KUALA LUMPUR, Oct 8 ― The Employees Provident Fund’s (EPF) latest warning about the depleting rate of retirement savings among its members has revived the debate about old-age income security, prompting public policy experts and politicians to ask if the existing pension system is enough to give retirees a decent post-work life.

Malaysia’s retirement conundrum predates Covid-19, but the unprecedented scale of the pandemic’s fallout means there is greater urgency to rethink social protection policies for the aged, and look for immediate solutions, experts said, citing data that points to a potential old-age crisis if elected officials fail to act now.

Khazanah Research Institute in a report released last month said that while the Covid-19 early withdrawals aggravated the problem of savings inadequacy, the issues of inadequate coverage and savings pre-date the pandemic.

"For the large majority of the population, Malaysia’s pension provision is neither providing the pension floor, nor adequate consumption smoothing,” the report said.

Many have bandied about the idea of a universal social pension, a system already put in place in many Asian countries.

Efficacy-wise at least, a universal social pension scheme funded by taxpayers is seen as one of the most effective because it limits the likelihood of people getting excluded and widens coverage quickly, said Nur Thuraya Sazali, the lead author of the report’s chapter on old-age social protection.

"Generally speaking, a universal social pension or a social pension that is available to all older individuals and fully tax-funded ― the present Budget pays for the present older population ― is the most ideal,” she told Malay Mail.

"It is the easiest to administer and has been argued to be the most effective in minimising exclusion error and providing the fastest full coverage.”

Yet this gold standard is still seen by many social protection experts as an exception to the rule, likely because such a programme is arguably costly.

From 108 countries observed, just a fifth has a universal social pension scheme that pays out a flat benefit to all persons above a certain age. Universal social pension is most prevalent in developing countries outside Europe and Central Asia, according to the KRI report.

Fiscal limitation?

One explanation behind the popular rejection of a universal social pension system is fiscal limitation. Everywhere in the world, experts and political leaders often disagree on how best to fund the programme, with cost implications usually resulting in political backlash, especially if it involves raising taxes.

 Pension Watch, an open source website dedicated to information about social protection for older people, notes that funding is often the key question in the discourse about social pensions worldwide.

In Malaysia, the Bantuan Warga Emas (BWE) programme is currently the only tax-funded old-age provision next to the civil service pension fund and other formal retirement savings systems like the EPF or the Armed Forces Fund Board (LTAT), according to KRI.

BWE benefits, initially introduced in Sabah in 1982 as "social assistance”, started at RM300 and later were raised to RM350 starting in 2017. It was eventually increased to RM500 in 2021 to align with the revised poverty line.

But the programme is strictly targeted towards older people without income, family support and living under the relative poverty line, which makes it inaccessible to a sizeable portion of retirees who are not protected by existing pension or retirement saving schemes.

Policymakers had reportedly mooted the idea of widening its coverage to include all persons aged 60 above, but Nur Thuraya said the expansion could cost taxpayers 44 times more than it did in 2018, or equivalent to 1.5 per cent of gross domestic product.

Total BWE expenditure between 2011 to 2018 rose to RM554.2 million from RM477.8 million, even when the number of BWE recipients dropped from 135,217 to 134,460, or six per cent of the total population aged over 60 to just four per cent, according to KRI data.

The programme would be even more expensive today, considering the size of the working population without any old-age social protection or is far bigger than what was initially thought. 

From the estimated 22.7 million individuals in the working age of between 15 and 64 in 2019, just a third were active contributors in the EPF.

Excluding the 1.4 million civil servants who are either eligible for tax-funded pensions or contributed to state-operated retirement funds like the LTAT, that leaves nearly 14 million of them without any formal retirement arrangements.

KRI said in its report that only 20 per cent of the country’s elder population received some form of periodic old-age benefits in 2017, even after taking into account civil service pensioners and BWE recipients as old-age pension beneficiaries.

