How to reform and fund social assistance ― Geoffrey Williams

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OCTOBER 14 ― The Covid-19 crisis has exposed huge gaps in Malaysia's social protection system not just for the B40 but also for the M40.

It showed that people are vulnerable even if they appear to be quite wealthy and it has been a shock which can hopefully be a catalyst for reform.

The best way to support people is to promote an environment for decent work and this must be the main focus. Nonetheless we have all come to understand that even with a system of well-paid work, people are still vulnerable for reasons outside of their control and the need for social protection from poverty or deprivation is not an indicator of individual failure or shame.

There is also a need to prevent people falling into difficulty when they face an unanticipated shock such as illness or injury beyond their control.

These three pillars of promotion, protection and prevention have been seen as part of a full social policy system that balances social assistance and social insurance with creating meaningful well-paid work as the foundation.

We also often consider nine areas of a comprehensive social protection system. The first group includes (1) sickness cover, (2) invalidity benefits, (3) medical care and long-term care, (4) survivor support (5) employment injury and (6) cover against involuntary unemployment. Insurance schemes are appropriate here because these are involuntary events which don’t involve any element of choice.

The second group includes (7) support for people in old age, (8) maternity and paternity support and (9) family support. These require different treatment because they involve an element of personal choice and can be addressed by personal financial planning.

Support for people in old age, for example, involves pension savings and decisions about when and how to retire. This requires a full reform of the pensions system which we have discussed at length elsewhere.

So while insurance can provide income protection against unanticipated events and financial planning can help with pensions and family finances, we are left with a perennial issue of how to provide protection for those on very low incomes.

The first principle of an effective social protection system is that it should be simple which is far from true in Malaysia. Research by Christopher Choong and Adam Firouz at the Khazanah Research Instutute (KRI) suggested that there were 123 different schemes across almost all federal ministries in 2018.

This number has increased under the various Covid-19 relief packages. They are also spread across multiple agencies which not only replicates administration costs but also makes applications more complex and many people are unaware of social assistance options available to them.

The second principle of effective social protection is universality. Within a social market economy for example, everyone is targeted so that we don't choose between “deserving” and “undeserving” poor. This is very old fashioned and lacking in ambition and is more often used for political patronage than to address real welfare needs.

Also, targeting increases the administration burden for social security schemes considerably because you have to first determine who is deserving or not deserving, then identify and monitor recipients in these groups.

The complications and huge administrative costs of this system as well as the opportunities for it to be used for patronage rather than social assistance support the argument for reform.

One promising alternative to completely replace Malaysia’s social welfare system is the negative income tax (NIT) which pays a credit to people below a threshold income, whilst people above that threshold pay tax as normal.

A negative income tax is not a new idea and was popularised by the Nobel Prize winning economist Milton Freidman in the 1960s. In fact, in 1995 a survey of American economists found 78 per cent supported NITs of some form and the Earned Income Tax Credit (EITC) in the United States is one of the main variants of an NIT used in practice.

For example, if the threshold was set at RM2,500 per month, a person earning the minimum wage of RM1,200 would receive a tax credit of RM1,300 if the NIT was 100 per cent or would receive RM650 if the NIT was 50 per cent. This would support their income and would not require employers to pay a higher minimum wage.

Based on data on household income distribution from the 12th Malaysia Plan we can make a preliminary estimate of the likely costs of a NIT under various assumptions.

First, targeting the tax on those below Poverty Line Income (PLI) of RM2,208 per month would cover 405,441 households in absolute poverty and 27,158 households in hard-core poverty. This would cost around RM3.1 billion per year, which is a figure confirmed by Deputy Women, Family and Community Development Minister Siti Zailah Mohd Yusoff in the Dewan Rakyat last week. This is only 0.9 per cent of government spending and around 0.2 per cent of GDP.

To target those below the Relative Poverty Line Income of RM2,937 per month would cover 1.24 million households and would cost RM10.2 billion per year or 3.2 per cent of government spending and 0.8 per cent of GDP.

A target somewhere in between, say the threshold income for the lowest 10 per cent of households of RM2,500 would cover 727,500 households and cost RM5.1 billion per year or 1.6 per cent of government spending and 0.4 per cent of GDP.

These amounts are actually perfectly affordable within normal government budgets, even if that required a reallocation from other sources.

Alternative ways of funding a NIT are also relatively affordable. For example, to fund a negative income tax threshold of RM2,208 a 1.2 per cent income tax on the T20 income group could be used. This would rise to 1.9 per cent to fund a threshold of RM2,500 or 3.9 per cent to eradicate relative poverty.

While insurance can provide income protection against unanticipated events and financial planning can help with pensions and family finances, we are left with a perennial issue of how to provide protection for those on very low incomes. — Reuters pic
While insurance can provide income protection against unanticipated events and financial planning can help with pensions and family finances, we are left with a perennial issue of how to provide protection for those on very low incomes. — Reuters pic

If redistributive taxes are unpalatable then a National Social Assistance Fund (NSAF) could be established to provide the money. Assuming five per cent investment returns, a fund of RM60 billion would fund the absolute poverty threshold, RM100 billion for the RM2,500 threshold and RM205 billion for the relative poverty threshold.

Such a fund could be relatively easy to build over a reasonable time period. For example, the Kumpulan Wang Amanah Negara (Kwan) could be reclassified to provide starting capital. Estimates by Islamic estate planning company As-Salihin Trustee Berhad suggest that as much as RM90 billion in unclaimed estates, mostly held by Malays, are currently left unused. These funds could be consolidated to form a NSAF quickly, even in the form of a national wakf.

Of course various combinations of taxes, direct government funding and investment returns within a portfolio would be the best option and would require some research and stakeholder feedback but the time has never been better to begin this debate.

* Professor Geoffrey Williams is an economist at Malaysia University of Science and Technology based in Kuala Lumpur.


** This is the personal opinion of the writer or organisation and does not necessarily represent the views of Malay Mail.

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