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Call to enhance retirement savings

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PETALING JAYA: With the country’s economy entering into recovery mode, it is timely to put in place comprehensive social safety nets and measures to boost the retirement savings.

Economists when contacted by StarBiz generally opined that the government should seriously look into retirement security, especially after the Employees Provident Fund’s (EPF) retirement savings took a hit from the Covid-19 pandemic.The Covid-19 has disrupted businesses and livelihood, and those in dire need had been forced to withdraw from their EPF savings via the i-Sinar and i-Citra schemes, resulting in lower retirement savings.

To date, the total disbursements from the schemes stand at a whopping RM67.6bil.

To ensure retirees have adequate savings throughout their retirement, economists suggested measures including the reinstatement of the EPF contribution rate by employees, option to contribute at a higher rate, raising the maximum amount of the EPF allowable for tax-deductions, increasing the retirement age as well as deepening financial literacy to enhance retirement savings.

EPF CEO Datuk Seri Amir Hamzah Azizan (pic below) has expressed the provident fund’s concern over retirement security, especially with 46% of EPF members below the age of 55 having less than RM10,000 in the EPF.

EPF Amir Hamzah Azizan

He noted that the pandemic has led to a significant drop in the percentage of members meeting the basic savings threshold which is RM240,000 at age 55 from 36% to 27%.

This is due to the p andemic-related withdrawals to supplement the contributors’ income during the crisis.

As of Aug 31, total EPF members stood at 15.1 million, out of which 7.6 million were active members.

According to Sunway University economics professor Yeah Kim Leng, (pic below) rebuilding the retirement savings of individuals and designing a more comprehensive social safety net, especially for those aged 50 years and above will be necessary to forestall the old-age crisis.

Sunway University economics professor Yeah Kim Leng

“The inadequate-saving problem among the low income households is almost a certainty given the projected increase in life expectancy,” he said.

While retirement security has been on the long-term radar of policy circles for many years, he said its importance and urgency have ratcheted up post the Covid-19 pandemic.He cited the EPF data showing that 46% of members below 55 years old having less than RM10,000 in their accounts as a stark reminder of the potential old-age crisis looming over the country’s socio-economic landscape within 10 years or closer.

“The risk of the nation ‘getting old before it becomes rich’ will ring through if income growth at the low and lower middle income segments is not accelerated over the next five years.

Despite the 12th Malaysia Plan reporting a narrowing of income inequality, Yeah said “There is a decline in the Gini coefficient from 0.44 in 1989 to 0.41 in 2019.”

The Gini coefficient is a measure of statistical dispersion intended to represent the income inequality or the wealth inequality within a nation or a social group.

“The greater impact of the Covid-19 on the low income groups and the reported 600,000 middle 40% households slipping into the bottom 40% category would certainly result in a widening of the income gap.

“This will also diminish the retirement savings of the low and middle income households,” explained Yeah.

Hence, raising the retirement age is inevitable, which is implemented in rich countries with good social safety nets and welfare programmes.

He noted that “a faster pace of income growth through better employment and business opportunities, sustainable wage increases and good returns performance of EPF and private retirement savings are absolutely essential.”

Having said that, all the favourable outcomes including the ability of the government to build an adequate social safety net for poor retirees will hinge on the performance of the national economy post-pandemic, he added.

Socio-Economic Research Centre executive director Lee Heng Guie (pic below) opined that the reinstatement of the employee contribution rate to 12%-13% from the current 9% is one of the measures which could be implemented to boost retirement savings.

Socio-Economic Research Centre executive director Lee Heng Guie

Since employees could opt for a voluntary cut of 3%-4% in EPF contribution this year, he said “they should consider contributing more than the statutory requirement rate of 12%-13% in the following year.”.

He also proposed that the government raise the maximum amount of EPF allowable for tax-deductible to RM6,000 from RM4,000 currently.

Lee said: “EPF members can grow their retirement income over time as they have an option to have a portion of their EPF savings in account one invested in unit trust funds or via private mandates managed by the EPF approved fund management institutions.”

“The EPF can help to restore and rebuild contributors’ retirement savings by optimising its asset investment allocation and strategy so as to increase dividends to contributors,” he added.

Lee pointed out that the percentage of Malaysians living below the poverty line income of RM2,208 per month had increased to 8.4% in 2020 from 5.6% in 2019.

While the decision to withdraw from the retirement savings is regrettable, especially for workers in their 30s, 40s and 50s, he acknowledged that it may be unavoidable.

This is given that many lower and middle-wage earners tend to have fewer financial resources at their disposal.

“Therefore, it is appropriate to review the EPF basic savings quantum as many contributors are struggling to make ends meet and have been forced to halt or raid their retirement savings in this pandemic-induced recession,” explained Lee.

The EPF basic savings quantum was last revised in 2019. It was raised from RM228,000 to RM240,000 effective Jan 1, 2019. This quantum is the minimum target for EPF basic savings that members should have upon reaching the age 55.

While retirement savings should be seriously looked into, Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid (pic below) said the solution may not entirely rest with the EPF alone.

Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid

“There are intertwined issues related to savings for retirement.

“Chief among them are salaries and wages as they are fundamental before one could actually save for their retirement,” he noted.

In this regard, Afzanizam said the real income which takes into account the inflation factor should be one of the main agendas. The other is on financial literacy, he added.

This would involve decisions on savings and investment, he said, noting that borrowings to buy big ticket items such as a vehicle and house as well as protection against financial calamities.

Therefore, there are multiple factors to be considered before one can arrive at the most realistic solution.

Afzanizam also felt that EPF schemes which allow its members to withdraw from their EPF savings should be reviewed.

“This could explain why EPF members’ savings have depleted rapidly.

“The education on long-term investment is also crucial as members need to understand the compounding factor is the critical success factor for building a sizable retirement fund.

“This would mean the monies that have been deducted from their salary plus the contribution from their employer should not be withdrawn unnecessarily as it will weaken the compounding factor,” he said.

EPF’s Amir Hamzah was reported as saying that the key element of the EPF’s strategy going forward is to get the gig workers, as well as those in the informal sectors, into the EPF scheme.

This is to enable them to start saving as early as possible and plan for their retirement, he noted.