Our society is growing older. In 2020, Malaysia’s population of 32.4 million transitioned into an ageing society, with 7% of its people aged 65 and older. The country is projected to become ‘aged’ in 2045 when the share reaches 14%, and ‘super-aged’ by 2060 when it reaches 20%.1
Longevity is to be celebrated but ageing often increases the risk of deteriorating income, health and social support, and while it is inevitable, the experience varies depending on how well the risks are managed. Policies must be designed to address the complex nature of old-age vulnerabilities.
Income insecurity in old age is one of the key factors underpinning other challenges including poverty, homelessness, disability, as well as physical and mental health issues. Malaysia’s rapidly ageing population requires urgent attention given the persistent coverage gap, inadequate benefits and unsustainable financing.
THE IMPORTANCE OF OLD-AGE INCOME SECURITY
An old-age retirement system should strive to achieve at least two main objectives. First, it should provide basic income security that prevents old-age poverty; and second, it should serve as a consumption smoothing mechanism throughout periods of both high and low income. The fulfilment of the first objective is usually assessed by the share of elders drawing pension benefits equivalent to the poverty line. The second one looks for a benefit level not lower than 40% of previous earnings.
While Malaysia already has in place a multi-tiered retirement ecosystem to help its population fulfil the intended objectives, the system has yet to achieve the first two objectives for all of its population.
The ‘painful truths’ of the financial situation of Malaysians
Data from the RinggitPlus Malaysian Financial Literacy Survey 2022 revealed that 70% of Malaysians saved less than RM500 per month (S$153) or did not save at all since the pandemic began, which marked the worst ever result in five years. Photo: REUTERS / Bazuki Muhammad
Tax-funded pensions that protect against old age poverty are effectively guaranteed to a few elders in two groups with benefits varying between the schemes. The first group includes elders aged 60 and above who are eligible for means-tested assistance under the Bantuan Warga Emas (BWE) scheme. However, the scheme currently only protects 4.2% of elders with a basic income of RM500 monthly as it is limited to those living below the poverty line and without family support. On the opposite end, the second group is comprised of more privileged elders who have served the public sector and hence are entitled to a civil service pension. The benefit under this scheme ranges from at least RM950 monthly up to 60% of their last-drawn salary. Between the two groups, just 24% of Malaysian elders receive periodic old-age benefits, while the world average is one in two.2
Meanwhile, workers in the private sector are required to build their retirement savings under the Employee Provident Fund (EPF). These are made via mandatory contributions by their employers as well as deductions from their own monthly salaries. However, EPF members are not considered to be pension beneficiaries due to the individual nature of these accounts and the opportunity for lump sum withdrawals.3
While the EPF scheme is meant to accumulate savings for retirement, the breadth and depth of the coverage have been inadequate. In 2010, it was estimated that 70% of retirees would exhaust their EPF savings within 10 years. In 2020, more than half of EPF members aged 54 had less than RM50,0004 in their accounts. This falls far short of the target set in 2019 of RM240,000 in savings by age 55, which would provide RM1,000 a month for 20 years of retirement — in line with Malaysia’s life expectancy.5 Even then, this rate is far below the estimated monthly expenses of RM 2,450 necessary for a senior citizen to maintain a decent living standard. On top of this, the four COVID-19 withdrawal schemes in 2021 and 20226 reduced the saving levels further with a total of RM145 billion withdrawn.
- BANTUAN WARGA EMAS (BWE)
RM500 monthly for ~140k elders aged 60+ without income and families (~4%) (2020)
Allocation: RM576 mil (2020)
MANDATORY RETIREMENT SAVINGS
EPF total members: 15.7 mil (2022)
EPF active members: 8.4 mil (2022)
- CIVIL SERVICE PENSION
Existing civil servants: ~1.6 mil (2022) Existing pensioners: ~886k (2022)
Annual pension & gratuities: RM31 bil (2022)
VOLUNTARY PRIVATE RETIREMENT SAVINGS (PRS)
Total accounts: 455k (2019)
12 schemes comprising 57 funds managed by 8 PRRS providers
The EPF (Employee Provident Fund) is the mandatory retirement savings fund for private sector workers in Malaysia, The LTAT (Lembaga Tabung Angkatan Tentera) is a statutory body providing retirement savings scheme for officers and members of other ranks of the Malaysian Armed Forces and the volunteer forces; KWAP (Kumpulan Wang Awam Diperbadankan) is Malaysia’s civil service pension fund; JPA (Jabatan Perkhidmatan Awam) is the Public Service Department; PRS refers to Private Retirement Scheme.
Source: Adapted from Knox-Vydmanov (2021), OECD (2015) for illustration purpose [LHS], SC (2020), JPA(2022), World Bank (n.d.), EPF (n.d.), Berita Harian (2022), MalaysiaKini (2021) [RHS]
Notably, the sparse provision has resulted in a significant gap known as the ‘missing middle’. These are individuals who are not part of the mandatory retirement schemes and who also do not qualify for old-age assistance or part of the civil service pension. It is estimated that in 2019 about 60% of working-age individuals4 in Malaysia were outside the formal retirement arrangements. Most of these individuals would have to rely on personal savings and assets, or intra-generational family transfers to sustain themselves after retirement. However, declining fertility rates, shrinking household size5, lower prevalence of multi-generational households6, as well as rising living costs and household debt7 indicate a future where old-age income security would depend less on family transfers.