In 2017, the number of elderly living under the relative poverty line was significantly "overrepresented”, at 60.5 per cent among the lowest 40 per cent of the population in terms of income or the "B40”, according to a study by Universiti Malaya’s Social Wellbeing Research Centre.

Its director, Datuk Norma Mansor, said a significant number of them were employed in the informal sector, where job and income security are highly precarious and makes it harder to save, especially in the face of economic shocks unleashed by the Covid-19 crisis.

"They’re the most vulnerable to old-age poverty,” Norma, who led a study on the absolute poverty rate among the elderly said from 2004 to 2017, told Malay Mail.

"They and women tend to leave the workforce much earlier, at the average age of 34, and never return to work.”

Alarming

The worrying state of retirement savings among the self-employed or workers in the informal sector did fuel attempts to expand old-age social security schemes, such as EPF’s i-Saraan and the newly rolled out i-Suri, a facility for housewives.

But researchers said the drive had been a failure. A year before the pandemic hit Malaysia, only half of the total 14.6 million or 7.8 million EPF members had regularly saved, while registered members in voluntary schemes like i-Saraan in that year accounted for a dismal 2.7 per cent, according to KRI.

EPF recently disclosed that more than 60 per cent of its active members have less than RM10,000 in savings. In 2020, more than half of members aged 54 had less than RM50,000, which is far from meeting the target set in 2019 of RM240,000 total savings by age 55.

The total reported withdrawal for the two Covid-19 facilities ― i-Lestari and i-Sinar ― was RM78 billion in May 2021, exceeding the initially expected withdrawal of some RM44 billion in 2020.

Despite the grim revelations, only a handful of political leaders appeared alarmed. Some responded by warning of an impending retirement crisis.

Shahril Hamdan, Umno’s centrist information chief, who described the depletion in EPF retirement savings as extremely worrying, echoed left-leaning proponents who called for radical solutions, proposing a "tax-funded social pension” scheme.

Under his proposal, the government will hand out cash to retirees whose incomes did not meet the retirement threshold in addition to their EPF withdrawals. The Umno leader suggested the programme can be financed via an earmarked taxation, and was open to the idea of a wealth tax as a means to fund the programme, something that has become increasingly mainstream.

"Taxation is clearly part of the picture here, not just from a fiscal management perspective but also to build a sense of shared responsibility… the public and the segments paying more taxes need to have confidence that they're paying for a good cause,” he told Malay Mail.

"If people understand where their additional tax ringgit is going, it is going to be easier to get public buy-in.”

Social insurance pension

But convincing fiscal conservatives in the government will likely be harder, Shahril conceded.

Leaders from the ruling coalition and public policy experts are predominantly from a generation that believe socio-economic objectives must go hand-in-hand with a healthy budget, making them likely to be dismissive of the idea especially when stimulus spending is estimated to push government debt up to record levels.

Still, the Umno information chief thinks whether or not the government can fund such a programme depends more on economic ideology than actual limitation of real resources.

"Covid-19 has shown the world that conventional thinking on the consequences of huge fiscal spending is not quite accurate nor borne by evidence so far,” he said.

KRI, on the other hand, proposed a compulsory contributory social insurance pension (SIP) scheme that pays out deferred annuity indexed to future inflation, taking into account so-called fiscal limitation.

Under the proposal, contributions will be made during the working years earmarked from a percentage of an earned income.

If the SIP is rolled out by 2025, KRI said its calculations showed all individuals aged 24, irrespective of gender, who pay a premium of RM53 per month for 36 years will receive a monthly annuity of RM600 a month by the time they turn 60, a sum estimated to be the equivalent to the future value of the poverty line per capita for a lifetime.

The proposal also entails the government paying for individuals without regular income to take into account the sizeable number of workers in the informal sector without adequate retirement savings, which means some tax will still have to be earmarked to fund the scheme.

"The SIP has the potential to effectively provide the necessary pension floor for the missing middle,” the institute said in its report.