, increased EPF contributions would be a major financial burden, especially for the micro, small and medium enterprises (MSME).
The increase in the employers' contribution will generate higher operational costs, which will be passed on to consumers in the form of price increases.
This proposal can also result in manipulation, where some employers may reduce salaries. Others may hire fewer employees to mitigate a surge in operation costs.
Furthermore, this may incentivise firms to invest in more capital intensive industries instead of labour intensive industries to sustain their business as the cost of labour becomes more expensive.
A higher cost may also encourage employers to stay informal and this will further hinder the government's effort in formalising business activities in the country.
It doesn't help when there has been an increase in informality in the economy due to various reasons during the Covid-19 pandemic. Start-up businesses or small businesses will resort to not registering to avoid making contributions to EPF.
While mandating higher EPF contribution will benefit employees, it could be detrimental to the economy in the short term. Widespread concern has been expressed that high employer contribution relative to our Asean neighbours would make Malaysia less competitive.
Employers' contribution, in essence, is part of the wage paid to employees. Workers' wages must be commensurate with the value they contribute to the firm. Therefore, the increase in employers' EPF contribution should correspond with the rise in their workers' productivity.
In other words, this will encourage employers to hire more productive workers. This is in line with the common practice by many organisations to reward good workers based on their performance, which is widely known as performance-based rewards.
Employers' EPF contribution can be an alternative to bonus, salary increment and so forth to reward productive workers. Collectively, this will benefit the whole economy in the long run through increased productivity.
To go along with this initiative, the government may also consider policies to encourage employers to reward productive workers by raising their EPF contribution through suitable incentives.
While increasing the employers' EPF contribution would improve the retirement income adequacy for retirees, it is far more crucial to expand the coverage of retirement income for senior citizens.
At the moment, 39 per cent of the working-age population has retirement income: 33 per cent are EPF contributors and six per cent are civil servants covered with a pension scheme.
This coverage is lower than the global average of 50 per cent of the working-age population.
Currently, upon reaching the age of 55, EPF members can either make full withdrawal or flexible withdrawal of their retirement funds. As the retirement age had been increased to 60 years old, EPF withdrawal should only be allowed at 60 years old, too.
Deferring the withdrawal age will allow retirees to have more savings as the number of years of accumulation is extended.
The implementation of the minimum wage of RM1,500 per month and the current government's aggressive measures in promoting productivity, together should push wages up and this should translate into higher retirement savings.
Another option would be for EPF to require members to retain a portion of their accumulated savings, or a minimum amount in their account upon reaching the withdrawal eligibility age.
The retained portion can then be the retirement income where withdrawal can be made on a monthly basis to cover their living expenses for the next 20 years after their retirement.
A drastic increase in the employers' EPF contribution from 13 to 20 per cent may adversely affect the economy. To put it into perspective, it takes about 60 years for the employer's contribution to increase gradually from 5 per cent in 1952 to 13 per cent in 2012.
Therefore, it is important to avoid a sudden large increase in contribution. A gradual increase over a number of years will be easier for the economy to absorb compared with a single large increase.
* The writer is director, Social Wellbeing Research Centre (Employees Provident Fund Endowmed Centre), Universiti Malaya; president, Malaysian Economic Association and fellow, Academy of Sciences Malaysia (ASM)