Effective social protection system vital
Adequate savings for retirement lacking in country
PETALINGJAYA: While economic and social policies have been receiving a fair share of attention in corporate Malaysia, there is one area that has been overlooked.
Although it has been repeatedly highlighted by experts, the implementation of an effective pension and social protection system has not met its mark.
Experts are calling on the government and private sector to urgently look at ways on how they can improve the system, judging from the fact that there is inadequate savings for retirement and Malaysia is heading towards an aged society within a decade or so.
It is estimated by the Employees Provident Fund (EPF) that only 3% of its contributors can afford retirement, which is an alarming fact that needs urgent attention, according to industry observers.
The EPF reported in August 2022 that Rm145bil had been withdrawn during the Covid-19 pandemic through the four withdrawal programmes that had been in place.
The EPF’S chief strategy officer, Nurhisham Hussein, in September was quoted as saying that those retiring in 20 to 30 years would need to have at least RM900,000 to Rm1mil, noting that this would be the “bare minimum” after factoring in inflation and medical bills, among others.
Furthermore, about 52% of EPF members have less than RM10,000 in their accounts while about 27% have less than RM1,000.
Describing it as a pension and social protection crisis, Malaysia University of Science and Technology economics professor Geoffrey Williams said there was an urgent need for reforms in this area.
Based on the pension fund’s data, it is clear that almost all Malaysians do not have adequate savings for retirement, he said.
Based on the EPF estimates, 96% of its members do not have enough savings for a living income pension and 73% do not have enough even for a poverty-level pension. Not even enough to pay for food on retirement, he said.
Among some of the initiatives to address the inadequate retirement savings, he said a National Pension and Social Protection Review Panel needs to be set up, besides having a universal basic pension for everyone and creating a Malaysian Superfund.
The panel, among others, would discuss the structural issues and possible models to address the problems in the current pension system, he said. The Superfund should include options for using Islamic financing and pooling under-performing funds into the overall management of pensions.
Williams said a good and efficient pension scheme was essential for economic growth and sustainability as well.
“Firstly, as the population ages a bigger number of people are in retirement on low income, so consumption spending collapses for millions of people. A pension helps to maintain their income and smooth consumption across generations.
“Secondly, funding retirement through a proposed Malaysian Superfund creates a new national sovereign wealth fund like Khazanah Nasional Bhd or a new pension fund like the EPF.
“This provides massive coordinated investment for the local capital markets. The proposed superfund could be managed by the EPF for example, as part of its portfolio.
“Lastly, if people do not have pensions they rely on the younger generation for support, either their family, in-laws, etc. This places a burden on the younger generation.
“If people have pensions, then the economic burden on the young is less and everyone is better off. Women are more empowered to work rather than look after elderly relatives, there is greater economic activity which generates growth and higher incomes for everyone,” he said.
Economist Carmelo Ferlito, who is CEO of the Centre for Market Education, does not think the current pension system needs a reform per se. He said what is needed is to restore the saving capacity on how to build social mobility and reshaping consumption habits.
This would bring to the creation of more resources that could be devoted to existing pension mechanisms, he noted.
Furthermore, he said there should be an ecosystem conducive to sustainable growth so as to create more wealth and more opportunities for everyone and increase the savings capacity.
To ensure efficient pension and social protection, Ferlito said, among others, entitled individuals should be provided with social vouchers rather than with the direct supply of services following the UK’S “direct payments” system.
“We propose the introduction of vouchers to be supplied to service beneficiaries to enable them to purchase the services they have been assessed from private providers, which later on can claim the voucher amount from the government,” he said.
He said there should also be a compulsory retirement scheme for both employees and self-employed workers. Contributions could be made either to the EPF or to a proposed private provider chosen by the individual or an option to contribute to both the EPF and to a private provider.
Among others, he said there should be an additional 1% monthly contribution to be paid to a dedicated temporary unemployment fund, adding that a worker could decide to pay either to the Social Security Organisation or Socso, or to a private initiative of his or her own choice.
On the whole, Ferlito said a sustainable path for economic growth is the best way to support an efficient pension and social protection system.
Meanwhile, at a recent Policy Roundtable on The Future of Pensions and Social Protection in Malaysia hosted by the Malaysian Institute of Economic Research, various experts shared their views and recommendations on the current domestic pension landscape.
Among the recommendations are the universality of pension reforms which must also include those who are not in the labour force, working in informal jobs or in the gig economy, and non-malaysians living here, including foreign workers and refugees.
A universal and holistic model with a tiered system was also recommended. These include a non-contributory pillar, a mandatory contributory pillar, private retirement schemes and options for other forms of income and support in old age beyond pensions.
At the same time, they advocated for comprehensive assessment needs to be carried out, including an economic analysis of the different models, short and long-term impacts, the alternative financial products available as part of a portfolio of solutions, and the needs, concerns and behaviours of the stakeholders driving sustainable solutions.
Above all, the experts recommend that the country should be ambitious and strive for a sustainable world-class system that provides security, respect and dignity for all Malaysians in retirement.
“There should be an ecosystem conducive to sustainable growth so as to create more wealth.” Carmelo Ferlito