Monday, June 09, 2008

Fair Wage & Malaysia Bonus

The "FairWage" and Malaysia Bonus proposal was first raised in the DAP Alternative Malaysia Budget 2008 announced in September last year. Given the recent changes in the fuel subsidy system, I thought it's an idea to put up the section on the above here on this blog for discussion.

But before proceeding to share your 2 sen, let me first share the key assumptions behind the policies suggested:
  1. Welfare provision is a key responsibility of the government for the less fortunate in the country. (Otherwise, it'll just mean no subsidies or grants at all)

  2. The policies below are formulated based on the principle that product subsidies tend to be very distortionary and unevenly distributed, hence a more targeted approach is required.

  3. The exact quantum of award/bonus suggested below may require further adjustment with more precise data from Government.

  4. Please also read the following in conjunction with the other posts I've put up on this blog. It may make more sense that way ;-)
The EPF is a social security institution formed according to the Laws of Malaysia, Employees Provident Fund Act 1991 (Act 452) which provides retirement benefits for members through management of their savings in an efficient and reliable manner. With rising costs of living, extended life expectancy and more expensive medical treatments, it is critical that Malaysians save as much as possible to ensure sufficient funds for retirement. It is also important for as many Malaysians as possible to be included in the system.

However, as studies have shown, low-income Malaysians are facing significant difficulties in saving enough via EPF. As a result, the Government must act to assist this group of Malaysians who face various challenges in the face of globalisation, particularly with a stagnant or declining real wages. This is clearly reflected in the 9th Malaysia Plan Gini coefficient statistics where by income disparity among Malaysians has widened substantially. Malaysia ranked highest in terms of income inequality in Southeast Asia.

To assist low and medium-waged workers, DAP proposes to raise the Employer EPF Contribution Rate from the current 12% of total wages to 15%, representing a 25% increase. This will in turn raise the total contribution from the employer and employee to the fund to a total of 26%.

At the same time, in view of the increase in cost for the employers, which may in turn affect the competitiveness of Malaysian companies, it is proposed that a limit of RM8,000 per month or RM96,000 per annum be set to Employer contributions to the EPF. That means that for employees earning above the limit, their EPF contributions will continue to be calculated at the limit level.

However, for middle-age workers who are earning below RM1,400 per month , it is clear that they will continue to face severe challenges despite the increase in employer’s EPF contribution. Whilst younger workers may be learning the ropes and learn new skills to upgrade their income level, older workers will face difficulties in our fast-changing economic environment and are in the greatest need of assistance from the state to make ends meet.

With the oil and gas sector contributing handsomely to the state coffers, it only makes social sense to share part of these gains with the less fortunate and lower income tiers within our society. However, at the same time, we still need to continue to incentivise these workers to secure employment to avoid over-dependence on the state. Hence, DAP proposes “FairWage”, an integral component of MENUS in promoting social justice. FairWage has a 3-prong strategy for implementation:
  1. To increase that take-home pay, workers will contribute a lower rate to the EPF. For with pay below RM900 per month, employee contribution to the fund will be waived while for those with income of not more than RM1,400 per month, the employee's contribution to EPF shall be reduced from the current 11% to 5%.

  2. To make them more employable, employers will reduce their rate of contribution to the EPF. For workers above the age of 35 to 55, earning between RM900 to RM1,400 per month, the employer contribution shall remain at the current 12%. For those earning less than RM900 per month in the same age group, the employer contribution shall decline to 10%.

  3. To compensate for the above, the Government will give workers FairWage income supplements to achieve a higher level of income. For workers aged 45 and above, receiving monthly income below RM900 per month, they will receive an annual income supplement Proposed 2008 Malaysian Budget Democratic Action Party of RM2,400. For those workers above the age of 35 earning less than RM1,400 per month will receive RM1,600 per annum. Of the supplement, a quarter shall be in cash form, while the balance will be channelled into the EPF accounts. By channelling a larger portion into the EPF, it will help the workers save for their future needs. An additional 10% on top of the income supplement shall be applied to those who live in the Klang Valley, Johor Bahru as well as on the Penang Island to cope with the higher cost of living.
As an example, a 48 year old worker in Muar earning RM800 per month used to take home RM712, will find his take-home pay increased by 19.4% or RM138 (RM88 + RM50) to RM850. At the same time, despite a reduction in employer contribution to 10%, the overall contribution to the EPF account will increase from RM184 to RM230, representing a 25% increment. His total monthly income will hence be RM1,080, an increment of 19.5% from before.

As a separate example, a 42 year old worker in Kuala Terengganu earning RM1,200 per month will find his take-home pay increased by 9.9% or RM105.33 (RM72 + RM33.33) from
RM1,068 to RM1,173. At the same time, the overall contribution to the EPF account will increase from RM276 to RM316 monthly, representing a 14.5% increment. His total monthly income will hence be RM1,489, an increment of 10.8% from before.

“FairWage” is not an original idea but an adaptation of best practices successfully implemented in other advanced countries. For example, in the United States, “Earned Income Tax Credit” acts like a negative income tax for low-wage workers, supplementing their earned income. Similarly, the UK has implemented a “Working Tax Credit” which has helped to reduce poverty and encourage work. While most recently, Singapore has introduced “Workfare” which supplements the income of older low-wage workers.

In addition to assisting current workers registered with the EPF, FairWage will also provide incentives for more workers, particularly odd-job or ad hoc labourers to insist on registration with the EPF by their employers due to higher pay. As a result, the overall system will be more inclusive for Malaysians, particularly those from lower income groups.

On top of that, DAP would introduce a “Malaysia Bonus” which will vary in accordance to the performance of the economy whereby poorer Malaysians will be able to share the fruits of the country's wealth. For 2oo8, the Malaysia Bonus shall be paid to those who have worked at least 6 months in 2007 based on their last drawn pay in December 2007. The Malaysia Bonus shall be channelled directly into the worker's EPF account and shall be available for immediate withdrawal.
  1. Those earning less than RM3,000 per month but at least RM2,400 will receive RM300
  2. Those earning less than RM2,400 per month but at least RM1,800 will receive RM600
  3. Those earning less than RM1,800 per month but at least RM1,200 will receive RM900
  4. Those earning less than RM1,200 per month will receive RM1,200
We will review the above schemes annually to determine the best mechanisms to achieve a better living quality for all Malaysians without detrimental effects to a person's incentive to seek work. As an integral part of MENUS, the above policies will ensure that all Malaysians in need are taken cared of by the Government, the country's wealth is shared equitably and no community will be left behind.

(The above policies form the foundation of DAP's call for up to RM3,000 be granted to deserving Malaysians to help them achieve a fairer deal. By our estimates, the above policy will cost substantially less than what the Government currently spends on subsidies but it goes directly to the people who needs it.)
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