KUALA LUMPUR: Will Malaysia soon face a retirement crisis, given that almost 40 per cent of its citizens do not have a retirement plan?
Only 4.0 per cent of Malaysians could afford retirement, according to the Employees Provident Fund (EPF) calculations from the previous year.
Increased expense of living in today's world and withdrawals of substantial portion of their savings from the EPF during the pandemic had caused some members to experience poverty even before they can retire, a market insider said.
"This is today's harsh reality, It's not just a matter of depleted funds now for those who took withdrawals from their EPF accounts during the pandemic. The interest that their accounts would have paid from the profits of their EPF investments represents an opportunity cost," the observer added.
EPF members have received an average annual return of about 6 per cent since 2011.
The return on a RM100,000 EPF account would be RM6,000, and it would rise annually. However, the interest rate is RM600 annually if you currently only have RM10,000 as a result of the different withdrawals you made.
"Rebuilding the EPF account's wealth will take time," the insider told Business Times.
To lessen the effects of the pandemic, 8.1 million Malaysians withdrew RM145 billion from the pension fund over the course of four rounds of Covid-19 withdrawals between 2020 and last year.
As early as February 2021, the EPF reported that about 30 per cent of members had nearly depleted their retirement funds in Account 1, which is typically not withdrawable before age 55.
About 6.7 million members under the age of 55 had less than RM10,000 in their accounts at the end of 2022, accounting for 51.5 per cent of all members.
According to statistics, 35 per cent or 94,827 of 274,715 EPF members aged 54 years, have less than RM10,000 in savings, while only 2.0 per cent or 4,877 members from the same age group, have over RM1 million.
"I think one solution to the low retirement savings crisis is to raise the retirement age from 60 to 65 years old. The government ought to consider providing a safety net to people who don't have a sizable enough retirement fund. Malaysia ought to follow other nations' lead," the industry insider said.
In Thailand, all citizens over 60 receive a monthly allowance of 600 baht (RM79.26), unless they work for the government. Every 10 years, recipients will receive an additional 100 baht a month until their allowance reaches 1,000 baht (RM132.10).
In Vietnam, elderly individuals who are 80 years of age or older and do not receive any type of pension or other social insurance benefits are entitled to a social retirement allowance, which amounts to roughly 360,000 dong (RM69.27) per month.
Based on Malaysia Ageing and Retirement Survey (MARS) Wave 2, some 37 per cent of the 4,821 respondents said they had not given much thought towards retirement while 23 per cent said they may opt to change the nature of their work.
At least 21 per cent of respondents said they would continue to work until their health failed, while only 10.8 per cent of interviewees said they would stop work altogether.
Also, 71 per cent of respondents who rarely or never think about retirement had no schooling or only had a kindergarten education, while 76 per cent had religious or primary education.
The trend was opposite among respondents with increasing education levels.
Furthermore, among respondents aged 60 and above, 26 per cent said they would work as long as their health held out.
The study was conducted by the EPF-endowed Social Wellbeing Research Centre (SWRC) of Universiti Malaya. Respondents comprised three age groups; 40-49, 50-59, and 60 years and older.
Data was collected from October 2020 to April 2022, involving face-to-face interviews with individuals aged 40 years and older residing in all states of the peninsula, as well as Sabah and Sarawak.
Greater household debt trap
A greater household debt trap could result from people's focus on home ownership rather than renting, says Consilz Tan, a senior economics lecturer at Xiamen University Malaysia.
She recently told FMT that this might cause a retirement crisis.
According to her, as Malaysia struggles with an aging population and a low fertility rate, demand for housing will decline.
With an increasing number and percentage of older people, Malaysia is witnessing a shift in its demographic composition.
Tan said overhang values are still being recorded in areas like Johor, Penang, and Selangor, and this is partly because of the mismatch between house types, prices, and locations.
"One should not rush into housing debt merely to fulfil the desire of owning a house without proper financial planning and fund allocation. There is nearly RM1.4 trillion worth of household debt in Malaysia, with 58 per cent of this being housing loans," she said.
According to the National Property Information Centre, there were a total of 27,746 overhang units worth RM18.41 billion in 2022.
Johor retained the highest number and overhang value in the country, with 5,285 units worth RM4.33 billion, accounting for 19 per cent and 23.5 per cent of the national volume and value respectively.
Selangor (3,698 units worth RM3.36 billion), Penang (3,593 units worth RM2.74 billion) and Kuala Lumpur (3,429 units worth RM3.15 billion) followed suit.
Putra Business School economic analyst Associate Professor Dr Ahmed Razman Abdul Latiff said the retirement statistics are concerning and will only worsen yearly.
"I agree with what Tan (Consilz) said because the high financing costs associated with housing have trapped many households into high debt, and as house prices keep increasing, the state of indebtedness among the households will also get worse," he told Business Times.