COMPARISON OF POTENTIAL SOLUTIONS
Public discourse has centred around two sets of options to address the long-standing issues of poor coverage and adequacy. The first proposes to improve the mechanisms within the EPF, while the second suggests broadening the coverage and possibly deepening the benefits of the means-tested BWE programme. These two solutions are not mutually exclusive and are often complementary.
EPF-centred solutions require parametric changes to the existing schemes. Three opportunities to improve the equitability of the EPF or help members with lower incomes include: (i) deepening the progressive contribution by increasing the employer’s contribution for local workers with a monthly salary of below RM5,000 from 13% to 15%; (ii) introducing progressive dividends by applying higher dividend rates for members with lower savings; and (iii) adding five years to the contribution period by raising the statutory minimum retirement age from 60 to 65.
A hypothetical simulation model assessed the effectiveness of each proposal and it found that raising the retirement age would have the most significant impact on improving members’ savings. Doing so would result in 82.2% of EPF members avoiding old-age poverty, while only 61.1% and 59.2% respectively would be able to do so with the progressive dividend and progressive contribution initiatives.
While raising the statutory retirement age can potentially address the gap, it is important to recognise that not all elders can continue to work due to various factors such as education, health, wealth and personal preferences. And more importantly, these proposals are not enough to yield significant results in terms of widening the coverage and deepening the savings as about 20% of EPF members would still live below the poverty line, let alone those who are not members of the EPF.
Elderly women hit hardest
According to a report from the World Bank in 2020, the employment gap between men and women in Malaysia is largest between ages 50 and 60, with only 17.9% of women in this demographic being employed compared to 59.7% of men. Women make up a larger portion of those self- employed or as unpaid family workers, resulting in less social insurance coverage. This makes financial security a particular challenge for women. Photo: REUTERS / Bazuki Muhammad
However, expanding BWE to universal coverage, even at a minimum benefit level, is a significant leap, with cost implications posing the greatest hindrance. The estimated universal social pension expenditure share of 1.5% of Gross Domestic Product (GDP) (RM24 billion) is nearly 50 times the BWE program’s existing share of GDP (RM0.5 billion). Undeniably, a social pension that is universal and fully tax-funded is the most ideal, but it remains elusive. The delivery of tax-funded social pensions varies widely globally, underscoring the fiscal constraints faced by governments.
INSTALLING A PENSION FLOOR VIA THE SOCIAL INSURANCE MODEL
Given the challenges and limitations of other options, introducing a life annuity scheme under the social insurance pension (SIP) model is deemed an enduring approach to achieving full coverage for basic income during old age. This scheme guarantees a lifetime stream of income via an annuity — a series of periodic payments — in exchange for a premium. It is based on the principles of solidarity and collective financing, must be operationalised by an institution with a public mandate, and should not be confused with private insurance.
In general, a SIP provides old-age benefits to individuals who have met the qualifying age against compulsory contributions made during working years — typically a percentage of earned income — for a minimum period which can vary between 10 and 35 years. Like other schemes, the RM operational details vary from country to country, (b) but it is worth noting that most social insurance 160schemes are a hybrid of defined benefits and defined contribution schemes where one’s entitlement depends on one’s contribution.8
Key features of a life annuity under SIP include monthly disbursements rather than annual ones, a single rate for both men and women, and pension benefits that increase annually to account for 60 inflation. Assuming the scheme launches in 2025, 40 RM28.8b preliminary estimates indicate that a 24-year-old would pay RM53 per month for 36 years to receive a monthly annuity equivalent to the future value of the poverty line per capita starting from the age of 60.9Upon reaching the age of 60, these individuals will receive a future value of RM1,346 monthly, instead of RM600 in 2020.
The SIP annuity will also increase annually at a fixed rate of 2% to account for inflation. It only offers a basic annuity scheme that covers the risk of longevity, and no compensation is given when the recipient dies as the annuity is not inheritable by surviving dependents. The scheme must also go through a periodic assessment to ensure the contribution rate can meet the potential increase of benefit expenditure, which will lead to higher premiums in the future.
To avoid additional costs to workers and employers, it is proposed that a percentage of EPF contribution be used to build this collective fund. The government also plays an additional role in ensuring the continuity of contribution for individuals without regular incomes, such as homemakers, unemployed individuals, and self-employed individuals with low and irregular wages. Once the desired coverage is achieved, the SIP has the potential to effectively provide the necessary pension floor to close the gap for the 60% without formal retirement arrangements. The benefit or annuity set at the poverty line per capita of RM600 is considered to be sufficiently high to cover basic needs during old age while at the same time sufficiently low to still encourage individuals to continue contributing to their existing retirement savings.
