The pandemic tightens the noose on retirement
THE large-scale Covid-19 pandemic has inflicted economic and social wounds on lives, livelihoods, businesses as well as investments.
Restrictive measures introduced in Malaysia to contain the spread of the virus have intensified the financial pressure on retirees not only now but also in the future.
Coupled with the increase in life expectancy and the increasing pressure on public resources to support health as well as the increase in the aging of the population, the risk that this pandemic will aggravate the precariousness of pensions is real.
Like many other countries, Malaysians are drawing heavily on their retirement savings to weather this pandemic crisis. This is in part due to the government’s policy of easing conditions, allowing Malaysians to withdraw their contributions to the Employee Provident Fund (EPF), the country’s largest pension fund, to ease their financial distress.
Such policy easing resulted in accelerated withdrawals which left 6.3 million contributors or 42% of the total of 15 million EPF members who would have less than RM 10,000 on account 1, while 9 , 3 million should have less than RM 10,000 on account 2.
Assuming basic savings of around RM 240,000 based on the retirement age of 55 or 60, and a relatively long retirement period of 15 to 20 years with an average life expectancy of 75 years, the The current depletion of savings certainly poses serious challenges.
Our retirees could use their retirement funds to help repay loans for fear of defaults, which could result in a “black mark” in CCRIS and CTOS files. This in turn could pose problems in the future, especially if they plan to seek new funding from banks. By using such withdrawals to stay afloat, many will end up with a paltry sum when they retire, jeopardizing their potential long-term returns.
The economic recession caused by the global health crisis has resulted in reduced pension contributions, lower investment returns and increased public debt. Inevitably, this will impact future retirements which might see some people working longer with others having a lower standard of living in retirement. The global pandemic has made retirement even more difficult.
But this problem cannot be attributed to the Covid-19 crisis alone. It was brewing even before this pandemic.
In fact, many public and private pension systems around the world were already under increasing pressure to maintain benefits before this pandemic. The Covid-19 pandemic has only worsened Malaysia’s pension crisis.
Before the pandemic, more than two-thirds (68%) of Malaysians aged 55 and under had savings of less than RM50,000. And this group could probably last around 4.5 years based on the poverty line of RM 930 per month. What about those with savings of less than RM7,000? What about informal and other sectors that are not covered by the pension fund?
Malaysians’ low financial literacy is believed to be one of the main reasons for low savings of around 36% compared to countries like Singapore at 59% and Myanmar at 52%. This lack of financial literacy could leave the next generation of retirees considerably poorer and sicker (due to not having enough savings to afford proper health care). This creates the risk that a “lost generation” of older people retire in poor health and without enough money to support themselves in retirement.
The opinion is that whether or not there is a Covid-19 pandemic, the risk of a retirement crisis persists. The pandemic has only raised fears that the next crisis will be a “pension crisis”.
This means the time has come for the government to seriously embark on a structural overhaul of how Malaysians can prepare for retirement, whether in the formal, informal or casual sectors. It is essential that the government recognizes the strengths and weaknesses of the current system and strives to ensure better long-term outcomes for retirees.
And it’s important to recognize that there is no one model pension system that will work for all countries. Malaysia urgently needs to design a practical retirement plan suitable for citizens of all segments. We need to get and study comparative information on different pension plans around the world to see what is possible and practical for us.
It is important to note that the coronavirus crisis has caused more than half of people in their 50s and 60s to experience a worsening of their financial situation. In addition, the closures had serious consequences for their physical and mental health. This could continue if this generation continues to be an afterthought in recovering from the coronavirus.
Malaysia will likely see a lost generation retire in poorer health and worse financial circumstances than previous ones. They are likely to face less than comfortable retirement years ahead. This could cause problems for the Malaysian economy and society, both structurally and individually. This will put more pressure on our high ratio of household debt to gross domestic product (GDP), which is around 93% in 2020. This is of great concern.
Efforts to tackle this problem need to be swift and coordinated across multiple parties to ensure effectiveness and policy coherence. Our financial and financial markets should focus on developing an ecosystem for fintech products and applying digital technology in addition to focusing on improving financial literacy and personal finance management and planning . Equally important, the government and its partners must take urgent action in two key areas.
First, they need to develop a “granular” view of those who need help keeping their jobs or finding a new job.
States, with the help of local councils, will be able to quickly develop a granular view of areas where jobs are at risk and areas where there is additional demand for labor by industry, occupation, demography and geography. .
Particular attention should be paid to small businesses and the most vulnerable workers, including those in the odd-job economy, as well as the informal and casual sectors.
In addition, the government must develop smart and cross-sectoral solutions with the aim of quickly obtaining support to help those affected. As it prepares to reopen the economy after the lockdown, it must find ways to maximize employment and protect itself against new infections, following standard operating procedures guidelines. Again, special emphasis will be needed to restart and support small businesses, which account for the majority of jobs in Malaysia.
At the same time, governments and businesses will need to create new mechanisms to help people whose jobs are at risk to redeploy to occupations in which the demand for labor still exceeds supply, and to expand rapidly. the skills needed for their new roles.
All will not be catastrophic if the population manages to bounce back from this health and economic crisis, just as investors did after past recessions. But unlike investors, it remains unclear whether the brutal spikes of slow wage growth and unemployment brought on by the pandemic could put additional strain on the system’s finances. It is important to look at where people are today compared to previous years.
Anthony Dass is the group’s chief economist and director of AmBank Research. He is a member of the Secretariat of the Economic Action Council; and Assistant Professor at UNE, Australia. The opinions expressed here are those of the author.