Counteracting the Impact of Societal Aging on Income Inequality : A Case Study of Malaysia

This paper analyzes the effect of societal aging on income inequality in Malaysia, to date and in the coming decades. The study starts from the hypothesis that, all things equal, aging exerts upward pressure on inequality (Deaton and Paxson (1994, 1995)). Drawing on nationally representative household survey data over the past two decades, the study finds evidence in support of this hypothesis in Malaysia. This picture becomes even sharper when projecting inequality levels for the years when Malaysia is forecast to reach aged (2045) and super-aged (2056) status. Estimates show that between 2022 and 2056, overall inequality of individual incomes could rise by as much as 13 percent due to aging. The analysis then demonstrates that expansion of a social pension system would attenuate this projected rise in inequality. The paper also undertakes counterfactual exercises simulating the expansion of an old age social pension with various design variants. The variants considered would expand existing social transfers for older people. Given the public revenue and spending patterns in Malaysia, some of these design options are potentially manageable from a fiscal perspective. The analysis suggests that, relative to the observed situation in 2022, wider coverage of social pensions could have resulted in lower inequality in household per capita income among older individuals (by 12–26 percent), thereby lowering overall inequality (by 4-9 percent). This inequality-reducing effect of social pensions becomes even more marked when projecting estimates of inequality for 2045 and 2056. Moreover, the findings show that expanded pensions would have resulted in a lower headcount poverty rate in 2022 by 1.3–4.2 percentage points among the 60+ population, and by 0.5–1.9 points among the overall population.