Universal pension scheme, change of spending habits among steps needed for retirement security in Malaysia, say economists

KUALA LUMPUR, Nov 25 — Drastic steps like the introduction of a universal retirement savings scheme and extending the retirement age need to be implemented soon to ensure Malaysians can retire “safely”, economists warned.

They added there also needs to be a shift in society’s mindset towards the value of money to ensure sufficient financial buffers for Malaysians when they retire.

This is in response to the Ministry of Finance’s recent revelation that almost half of the Employees’ Provident Fund’s (EPF) 14 million members have less than RM10,000 left in savings, with 3.6 million from that figure with less than RM1,000.

Economist and Malaysia University of Science and Technology Professor Geoffrey Williams said these numbers came as no surprise, adding how the recent withdrawals allowed through the i-Sinar and i-Citra programs exacerbated the situation with most wiping out their entire savings.

“The warnings were ignored and the previous government pushed ahead with the withdrawal schemes and now we see the devastating consequences of that.

“So this is structural and now we know how bad the reality is with only 3 per cent of EPF members currently having enough to meet the basic threshold and millions with nothing at all,” he told Malay Mail.

Universiti Malaya’s Professor Mohd Nazari Ismail agreed with Williams, adding the problem of having insufficient retirement savings began long ago with the rising cost of living and wasteful spending habits.

“I think the problem is not caused solely by the pandemic. The pandemic simply worsened the situation,” he said.

AmBank Group Chief Economist Anthony Dass agreed the Covid-19 pandemic just made the situation worse, saying the effects are more adverse than in any previous financial crises.

He explained those who are the worst off are individuals who either took huge pay cuts or were retrenched, leaving them with little to no ability to save, and with the recently permitted withdrawals wiping out their savings further.

Dass said around 40 per cent or five million of EPF members saw their savings drop by 38 per cent to just RM8 billion, which translates into a median savings balance of RM1,005, while the middle 40 per cent saw a decline of 18 per cent to RM155 billion.

This, he said, translates to an average balance of RM24,995 per person.

“Only the top 20 per cent of members saw an increase in savings, but this translates to a median of RM152,043, or equivalent to just RM633 per month for 20 years.

“With nearly three-quarters of EPF members in a serious state of having inadequate funds to retire above the poverty line, this is worrying. And what about those in the informal sector who may not have any EPF contributions or other forms of safety net?” he pointed out.

Dass also highlighted the weaknesses within the current system, which he said was fragmented and ineffective.

“We need to revisit and probably overhaul the current system. The safety net needs to be more integrated through collaboration with as many relevant agencies as possible. And it must revamp assistance programmes and review the existing database to prevent accidental exclusion,” he said.

Reforms required

The notion of an extensive overhaul of the current retirement savings system is something all the experts agree on.

Williams suggested a four-tiered savings system that could help alleviate the current situation, among them a Universal Basic Pension that applies to all Malaysians, regardless of whether they have been in the workforce.

He explained this system could be funded by government grants, income from public investments, contribution schemes for those who can afford to, and social top-ups for those unable to afford it.

The next would be an Income Replacement Pension system which would be similar to EPF’s current module, but would also include those in the informal sector and offer larger tax-saving incentives.

Williams said for those who can afford it, a Desired Income Pension system could be introduced for them to save up for a more comfortable retirement, with the system based on tax-free investment options into public investment funds.

The economics professor also proposed a Senior Asset Account (SAA) be set up by the government as a more sustainable and long-term alternative to the current solution of withdrawing the combined funds from one’s EPF Account One and Account Two.

Williams explained a person’s SAA account would be valued based on their existing assets such as properties, unit trusts, shares and other financially valuable items that could, in turn, be liquidated as an income-generating asset to sustain their retirement.

“For example, those with a house worth RM240,000 could have a reverse mortgage in which they receive a payment of RM1,000 per month for 240 months, or 20 years, secured against the value of the house.

“They would continue to own the house during the remainder of their life but it would revert to the pension provider when they pass away,” he said.

Williams also suggested the government introduce a system to offer non-pension income alternatives which would incentivise individuals to work past the retirement age, at flexible hours, to allow them to earn and maintain their intended lifestyles.

“If my scheme were to be introduced it could take effect very quickly, within one policy cycle or around one year on a preliminary basis. The universal basic pension could benefit those in the informal sector and those already living in poverty almost immediately.

“Of course pensions are a long-term investment so my scheme would grow, develop and mature over time and could be self-sustainable within five to 10 years,” he said.

Dass told Malay Mail that considering how a majority of Malaysians are dependent on their EPF as a safety net, the government should prioritise creating jobs to allow those retrenched to re-enter the job market while also ensuring new entrances are given ample opportunities as well.

He said the current social safety nets are fragmented and ineffective

Dass proposed extending the retirement age by five to seven years from the current limit, which he said would allow those nearing retirement to rebuild their savings.

“It is important to take note with an increasing life span of Malaysians and (the country) heading towards an ageing population, the current retirement age of 60 years can be viewed as early.

“Risk of ageing population issues will flare up besides lack of savings, rising living costs, and longer life expectancy,” he said.

This view, however, was opposed by Williams who felt the two options of increasing savings contributions and extending working lifespan produce insignificant results.

“If you earn an average salary of RM2,933 per month and you saved 24 per cent of that in a pension, working an extra five years beyond retirement at 60 years old would add only RM235 per month extra in your pension at 65 years old.

“The median salary is RM2,062 so half of the 9.4 million people earning wages have less than this. That is 4.7 million people.

“If they worked an extra five years beyond 60 years old and saved 24 per cent into their pension they would have only RM165 per month extra to their pension at 65 years old.

“So the two options of increasing the working lifespan or increasing savings do not work. We need a complete reform of the pension system,” Williams said.

Nazari, meanwhile, is a proponent of a paradigm shift in societal values to increase financial literacy, increasing the general awareness of the importance of saving, and understanding the value of money.

Alongside the increasing cost of living, he said the relentless banking industry pushing for everyone to spend more also played a part in the rising rate of debt and shrinking rate of personal savings.

“We have to change the values of people so that they learn to live within their means. They should also avoid being in debt, but the problem is we have the banking industry that encourages people to be in debt; companies are also encouraging people to spend.

“And, sometimes even government leaders also encourage people to spend to spur the economy even though the level of personal savings among many Malaysians is so low. So everybody is at fault here in that sense,” he said.

On possible policy changes, Nazari said increasing the percentage of monthly contribution to one’s EPF savings could be a viable option, but remained pessimistic as such a move would require strong political will.

“There should also be more campaigns by the EPF and the government to educate and create awareness of the need to save for old age by increasing savings,” he said.

Bleak future

If nothing much is done to improve the current situation, the economists all agreed that Malaysia would head towards becoming an ageing nation with a high number of elderly living at or below the poverty line.

Williams is for quick action and proper research to be done to restructure the system, or risk condemning millions of Malaysians living in poverty in their old age.

He said such an outcome would in turn force the government to channel funds to look after their ageing population, depriving other sectors of allocation.

“Without proper reform, the government will have to fund this on an ad hoc basis and that will divert money from other priorities or increase debt,” he said.

Nazari agreed, saying the rising cost of living not only caused people’s savings to shrink but has also discouraged the younger generation from having children, an important economical factor to ensure a balanced demographic.

“Yes, there is a very real possibility of Malaysia becoming an ageing nation because the cost of living is discouraging people from getting married and having children.

“The resultant increase in debt level coupled with the reduction in the value of money and stagnant wages all contribute to the increase in the cost of living, which discourages young people from getting married and having a big family,” he added.

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