OCT 3 — Based on current estimates of retirement savings, the majority of Malaysians will live in abject, absolute poverty during the final years of their lives.
To see this, we need to note that Malaysia’s working-age population is around 23.3 million people with 16.0 million in the workforce and 7.3 million outside of the workforce.
Unemployment and underemployment account for 771,800 and 2.4 million people respectively.
Around 15.3 million people are actively working, with 3.8 million in the informal sector and 11.6 million in the formal sector. Within this group, 4.1 million have no formal pension cover leaving only 5.8 million active Employees Provident Fund (EPF) contributors and 1.7 other formal pension contributors mainly in the civil service.
Among the EPF contributors, we now know that around 46 per cent or 2.7 million have less than RM10,000 in pension savings.
Taking this together, around 48.9 per cent of the working-age population have no cover for retirement and 63.8 per cent have basically no cover for retirement.
In fact this scenario for the whole population is mirrored in recent analysis from the EPF which suggests that only three per cent of Malaysians will reach their estimated threshold for required savings of RM240,000 by retirement according to EPF chief strategy officer Nurhisham Hussein.
In order to understand how devastating this is, let’s do some simple mathematics. If a person retires with RM10,000 in their EPF account and lives 20 years they would have RM500 per year or RM42 per month or RM1.37 per day to live on.
Recent EPF data showed a 60 per cent decline in median savings among the 5.05 million EPF members in the B40 group from RM2,434 (RM10 per month for 20 years) to RM1,005 (RM4 per month for 20 years) post-pandemic.
For those in the M40 category there was a 17 per cent drop in median savings from RM30,113 (RM125 per month for 20 years) to RM24,995 (RM104 per month for 20 years).
We know the withdrawal schemes under i-Lestari, i-Sinar and i-Citra which have left 6.3 million Account 1 holders and nine million Account 2 holders with less than RM10,000 balance but this is only part of the problem.
The extent of pension inadequacy is a structural problem, not related to EPF alone but related to wider issues of low-pay, poor savings, low workforce participation and too few savings options.
For now, rehearsing these causes and looking for someone to blame serves little purpose. Instead we must look for solutions because pension reform is essential and must begin immediately.
The best schemes target a good standard of living as we get older rather than providing a replacement for income when we stop working at a fixed artificial age.
This would include a means-tested guaranteed Universal Basic Income (UBI) or Living Wage (LW) jointly funded by the state and contributions as now from employees and employers but with social top-ups for those unable to make the target monthly savings.
Reforms must also accommodate changes in the working environment such as those with incomplete careers who have taken time out and of course they must also accommodate the shift to non-standard work patterns, gig-economy workers, freelancers and microenterprises all of which have increased due to the impact of Covid-19.
Private schemes would probably have a minor role in Malaysia because actually public investment funds in Malaysia like EPF are much better in terms of risk adjusted returns and efficiency.
People should also be encouraged to find non-pension income where possible from housing and financial savings but also in maintaining engagement though easier and more flexible work as they get older.
In some countries work ends over a more flexible timescale and rehire schemes provide less abrupt retirement which helps mental and physical health and eases the transition to a happy, smoother retirement.
With these ideas in mind, Malaysia could look at a new social pension system based on four tiers of protection which would be funded from multiple sources with shared responsibilities between employees, employers, government and investment funds within a social market model.
The first level should provide a Universal Basic Pension (UBP) with a minimum income for the older cohort based on a Universal Basic Income (UBI) or Living Wage (LW) which will guarantee a decent standard of living beyond the bare minimum.
It should be universal, that is provided for everyone whether they have been working or not and whether they have made pension contributions or not.
The best form of funding would be with a portfolio of direct government grants, contribution schemes for those that can afford it, social top-ups for those who cannot afford contributions and investment income from public investment funds.
The second level should provide Income Replacement Pensions (IRP) based on a percentage of early-life income, or the median or average income. Again all income earners should be eligible with income-related contributions shared between employers and employees and investment income from public investment funds.
This is similar to most of the schemes we have now but would have extended scope to informal workers and tax-incentives to encourage savings.
The third level should provide a Desired Income Pension (DIP) through which people can target a higher income and lifestyle in older life. It would mostly cover higher income earners who could be encouraged to save with higher tax-free contributions into public or private funds. This opens up a series of options for people who want and can afford a better retirement income and reduces the burden on the social pension schemes.
The fourth and final level should provide options for Non-pension Income Alternatives (NPIA) to incentivise people to continue to earn income in older-life from multiple sources. This offers scope for people to maintain their lifestyle and choices in older-life income. An obvious example is to allow those who want to continue to work to do so on a more flexible basis.
A less obvious alternative is to create a Senior Asset Account (SAA) composed of non-pension assets which might include your home, shares and unit trusts or other savings, financial assets and valuables. The idea is to combine all of your assets on retirement, rather like combining the Account 1 and 2 of EPF at 55 years old and to convert this into an income generating asset or annuity of various forms.
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.
The burden of pension reform cannot fall on EPF alone, although clearly it will be an anchor to the system. We must look for wider alternatives drawing together all stakeholders to find a solution urgently. The alternative of mass poverty should be incentive enough to focus our minds.