This proposed SIP route is expected to cost much less at RM1.8 billion than the RM28.8 billion it would cost to directly provide the universal tax- funded social pension for all elders as shown in figures 2 and 3. Based on the forecast, the large cost difference still holds even if we compare the annual cost of paying the premium today (0.09% of GDP) versus the cost of paying social pension tomorrow (0.3% of GDP) for the same age cohort.
Pension systems are crucial for income security in old age, but other social services like healthcare and housing also play a vital role. No single programme can address all challenges that arise from an ageing society. The proposed SIP scheme offers a step towards developing a sustainable and equitable pension floor in Malaysia that can insure against longevity risk and ensure old age-income security. While the fruit of SIP may only be seen long into the future, the seeds of change have to be sown now.
- Berita Harian. 2022. “Lebih 87,000 pesara awam tergolong miskin tegar.” Berita Harian, 2022. https://www.bharian.com.my/ berita/nasional/2022/03/937284/lebih-87000-pesara-awam- tergolong-miskin-tegar
- CEIC. n.d. “CEIC Database.” n.d.
- ILO. 2017. World Social Protection Report 2017-19: Universal Social Protection to Achieve the Sustainable Development Goals. World Social Protection Report 2017/19. Geneva: International Labour Office.
- IMF. 2017. “Asia: At Risk of Growing Old before Becoming Rich?” Washington, DC: International Monetary Fund.
- EPF. Various years. “Annual Report.” Kuala Lumpur: Employees Provident Fund.
- ———. n.d.-a. “EPF.” Employees Provident Fund. n.d.-. https://www.kwsp.gov.my/.
- Kinsella, Kevin, and Victoria A. Velkoff. 2001. “An Ageing World: 2001, International Population Reports.” Washington, DC: U.S. Department of Commerce. https://www.census.gov/ prod/2001pubs/p95-01-1.pdf.
- Knox-Vydmanov, Charles. 2021. “Social Protection for Older Persons.”
- Malaysiakini. 2020. “EPF Chief Vows Not to Make Reckless Decision over Account 1 Withdrawal.” Malaysia Kini, 2020. https://www.malaysiakini.com/news/550637.
- OECD. 2015. “Pensions at a Glance 2015, OECD and G20 Indicators.” Paris: OECD Publishing.
- Rabi, Amjad, Norma Mansor, Halimah Awang, and Nurul Diyana Kamarulzaman. 2019. “Longevity Risk and Social Old-Age Protection in Malaysia: Situation Analysis and Options for Reform.” Kuala Lumpur: Social Wellbeing Research Centre (SWRC).
- SC. 2019. “Annual Report 2020.” Kuala Lumpur: Securities Commission.
- World Bank. 2020. “A Silver Lining: Productive and Inclusive Aging for Malaysia.” Washington, DC: The World Bank.
- ———. n.d.-a. “ASPIRE: The Atlas of Social Protection Indicators of Resilience and Equity.” https://www.worldbank.org/en/data/datatopics/aspire.
- ———. n.d.-b. “World Bank Open Data.” https://data.worldbank.org/
HAWATI ABDUL HAMID
Hawaii Abdul Hamid is a Deputy Director of Research at Khazanah Research Institute (KRI). At the Institute, she works on socio-economics issues such as poverty, inequality, social mobility and social protection. Prior to joining KRI, she worked at the Securities Commission Malaysia, Universiti Teknologi MARA (UiTM) and the Nasional News Agency, Malaysia (Bernama). Hawati holds a master’s degree in International Development Studies from the Graduate Institute for Policy Studies Tokyo, Japan and Executive MBA from University Teknologi MARA, Malaysia. Hawati obtained her BA (Hons) in Economics with Computing from the University of Kent, United Kingdom.
- Unless otherwise stated all demographic statistics are KRI calculations based on the medium fertility variant of the 2019 revision of the United Nations Population Forecast via CEIC (n.d.).
- This is based on an unweighted average of old-age effective coverage from 180 countries reported. Source: ILO (2017)
- The total periodical and monthly EPF withdrawals have been negligible, reported to be 796 in 2017 and just 579 in 2019. Source: EPF (various years)
- https://www.krinstitute.org/assets/contentMS/img/template/editor/ Report%20-%20Building%20Resilience;%20Towards%20Inclusive%20 Social%20Protection%20in%20Malaysia.pdf, pp 92
- Household size shrunk from 4.3 in 2005 to 3.9 in 2019. The declining pattern is observed in both rural and urban areas. Source: DOS via CEIC (n.d.)
- The proportion of three-generation households declined from 41.1% in 2004 to 30.7% in 2016. Source: World Bank (2020)
- Household debt as percentage of nominal GDP has increased from its all-time low of 60.4% in 2008 to 93.3% in 2020. Source: BNM via World Bank (n.d.-b)
- As the name suggests, defined-benefit schemes are those where benefits of the schemes are predetermined, while in defined contribution schemes, the contribution rates are predetermined.
- This is based on an expected investment return or interest rate of 4