Pandemic tightens the noose on retirement

Just like many other countries, Malaysians are heavily dipping into their retirement savings to weather this pandemic crisis. This is in part due to the government’s policy to relax conditions, allowing Malaysians to withdraw their contributions in the Employees Provident Fund (EPF), the country’s largest pension fund, to alleviate their financial distress.

THE far-reaching Covid-19 pandemic has inflicted economic and social wounds on lives, livelihood, businesses as well as investment.

Restrictive measures introduced in Malaysia to contain the virus spread have intensified the financial pressure on retirees not just in the immediate term but also in the future.

Coupled with the increasing life expectancy and the rising pressure on public resources to support the health as well as the expanding ageing population, the risk of this pandemic exacerbating retirement insecurity is real.

Just like many other countries, Malaysians are heavily dipping into their retirement savings to weather this pandemic crisis. This is in part due to the government’s policy to relax conditions, allowing Malaysians to withdraw their contributions in the Employees Provident Fund (EPF), the country’s largest pension fund, to alleviate their financial distress.

Such policy relaxation saw an acceleration of withdrawals that left 6.3 million contributors or 42% of the total 15 million EPF members believed to have less than RM10,000 in Account 1, while 9.3 million are expected to have less than RM10,000 in Account 2.

Assuming the basic savings of around RM240,000 based on the retirement age of 55 or 60 years old, and a relatively long retirement period of 15–20 years with an average life expectancy of 75 years, the current depletion of savings certainly poses serious challenges.

Our retirees could be using their retirement funds to help pay off loans in fear of defaults which could result in a “black mark” in the records CCRIS and CTOS. This in turn could cause problems in the future, especially if they plan to seek new financing from the banks. Using such withdrawals to stay afloat, many will end up with a paltry sum when they retire, thus jeopardising their potential returns in the long run.

The economic recession caused by the global health crisis has led to reduced pension contributions, lower investment returns and higher government debt. Inevitably, this will impact future pensions that could see some people working longer with others having a lower standard of living in retirement. The global pandemic has made it even harder to retire.

Anthony Dass Anthony Dass

But this problem cannot be attributed to the Covid-19 crisis alone. It has been brewing even before this pandemic.

In fact, many public and private pension systems around the world were already under increasing pressure to maintain benefits prior to this pandemic. The Covid-19 pandemic only escalated the retirement crisis in Malaysia.

Prior to the pandemic, more than two-thirds (68%) of Malaysians aged 55 and below had savings of less than RM50,000. And this group could probably last around 4½ years based on the poverty line of RM930 per month. What about those with savings less than RM7,000? What about the informal and other causal sectors that are not covered by the retirement fund?

Poor financial literacy among Malaysians is believed to be one of the main reasons for the low savings of around 36% compared to countries like Singapore at 59% and Myanmar 52%. This lack of financial literacy could leave the next generation of retirees significantly poorer and sicker (due to not having enough savings to afford proper healthcare). It creates the risk of a “lost generation” of older people entering retirement in poor health and without enough money to support themselves in retirement.

The view is that irrespective of whether there is a Covid-19 pandemic or not, the risk of a retirement crisis has been lingering. The pandemic has only raised the fear that the next crisis could be a “retirement crisis”.

This means that the time is ripe for the government to get serious on a structural overhaul of how Malaysians can prepare for retirement, be it in the formal, informal or casual sectors. It is critical for the government to take cognisance of the strengths and weaknesses of the current system and work towards ensuring better long-term outcomes for retirees.

And it is important to acknowledge that there is no single pension system model that will work for every country. Malaysia needs to design urgently a retirement plan that is practical and best fit the citizens across all segments. We must obtain and study comparative information on the various retirement plans across the globe to see what is possible and practical for us.

It is important to take note that the coronavirus crisis has caused more than half of those in their 50s and 60s to experience worsening financial circumstances. Also, the lockdowns have taken a heavy toll on their physical and mental health. This could continue if this generation continues to be an afterthought in the coronavirus recovery.

Malaysia will likely see a lost generation entering retirement in poorer health and worse financial circumstances than those before them. They are likely to face less-than-comfortable retirement years ahead. This could lead to problems for the Malaysian economy and society, both structurally and individually. It will add pressure on our high household debt-to-gross domestic product (GDP), which is around 93% in 2020. This is deeply worrying.

Efforts to tackle this problem must be carried out fast and coordinated among several parties to ensure effectiveness and policy consistency. Our financial and capital markets must emphasise on developing an ecosystem for fintech products and apply digital technology besides focusing on upgrading financial literacy and personal finance management and planning.Equally important, the government and its partners need to take urgent action in two key areas.

First, they need to develop a “granular” view of who needs help to keep their job or find new work.

States, with the help of local councils, will be able to quickly develop a granular view of where jobs are at risk and where there is additional demand for labour by sector, occupation, demographics and geography.

Special focus should be given to small businesses and the most vulnerable workers,including those in the gig economy, as well as informal and casual sectors.

Also, the government needs to develop smart and cross-sector solutions with the aim of getting support quickly to help those affected. While preparing to reopen the economy from the lockdown, it needs to find ways to maximize employment and protect against new infections, following the standard operating procedure guidelines. Again, special emphasis will be needed to restart and support small businesses, which account for the majority of jobs in Malaysia.

At the same time, governments and businesses will need to create new mechanisms to help people whose jobs are at risk redeploy to occupations in which labour demand still outstrips supply, and rapidly build the skills needed for their new roles.

It will not be all doom if the people are able to bounce back after this health and economic crisis, just as investors have after past recessions. But unlike investors, it remains unclear if the brutal nails of slow wage growth and unemployment brought on by the pandemic could put additional strains on the system’s finances. It is important to look where people stand today versus previous years.

Anthony Dass is group chief economist and head of AmBank Research. He is a member of the Economic Action Council Secretariate; and an adjunct professor in UNE, Australia. Views expressed here are the writer’s own.

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