Insight – Reality of retirement savings crisis
Lee Heng Guie, The Star
The retirement golden years of millions of Malaysians will be significantly tarnished by the lack of savings.
Data showed that many Malaysians are in danger of not having enough savings to maintain their minimum standard of living during retirement.
The problem is getting worse over time and a retirement crisis is brewing.
The change in the demographic landscape demands that new approaches are taken to expand and have adequate retirement coverage.
The population of Malaysia is ageing. In 2020, more than 7% of total population were aged 65 and above, which is conventionally defined as an “ageing society.”
It is estimated that 14% of total population will be aged above 65 years by 2044, making Malaysia an “aged society” and by 2056, over 20% of the population will be above 65, which is termed as a “super-aged society”.
With Malaysians’ average life expectancy of about 75 years, most have another 15 to 20 years to live after retirement. Hence, retirement protection is an essential element in providing security for the retirees and the elderly.
Do the retirees have the financial resources needed to maintain a decent standard of living?
Two years of Covid-19 pandemic-inflicted income reduction on workers and wage earners have forced many employees to tap into their retirement savings to stay afloat.
Close to half of all Employees Provident Fund (EPF) members (over 7.4 million out of a total member base of 15 million) have made EPF withdrawals, resulting in a total of RM101bil being disbursed to provide some financial relief during the pandemic.
While the EPF withdrawals provide income and cashflow relief, it could come back to hurt the members in their golden years.
The EPF’s findings validated our concern about the acute retirement-deficit savings of contributors to maintain their minimum standard of living.
A high number of members have reduced their savings to levels that cannot guarantee their retirement:
> About 6.1 million members now 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 members, in a serious state of having inadequate funds to retire above the poverty line.
The EPF estimates that 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 end-2021.
> By end-2021, 54% of EPF members aged 54 would have less than RM50,000 in their savings account and a majority of those who withdrew their entire EPF savings upon reaching age 55 would use it up within two to three years.
The insufficient savings is very worrying and is brewing a retirement crisis if contributors and retirees are behind on their savings.
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 puts the contributors in an ill-prepared financial position for rainy days and makes it difficult for the vulnerable elderly retirees to maintain a minimum living standard, including medical expenses.
Both the family dependents and the government could be left to shoulder the financial burdens if retirees are really left with no choice but to depend on welfare and financial support.
There are calls to improve the retirement protection system but views are divergent as to what improvements are needed. Enhancing the social protection system to help the elderly must be based on sound financial principles, regardless of race and geographical factors.
Retirement savings and security schemes advocate that the working population should save and have good financial planning for their retirement through compulsory savings via the EPF, voluntary savings, private retirement funds and investment planning.
The government will be responsible for the provision of adequate social safety net to protect as well as supplement the essential needs of the elderly through the provision of subsidised public services such as healthcare, housing, transportation, lifelong learning programme and community care centres.
Malaysia needs a fundamental reform and approach to enhance the existing retirement protection system to enable the vulnerable elderly people maintain a reasonable standard of living in their twilight years:
> The intended target is to establish a comprehensive, adequate, sustainable, affordable and robust retirement protection system. A comprehensive system covers both income protection and core public services such as housing, healthcare and welfare.
The system must be sustainably funded by the government and be made affordable for employers and employees.
Equally important is the system must be 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 processes 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 RM988.6bil 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 markets (bonds and equities) and also on the financing of the government’s budget deficit.
> Maintain a clear focus on the long-term best interests of members to ensure consistent and better dividend payment while preserving contributors’ savings and safeguarding their interests and retirement.
Understand the trade-offs when making retirement withdrawals. Before making a withdrawal, carefully consider if you have sufficient savings to suit your 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 a life expectancy-pension gap.
About 50.8% of those employed in the labour force are contributing to the EPF, leaving almost 50% without old-age pension coverage. These include the self-employed, gig workers and workers in the informal sector.
> Enhance 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.
Lee Heng Guie is executive director of Socio Economic Research Centre. The views expressed here are the writer’s own.