Retirement crisis in the making

The government must find ways to allow members to rebuild their lifetime savings in the EPF as to many, it is the only source of funds that they may have when it comes to retirement.

MUCH has been said about the total RM145bil that was withdrawn from the Employees Provident Fund (EPF) which has left many members high and dry and created a retirement crisis if not addressed early on.

To make matters worse, there have also been calls to allow further targeted withdrawals, but the government has flatly rejected the idea, as it will cause further hardship to EPF members in the future.

On the contrary, the government must find ways to allow members to rebuild their lifetime savings in the EPF as to many, it is the only source of funds that they may have when it comes to retirement.

With median savings in the EPF down by 50% to just RM8,100 at the end of last year due to the previous withdrawal scheme and only 29% of active members meeting the basic savings threshold of RM240,000 at the age of 55 from 36% previously, there is a drastic need to address the shortcomings sooner rather than later, as Malaysia is fast approaching the definition of an ageing nation if we are not already one.

With our healthcare system too being tested to the limit and if retirees do not have sufficient savings, the dire consequences of not doing anything now are unimaginable.

Reset contribution rates

Presently, Malaysian employees contribute 11% of their monthly salaries to the EPF while employers contribute 12% for those earning more than RM5,000 a month, while for those earning RM5,000 and below, the employers are mandated to contribute 13% a month.

There is also a limit of RM60,000 per annum for members wishing to make a voluntary contribution and under the original Budget 2022, this limit was raised to RM100,000 per year.

Let’s face it, Malaysians by and large do not earn enough, as the median wage in the country was only RM2,250 per month based on the Statistics Department data in 2021.

Even assuming that we had some wage growth last year and this year, the median wage would have probably increased to RM2,400 per month.

Based on this figure, half of Malaysians are only contributing RM6,912 per year.

Hence, excluding the compounding impact from dividends or any withdrawals allowed by the EPF, it will take roughly 35 years for an average employee earning RM2,400 per month to reach the minimum amount.

However, given time, salaries do increase and employees in general also receive an annual bonus, which will boost members’ savings too.

As a starting point, let us assume that a person who is 30 years old is experiencing a modest wage growth of 4% a year and receives a bonus amounting to two months of pay and the EPF dividend is on average at 5% a year.

Based on this data, and assuming inflation is at 2.5% a year over the next 30 years, the EPF savings would have reached the desired threshold level when he/she attains the age of 54.

The calculated figure is based on the assumption that the minimum saving threshold should be RM250,000 this year, after taking into consideration the inflation impact between 2019 and 2022.

However, this is on the premise that the EPF member has not and will not withdraw a single sen over the next 24 years or so and by the time the member is at the age of 54, his/her savings will increase to approximately RM453,000 and just 0.3% above the minimum threshold of RM452,000 in the year 2047.

Of course, these are all assumptions and can have a significant difference in the future if the variables do not match expectations, especially with respect to the EPF dividend rate, and most importantly, the inflation rate.

A 1% increase in the rate of inflation over the period (to 3.5% from 2.5%) can delay a person’s objective of achieving the minimum threshold by eight years, and well beyond the present retirement age of 60.

Time for a tweak

While Malaysia is stuck in a low wage structure model, we also have huge income inequality, in particular those in the T20 and above and specifically, those earning perhaps north of RM20,000 a month.

A person who earns RM20,000 a month is a significant contributor to the EPF with a monthly contribution of RM4,600 or RM64,400 a year, inclusive of EPF contribution for two months of bonus payment.

Even if this employee is 40 years old today and has only RM50,000 in EPF savings now due to the withdrawals made, he/she will achieve the EPF millionaire status in just 10 years, based on similar assumptions made earlier with respect to the EPF dividend rate, wage growth and bonus payments.

The recent comment made by the Deputy Finance Minister that the T20 had significant savings in the EPF is testament that the current contribution rate, which has no restrictions in terms of limit, allows high-wage earners to have significant savings in the EPF.

Based on the data that was presented, it can now be assumed that the T20 perhaps accounted for some 80% of total EPF savings as at the end of 2022, due to a significant decline in savings among the M40 and B40 members.

While it is perfectly natural to allow employees to continue to contribute to the EPF at the current mandatory rate of 11%, the EPF should recommend to the government to tweak the EPF contribution rate for employers.

This can be done by raising the rate to 20% for those earning RM5,000 and below per month, with the rate tiered to 15% for employees earning between RM5,001 and RM8,000 per month, 12% for employees earning between RM8,001 and RM10,000 per month, 10% for employees earning between RM10,001 and RM12,000 and just 8% for employees earning RM15,000 and above per month.

The EPF too can introduce a cap whereby the maximum contribution from an employer shall not exceed RM15,000 a year and thus offsetting the higher EPF contribution cost for an employer for the lower-income group at the expense of the higher-income group.

Indirectly, this will help employees battered by the Covid-19 pandemic to recoup some of the withdrawn funds over a period of time.

A better outcome

Based on the higher tiered rate for those earning less than RM8,000 per month, the individual aged 30 from the above example who was earning RM2,400 per month, will be able to achieve the desired threshold minimum savings of approximately RM400,000 (based on a rate of inflation of 2.5% per annum) by the age of 50 and not 54.

His/her total EPF savings by the age of 55, meanwhile, will be approximately RM605,000 against RM486,000 under the current structure, an increase of 24.5%.

For the employee aged 40 and earning RM20,000 a month, a lower employer EPF rate of 8% and a cap of not more than RM15,000 a year will see the employee achieving the EPF millionaire status delayed by approximately three years, leaving everything else equal.

Based on the above example, it is a win-win situation for all (except for high-income earners in the RM10,000 per month and above category), as not only can the government avoid a future retirement crisis but also help members to have the right retirement nest.

At the same time, the lower EPF contribution rate with a ceiling on the employer portions will not only help employers reduce their overheads, but allow a more balanced distribution between the haves and the have-nots.

Failing to restructure the current EPF scheme will leave vulnerable Malaysians with lesser savings and the government will be up against not only an ageing society, but also one that has very little to support themselves due to the lack of retirement funds.

We must avoid the retirement crisis from becoming a reality by acting now and not years down the road when it is too late.

Pankaj C. Kumar is a long-time investment analyst. The views expressed here are the writer’s own.