THE Covid-19 pandemic has revealed that hundreds of thousands of Malaysians live in a precarious financial condition and also the majority of wage earners are financially unprepared for retirement.
Job and income losses as well as health challenges have widened divides and exacerbated financial insecurity.
Owing to the differing magnitude of the pandemic’s impact, those who are already doing well do better and those who are struggling do worse.
The economic devastation inflicted on millions of households by the pandemic makes it clear that we need new solutions to help people rebuild financial security in retirement.
The pandemic has deeply scarred the already low level of accumulated savings and inadequate retirement savings, exposing the vulnerability of a large number of Employees Provident Fund (EPF) contributors’ retirement savings.
Low and middle-income households and individual savers saw the value of their hard-earned nest eggs being depleted when the pandemic resulted in the loss of employment and income; and reduction in income.
The disrupted employment as well as a sudden income shock amid the continued rise in living costs have put these vulnerable households and individuals teetering on the brink of financial insolvency, and have pushed them to the lower bound of the household income trajectory.
The percentage of Malaysians living below the poverty line (income of RM2,208 per month) had increased to 8.4% (640,000 poor households) in 2020 from 5.6% (405,000 households in 2019). And about 600,000 M40 households (20% of the middle-income group) have slipped into the B40 category.
Retirement savings reduced
Many households with relatively low savings and earnings amid high personal debt have withdrawn from their retirement savings (through i-Lestari, i-Sinar and i-Citra programmes), as well as opting for a voluntary cut in the EPF contribution rate.
Low interest rates (meaning lower debt service charges) and the automatic loan repayment assistance have helped to ease the financial burden of the highly indebted households.
While pulling from retirement savings is regrettable, especially for workers in their 30s, 40s and 50s nearing retirement age, it may be largely unavoidable if other options aren’t available. Lower and middle-wage earners tend to have fewer financial resources at their disposal.
Our concerns about retirement-deficit savings to maintain the minimum standard of living in retirement are validated by the findings of the EPF, which showed that a high number of members have reduced their savings to levels that cannot guarantee their retirement. The findings:
> Close to half of all EPF members (over 7.4 million out of a total member base of 15 million) have made the EPF withdrawals, resulting in a total of RM101bil being disbursed to provide some financial relief during the pandemic.
> Some 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 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.
> 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 withdraw their entire EPF savings upon reaching 55 will use it up within two to three years.
Fixing the balance sheet
Post-pandemic, it is indeed challenging for households and individuals to repair their balance sheets and rebuild precautionary savings. This can only be made possible by a growing economy, a recovery in employment and increase in wages.
How can the public policies address this retirement savings deficit?
It is more important for us to look at how we can help our members restore their savings post-pandemic.
The three key areas for public policy action:
> Strengthen the social security safety net, including affordable medicare and housing, the primary structure of retirement income security for low and middle-income households;
> Expand the low and middle-wage workers’ access to affordable and good investment returns for retirement plans with professional investment management, risk pooling and lifetime pay-outs; and
> Design a special plan to boost the retirement savings of low-income earners struggling with stagnant wages.
Reviewing the savings quantum
It is appropriate to review the EPF Basic Savings quantum, given that many contributors, who are struggling to make ends meet, have been forced to halt or raid their retirement savings due to the pandemic.
The EPF Basic Savings quantum was last revised in 2019 when the quantum for the Basic Savings was raised from the current RM228,000 to RM240,000 effective Jan 1, 2019.
The amount will be set as the minimum target EPF Basic Savings members should have upon reaching age 55.
The Basic Savings quantum is revised periodically according to the minimum pension for public sector employees, or every three years, whichever earlier.
The current minimum pension for public sector employees is RM1,000 per month.
The contributors can rebuild their EPF retirement savings through:
> The reinstatement of the contribution rate to 12% to 13% from 9%. In Budget 2022, the employees can opt for a voluntary cut of 2% in the EPF contribution rate till June 2022;
> Incentivising the contributors to contribute more than the statutory requirement rate (12%-13%). The government can allow the full amount of EPF contribution allowable for tax-deductible for the income wage earners of RM5,000;
> Higher dividend rates for the low-income earners;
> Growing the retirement income over time as the members have an option to have a portion of their EPF savings in Account 1 invested in unit trust funds or via private mandates managed by the appointed fund managers institutions (FMI); and
> The EPF restoring and rebuilding contributors’ retirement savings by optimising its asset investment allocation and strategy so as to increase higher dividends to contributors.
Financial planning crucial
It is a good move to get the self-employed, gig workers as well as those in the informal sectors into the EPF scheme so as to help start precautionary savings and plan for their retirement. We must embrace good and sound financial planning from a young working age.
Raising the retirement age is one of the options to help increase retirement savings, while retaining elderly workers in preparing the country for an ageing population and the consequent falling labour force participation and rising cost of pensions.
The question is, should raising the retirement age be made mandatory or optional?
What are the implications on the tight budget, given the current large public-sector pension liabilities?
As for the private sector, some companies have already extended the employment service of their retired employees.
Some form of tax incentives can be given to companies for allowing employees to work beyond the retirement age limit, subject to both companies and employees reaching a consensus.
The government can consider changing the retirement landscape through an innovative and self-funding approach to level the playing field at birth, which can increase financial security and narrow the racial and retirement wealth gaps.
This can be implemented through the issuance of a 20-year bond for children born each year.
The bond would be eligible for redemption after 20 years.
The money will be managed and governed by a special entity.
Lee Heng Guie is executive director of the Socio Economic Research Centre. The views expressed here are the writer’s own
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