Get cracking, we may be headed to a retirement savings crisis!

Lee Heng Guie, Focus Malaysia

MILLIONS of Malaysians’ golden years (retirement) will be significantly tarnished by the lack of savings.

Current data show that many Malaysians are in danger of not having retirement savings to maintain their minimum standard of living during retirement. The problem is getting worse over time with a retirement crisis brewing.

The change in demographic landscape demands new approaches to expand and have adequate retirement coverage. Population is aging in Malaysia.

In 2020, more than 7% of the country’s total population would have aged 65 and above which is conventionally defined as an “aging society”.

By 2044, it is estimated that 14% of total population will age above 65, thus making Malaysia an “aged society” while by 2056, over 20% of the Malaysian population will age above 65 which is termed as a “super-aged society”.

With Malaysians’ average lifespan expectancy of about 75 years, they have another 15-20 years to live after retirement. Hence, retirement protection is an essential element in providing security for the retirees and elderly people.

Do the retirees have the financial resources needed to maintain a decent standard of living? Two years of COVID-19 pandemic-inflicted income retrenchment have forced many wage earners to tap into their retirement savings to stay afloat.

Close to half of all the Employee Provident Fund (EPF) members (over 7.4 million out of a total member base of 15 million) have made withdrawals which resulted in a total of RM101 bil being disbursed to provide some form of financial relief during the pandemic.

While the EPF withdrawals provide income and cash flow relief now, it could come back to hurt them in their golden years. Findings by EPF validated our concern about contributors’ acute retirement-deficit savings to maintain their minimum standard of living.

A high number of members have reduced their savings to levels that they cannot guarantee their retirement.

• 1 million members have less than RM10,000 in their EPF accounts, of which 3.6 million have less than RM1,000, leaving them vulnerable and unprotected for their retirement.
• Three exceptional withdrawals have left 73% or nearly three quarters of EPF members in a serious state of having inadequate funds to retire above the poverty line.

EPF estimates that those members will need to work between an extra four to six years to rebuild the savings that have been utilised during the pandemic. There has been a significant drop in the percentage of members meeting the basic savings threshold (RM240,000 at age 55) from 36% in 2020 to an estimated 27% by the end-2021.

• By end-2021, 54% of EPF members aged 54 would have less than RM50,000 in their savings account and that a majority of those who withdrew their entire EPF savings upon reaching age 55 would use it up within two to three years.

Inadequate safety net

The insufficient savings are very worrying and is brewing retirement crisis. As it is, many Malaysians are having a crisis of confidence when it comes to whether their savings will meet their retirement goals.

Draining their retirement savings from the EPF put the contributors in a financially ill-prepared position for rainy days as well as those vulnerable elderly retirees ffrom maintaining a minimum living standard, including medical expenses.

Both the family dependents and government could be left to shoulder financial burdens if the retirees were really left with no choice but to depend on welfare and financial support.

There are calls for improving the retirement protection system but views are divergent as to what improvements are needed, including enhancing the social protection system to help the elderly with financial needs principle, regardless of races and geographical boundaries.

The retirement savings and security scheme advocates that the working population should save and have good financial planning for their retirement life through compulsory savings via EPF, voluntary savings, private retirement funds and investment panning to increase retirement savings.

The Government will be responsible for the provision of adequate social safety net to protect as well as supplement for the essential needs of needy elderly through the provision subsidised public services such as public healthcare, housing, transportation, long life learning programme and community care centres for the elderly.

Sustainable model

Malaysia needs a fundamental reform to enhance the existing retirement protection system to enable the vulnerable elderly people to maintain a reasonable standard of living in their twilight years.

Some of the proposed approaches are include:

• The intended target is to establish a comprehensive, adequate, sustainable, affordable and robust retirement protection system. Comprehensive covers both income protection and core public services such as housing, healthcare, and welfare.

The system must be financially sustainable and funded by the Government as well as also affordable for employers and employees. Equally important is that the system is robust to safeguard the interests of retirees against economic shocks without having to reduce their benefits due to insufficient public funding.

• The EPF model of managing retirement funds for both private sector and non-pensionable public sector must be strongly preserved with strict (non-compromised) governance process and professionalism. A strong governance structure discourages external political influence, encourages transparency and accountability.

This is deemed vital to sustain contributors’ confidence and trust in the EPF’s management of investment assets of RM988.6 bil as of September 2021. We caution that the erosion of trust towards EPF would spark members to withdraw their money en masse, causing wide negative implications on domestic capital market (bonds and equities) and also the financing of the Government’s budget deficit.

• Maintain a clear focus on the long-term best interests of members to ensure consistently better dividend payment while preserving contributors’ savings and safeguard their interests and retirement. On their parts, members must understand the trade-offs when making retirement withdrawals. Before making a withdrawal, they must carefully consider if they have sufficient savings to suit their retirement lifestyle.
• Malaysia’s demographic landscape and the gig economy demands new approaches to expand pension coverage. We already have a lack of pension coverage and life expectancy-pension gap as 50.8% of those employed in the labour force are contributing to EPF, leaving almost 50% without old-age pension coverage. These include self-employed, gig workers and workers in the informal sector.
• Enhance proper financial planning awareness for retirement savings; create a conducive policy environment to encourage the market to develop more retirement investment financial products and wealth management such as annuity plans or retail saving bonds with a longer-term maturity; and provide tax concessions to incentivise more voluntary retirement savings. – Jan 30, 2022

 

Lee Heng Guie is the executive director of the think-tank, Socio-Economic Research Centre (SERC).