Retirement dilemma
What will be the impact of the estimated 100,000 Malaysians retiring next year?
NEXT year, about 100,000 workers who should have retired at 55 in the second-half of 2013 will finally leave the workforce at 60 years old.
In other words, after a period of five years where zero mandatory retirement took place – within the private sector at least – we will have some 100,000 workers leaving their jobs.
Recall, within the private sector, the retirement age was upped to 60 from 55 in 2013, when the Minimum Retirement Age Act kicked in.
Within the civil service, the minimum retirement age in the government service was increased gradually, from 55 to 56 in 2001, 58 in 2008 and eventually to 60 in 2012.
Exactly, what kind of implications can be expected from the sudden influx of retirees? Equally important, what are some of the measures that can be taken to mitigate the negative impact, if any?
Malaysian Employers Federation executive director Datuk Shamsuddin Bardan says firstly, this will result in the re-opening of the replacement market, which has not been available in the last five years – but only to a certain extent.
“Every year, there are about 200,000 new graduates entering the job market with another 300,000 school leavers also entering the workforce, but this (retirees leaving their jobs) may not necessarily translate into increasing chances of these graduates getting jobs.
“Companies have become very careful in hiring now, and they may not fill up the positions (that the retirees will leave vacant) due to the prevailing weak economic conditions,” Shamsuddin tells StarBizWeek.
Will this affect productivity? Yeah Kim Leng, a professor of economics at Sunway University Business School, says whether or not productivity will be affected is more company-specific than anything else.
“Companies will need to weigh out the cost versus benefit in their hiring decisions,” he says.
Having said that, it is difficult to quantify intangible costs and benefits.
The current unemployment rate in Malaysia stands at about 3.5%, translating to about 600,000 people being unemployed.
At 3.5%, Malaysia is ahead of the Philippines and Indonesia, which have unemployment rates of about 5.5%, but behind Singapore, Thailand, Cambodia and Brunei, which are at about 2%.
The move to increase Malaysia’s official retirement age to 60 for the private sector some four years ago was seen as timely and in line with the retirement trend in the other countries within the region.
In Singapore, for instance, the minimum retirement age according to the Retirement and Re-Employment Act is 62 years.
The increase in Malaysia’s official retirement age was also viewed as a reflection of the longer lives that Malaysians are experiencing compared to years ago.
According to latest available data, life expectancy at birth for Malaysians is 72.5 years for males and 77.5 years for females. This is an improvement from 2010 when male life expectancy was 71.9 years while for females, it was 76.6 years.
Ageing population
Even so, this has brought about another emerging issue – an ageing population, exacerbated by a decreasing fertility rate.
According to Yeah, who is also an external member of Bank Negara’s Monetary Policy Committee, Malaysia already has a sizeable group of individuals aged 65 and above who make up 7% to 8% of the entire population.
By 2020, he reckons the number will hit 9% and by 2030, Malaysia could be an aged country with some 15% of people aged 60 and above.
“The question is whether the retirees have enough retirement savings,” Yeah says.
To be sure, although the mandatory retirement is at 60, the Employees Provident Fund (EPF) withdrawal is still maintained at 55.
“What this (ageing population) could also mean is that the dependency ratio, which measures the number of dependants one has, will start to increase and on a macro level, this could pose a greater burden on the overall economy.”
According to Yeah’s back of the envelope calculations, to retire comfortably in the Klang Valley, one would need about RM5,000 a month, RM60,000 year or a total of RM1.2mil just for living expenses, assuming one lives to about 80 years old. This is also on the assumption that there are no more debts to be serviced.
“If the lower-income people under the B40 category can move toward the middle-income group (M40), the financial burden of those who are being depended on will lessen as time goes by.”
According to Socio Economic Research Centre executive director Lee Heng Guie, the demographic shift towards a higher proportion of ageing population which he describes as “unprecedented”, threatens to impact productivity, economic output and economic welfare which requires social, political and economic change at all levels.
Firstly, the vast numbers of experienced workers who retire from the labour force will cause capital to become scarce and result in reduced savings in pension funds, Lee says.
However, Sunway’s Yeah says that pension funds like the EPF already have surplus savings, which means that this is hardly an issue.
Neverthless, Lee concurs with Yeah, saying that low birth rates and an aged society mean a higher dependency ratio where the younger generation will need to support the aged society.
“This, coupled with rising healthcare costs and other related agedcare expenses, will divert resources for consumption and spending,” Lee says.
AllianceDBS Research chief economist Manokaran Mottain says from a company’s perspective, the ones that are over-staffed may take the opportunity to stop hiring or hire selectively once the retirees leave.
“The issue is whether or not the young ones have the skill sets required. If yes, they can be easily absorbed into the job market,” he says.
AmBank group chief economist Anthony Dass thinks that the current retirement age of 60 should be increased further, given the increasing life expectancy and the issue of the lack of skilled workers.
