KUALA LUMPUR, March 29 — Addressing issues related to retirement savings in Malaysia will take a larger time frame as most of the impediments, such as low wages, are structural in nature.
According to Bank Negara Malaysia, in terms of sequencing, equitability-focused reforms can be the focus in the medium term, where the immediate priorities should be centred on rebuilding resilience and adequacy of retirement savings in a post-pandemic landscape.
“The latter include ringfencing retirement funds and enhancements to existing old-age safety net programmes.
“This should be done in tandem with system enhancements to improve broader policy effectiveness and efficiency, such as enhancing productivity and unlocking the potential of social protection data,” the central bank said in its Economic & Monetary Review 2022 report released today.
It noted that policy reforms are most effective when they are comprehensive, complementary to each other and linked with multiple pillars of social protection.
According to the report, the sizeable gap between the median longevity of retirement savings and life expectancy after retirement highlights the urgent need to rebuild saving buffers, which had been depleted by special withdrawals during the pandemic.
“Against this backdrop, policies to enhance savings accumulation by way of lengthening the accumulation phase needs to be urgently instituted, and based on international benchmarking, ringfencing and reinvestment offer a potential solution.
“This involves reinvesting a portion of savings that would otherwise have been withdrawn upon the withdrawal age, thereby extending the accumulation period,” it said.
BNM said in Malaysia, the benefit of ringfencing will be significant, especially for members with continuous contributions after reaching the withdrawal age of 55 years old.
Employees Provident Fund (EPF) members aged 50 to 54 years old with incomes at the B40 threshold stand to benefit by up to an additional RM36,800 more savings if they defer withdrawals of their savings and continue contributing by another five years to age 60, it said.
“This is equivalent to 16 per cent of EPF’s Basic Savings and could extend the sufficiency of accumulated savings post-retirement by an additional three years.
“This will unequivocally improve the resilience against economic and financial shocks for retirees,” it said.
According to the report, insufficient retirement savings is a critical issue around the world and is expected to worsen in the future.
The World Economic Forum (WEF) projected that global pension savings will face a shortfall of US$400 trillion by 2050.
“This is mainly due to longer life expectancies and higher dependency ratios. While longer life expectancies are a positive trend, a shrinking working-age population adds a strain on prevailing social protection systems.
“Thus, individuals entering retirement may find it harder to meet their post-retirement needs,” the report said.
In ensuring the basic needs of the elderly are adequately catered for, BNM said many countries have implemented policy support in the form of social safety nets.
These are typically in the form of targeted cash assistance programmes which aim to provide a minimum level of protection for vulnerable old-age persons.
“In Malaysia, approximately 19.5 per cent of individuals aged 60 and above receive old-age benefits.
“As the share of old-age individuals rises, so will the reliance on these assistance measures. As such, reforms should therefore prioritise to increase its adequacy and reach,” it said.
The report said that adequacy can be enhanced by ensuring that assistance are linked to the standard of living measures.
“Reforms of the old-age protection system is a broad and highly complex policy challenge for Malaysia, nonetheless, shorter-term policies to boost policy effectiveness and facilitate retirement savings accumulation discussed are crucial, urgent, and implementable.
“This would also pave the way for other reforms in reducing labour market frictions, solidifying fiscal sustainability which includes reforms in public revenue and expenditure, and enhancing the overall social protection framework,” it said.
The report said that it is worth emphasising that these enhancements are no substitute for necessary long-term economic reforms that can raise current income levels.
“A labour market underpinned by robust productivity and high financial literacy are vital complements for a better pension system.
“Therefore, enhancements over both short- and long-term horizons are needed concurrently to ensure continued strengthening of the economy, supported by an effective social protection system,” it said.