Razman said the current monetary system needs to be changed by supporting equity financing for businesses instead of debt financing, as well as other alternative financing options for individuals like musharakah mutanakisah for home financing and qardhul hassan for personal financing.
He added that in accordance with Swiss practice, time-based banking systems could be implemented for the elderly.
"There is a possibility we will face situations like in Japan where the elderly will have to keep on working after their retirement age in order to sustain themselves," he said.
Based on the Department of Statistics Malaysia, the composition of the population aged 65 years and over (old age) increased from 7.2 per cent in 2022 to 7.4 per cent in 2023, encompassing 2.5 million people, indicating that Malaysia is experiencing population aging.
KGV International Property Consultants executive director Ir. Samuel Tan said with this come higher costs for healthcare and other socially related matters.
"Elderly care is another issue that must be addressed. One of the causes is the reduction in birth rates in certain segments of society.
"The younger generations are not too keen to tie the knots, and this results in a gap as their children will be born in their latter years," he said.
Tan said it is also rather alarming that only 4.0 per cent of Malaysians could afford to retire, according to the EPF's calculations.
He said the Covid-19 pandemic compounded the problem as many withdrew their funds for emergency uses.
"It will take years to top up this shortfall, if ever. How this can be done is still unknown. The problem will be apparent down the road unless a certain safety net is created to safeguard their interests," he said.
Renting versus buying
Alternative investments, such as stocks, bonds, foreign exchange, and cryptocurrencies, according to some experts, can assist the investing community in building wealth for those with extra cash.
However, KGV's Tan thinks that they should look to the housing market if they have extra cash and can afford it in the long run, even though there are still risks associated with that tactic.
"I've always supported renting rather than buying a home. It is a practical measure to make sure individuals who are unable to purchase a home are not burdened by a long-term obligation.
"There can always be a "rent to buy" approach. Rental gives people the flexibility to upgrade or downgrade depending on their financial ability," he said.
In order to lessen the issue in the future, an "out-of-the-box" solution needs to be found.
Tan said while a safety net is necessary, it is difficult to implement because Malaysia is not a welfare state.
"We might need to make changes to our tax system in order to help. It is unclear if we are prepared for a shift this significant," he remarked.
Regarding the 37 per cent of the 4,821 participants in the MARS survey who stated they had not given retirement much thought and the 23 per cent who stated they may choose to change the nature of their work, it is an inevitable option, he said.
According to him, planning for retirement is a long-term endeavor that should begin while a person is still in their 30s.
"That being said, it is still preferable to work on it now under any circumstances because the effects will be felt shortly.
"The government needs to start a new strategy to stop these issues in the future. All new hires or even the younger generation should be the first to benefit from this," he said.
Is retirement really a current crisis in Malaysia?
Given the rising mortality rate in Malaysia, Dr. Mohd Afzanizam Abdul Rashid, chief economist of Bank Muamalat Malaysia Bhd, said the country's current retirement situation is unquestionably a serious problem.
More members now have less money set aside for retirement as a result of the Covid-19 shocks, he said.
According to him, the future of dividend rates will depend on how volatile the financial markets remain.
"I'm not sure whether we should call it a crisis because a crisis has to be addressed immediately. Inculcating savings habits is definitely a must, and that would resonate well with financial literacy.
"At the end of the day, how much money could one accumulate when they retire? And this can be achieved via savings in EPF and other savings, liquid financial assets, and owning a property," he said.
According to Afzanizam, there needs to be a careful balance struck between creating the standard for attaining adequate retirement savings and encouraging a culture of saving in our community.
He said at the end of the day, every person's lifestyle is different, and they may all have additional ways to supplement their retirement funds, like inheritances from relatives or side businesses that can give them a steady income in retirement.
Sending the appropriate message to EPF members is therefore equally crucial, he said.
"Perhaps there shouldn't be a one-size-fits-all solution when it comes to owning a house. Whatever it is, it has to be pragmatic. If one feels that they cannot afford to buy a house, renting is obviously the best option," he said.
He said there appears to be a culture in which having a home is essential and a sign of financial success.
"Perhaps we need to change that and be pragmatic in our approach. If not holistically addressed, we could find our society working longer than they should, thereby affecting their quality of life."
''I think we need to put in more efforts on financial literacy. We want our society to be financially savvy when it comes to personal budgeting, familiarise themselves with banking products, and appreciate the effects of inflation on their purchasing power.
"When our society is well equipped with knowledge, they will be less likely to fall prey to financial scams and will be more disciplined in their personal finances," he said.
He also asserted that society should keep improving its skills in order to prepare for the future.
Additionally, he said that in order for young people to become resilient in the face of adversity, they must be motivated.
"My overall take is that it is a delicate balancing act between promoting more people to save for retirement and the fact that Malaysian society needs to cope with the rise in the cost of living.
"There is no one-size-fits-all solution, and creating the right behaviour and environment to save for retirement is more critical. In that respect, education on financial literacy needs to be holistic, and it should be deemed a survival skill," he said.