“I feel raising the retirement age is very beneficial, as it leads to higher tax revenue and consumer spending. The main problem with this policy is that it will be highly unpopular, especially with those who are nearing retirement age,” he says.
Anthony says there should be a focus on staggered retirement by having a scheme that allows older workers to work fewer hours but remain in the labour force.
“If the individual is unable to take advantage of this staggered work due to health or any other reason, then the Government should look at voluntary work.
“I feel such an avenue will benefit both the economy and the social environment, taking some pressure off the aged.”
Lower costs for companies?
At a glance, it may appear that costs for companies will go down once this group of retirees vacate the labour force.
But observers point out that while costs may come down at some companies, this may not be necessarily true for all.
New hires within the areas of e-commerce, ICT and other highend services can cost more than the cost of hiring those who have retired.
“Take, for instance, the banking industry. While the retirees may leave, it may cost more to hire those with specialities in the newer areas of banking like fintech and so on. Costs may even go up in some cases,” Yeah says.
Still, for government-linked companies, on the whole, they should see a relatively significant reduction in overall costs, as these firms tend to have large numbers of long-serving employees, says Manakoran.
Pension bill
Within the civil service, the pension bill next year is expected to rise to RM24.55bil or 10.5% of the federal government’s operating expenditure (opex).
This figure surpasses next year’s expected petroleum revenue of RM11.45bil.
As comparison, in 2014, the pension bill stood at RM18.22bil or 8.3% of the federal government’s opex.
It goes without saying that the higher pension bill will put a strain on the government’s coffers.
Public healthcare is another issue.
With increases in private medical bills outpacing the general inflation rate each year, retirees may have no choice but to turn to public healthcare services when they are
sick, especially for those who are not adequately insured.
In March this year, Health Minister Datuk Seri Dr S. Subramaniam was quoted as saying that health spending per capita in Malaysia has increased by as much as two and a half times within 17 years, that is from RM641 in 1997 to RM1,626 in 2014.
Additionally, a recent study by Swedish reinsurance company Swiss Re reveals that Malaysia could face a potential shortfall in the financing of healthcare amounting to US$4.1bil (about RM17bil) by 2020.
This suggests that additional fiscal spending may be needed, or individuals may need to fork out for the shortfall on their own.
The Socio Economic Research Centre’s Lee says that the change in demographic trends accompanied by the rising number of retirees in both public and private sectors and longer life expectancies will impinge on the future budget burden.
He notes that public servants’ retirement charges grew 12.5% per year in 2000-2017. The number of retirees, meanwhile, has increased by 3.7% per year to 765,420 persons at end-2016 from 660,907 persons at end-2012.
Because the cost associated with retirement charges has been increasing, the expenditure on pensions increased from 7.6% of the Government’s total opex and 7.2% of total revenue in 2010 to 10.8% and 10.5% of total revenue, respectively, in 2017.
“It is, therefore, fiscally unsustainable for the Government to continue on this path, given that other committed expenses such as emoluments and debt service charges also take the lion’s share of opex,” Lee says.
Lee also says that it is about time to consider a phased migration from a defined-benefit to defined-contribution pension scheme for public servants.
There is also the question of how to work out a sustainable retirement income and pension scheme for older employees.
Lee asks: “While the EPF and private pension scheme provide retire- ment income buffers, are they sufficient?
“The Government needs to actively support older workers and ensure that they have sufficient savings toward retirement.”
For example, he says the EPF can consider giving an additional dividend of 1% on the first RM50,000 of accumulated EPF savings for employees aged 50 years and above.
“Employers may pioneer a flexible private retirement scheme, which allows employees to reduce working hours and claim part of their pension while continuing to accrue further pension entitlements for when they fully retire.”
Other policy changes that could be considered include a higher EPF contribution by employers for older employees, which most companies at the moment have capped at a fixed rate, along with a lower EPF contribution rate by the employee.
Still other measures to address the issues include altering health insurance and critical illness policies to cover the higher risks as people age, he adds.
“The health implications of an ageing population are double-edged. Not only are Malaysians living longer but they are also getting healthier.”
Going forward, healthcare expenditure and aged-care funding will rise further, continuing to burden the Government’s fiscal finance conditions, households as well as increased out-of-pocket expenses for the elderly, Lee admits.
“As such, both public and private healthcare financing have become one of the pressing policy issues that need to be critically looked at.
“Perhaps, a private-public funded healthcare medical and insurance fund is worth exploring based on the principles of equitability and affordability,” he says.
The issue is whether or not the young ones have the skill sets required. If yes, they can be easily absorbed into the job market.
Manokaran Mottain
The retirees leaving their jobs may not necessarily translate into increasing chances of the graduates getting jobs. Datuk Shamsuddin Bardan
While the EPF and private pension scheme provide retirement income buffers, are they sufficient? Lee Heng Guie