Will the EPF silver bullet proposals work given Malaysia’s ageing and low fertility nation scenario?
Recently there have been quite a number of news updates on EPF. It was reported that they want to handle the current retirement sufficiency and livelihood balance with 2 proposals which some are calling the silver bullet for this issue.
These proposals are:
- The creation of an Account 3 whereby 5% to 10% of the contributions will be allocated to this account and the members can withdraw it at any point in time.
This is to address the many recent complaints of persons claiming that they need the funds for their livelihoods today and not when they retire given the aftermath of the Covid19 pandemic.
- A proposed lifetime pension approach for those born after 2009
This is to handle the concerns that people don’t have enough retirement savings to live in dignity due to increasing life expectancy.
It is too soon to judge if any of these proposals will have the impact envisioned without the details on how they will be carried out. However, I believe these two initiatives won’t resolve the situation. They are contradictory to one another and do not address the core issue at stake: the creation of an economically viable and competitive country with a productive population who can live, work and retire with dignity.
Why I believe it won’t work:
- EPF was first created because people don’t save enough for their retirement.
If we look into the history and rationale of the EPF’s creation, it is because people don’t plan their retirement properly and don’t have the self-discipline to ensure that they take care of their sunset years. This in turn ends up burdening the government healthcare and welfare systems which are already underfunded, overworked and generally not in great condition even then and even more so now.
As it is, EPF already has many options and exceptions that allow for early withdrawal in many circumstances including housing, education, medical and etc. This makes the EPF Account 3 proposal against the initial rationale of EPF and its already extensive withdrawal exceptions. See here for the full list: https://www.kwsp.gov.my/member/withdrawals
- The idea of a pension scheme methodology only works if you have continued young productive members.
The initial pension scheme model in Malaysia was a more pure government and GLC method whereby the organisation would pay for their employees’ retirement as a sign of thank you for the years of loyalty. In recent years, corporates have abandoned the model (not many were doing it in the first place) as it is a huge drain on resources and trends show no loyalty to reward workers any longer. The government maintains it but now chooses to create KWAP (Kumpulan Wang Persaraan – https://www.kwap.gov.my/corporate/overview/) whereby the funds for pension payments that are given to them are also invested to generate returns to make the pension payments more manageable and sustainable.
So today, with this switch of no lump sum payments from organisations and self-generation of investment returns on funds, a pension scheme relies on its younger contributing members. It is only sustainable when there are more young and productive contributing members who continue to earn and contribute to a fund which then invests and pays for the older retired members whilst having money left over to invest to safeguard the current contributing generation. The moment when there are more retirees (none productive members who don’t contribute to the fund) vs productive members the pension fund is at risk of failing. This is very likely given the increased life expectancy today vs the retirement age.
- The EPF model is already under pressure if not failing due to increasing life expectancy
When EPF was first envisioned, the retirement age, the contribution percentage and the amount needed to retire were done based on the life expectancy then. They were expecting people who retire to die within 3 to 5 years of retirement. Today, the life expectancy is 77 (females) and 75 (males) according to the Department of Statistics Malaysia. People are living 20-plus years after retirement (current retirement age 55 years old). This is why funds aren’t enough even when they do contribute to the EPF fund.
- Macro trends affecting workforce productivity and income generation for sufficiency of funds in the EPF model
Related to point number 2, we need to acknowledge that there are multiple macro trends also affecting the continued existence of a more productive younger workforce and their earning potential and capacity.
- Malaysia is an ageing nation.
This means we will have more older people and fewer younger people in the population. This is in part due to people living longer ie we are victims of our own success. So creating that influx of new more productive citizens is impossible by just utilising existing citizens and population in Malaysia. We need to not just encourage more people to have children but we need to seriously look at more progressive immigration laws and citizenship laws – more on this here.
- The influx of older generations in the workforce for their survival and its impact on opportunities for the next generation
Due to the rising cost of living and insufficiency of retirement funds, these same older generations are now either forced to work longer or depend on their children for support. The older ones who do manage to retain their work I would argue generally are less productive and not as adaptable to technology changes. This makes that workforce also less economically productive and causes the younger generation to pick up their slack.
In a nutshell, this means: there are less room and opportunity for the next generation to be promoted and earn more salary as their bosses literally have to die before they are able to climb up – despite them already doing more than any previous generation in the same position. This is in addition to the younger generation having to support older family members who could not keep working ie the sandwich family trend.
- Malaysia’s low fertility rate
Malaysia has a low fertility rate and we are slowly reaching the point where we will no longer even be producing enough children to replace the persons who die.
So the point mentioned on getting people to have more children is already failing as a government policy and/ or is not as emphasized by the government as a policy. I believe that there is a correlation between this and the sandwich family trend mentioned above. As younger people are required to work longer and support more family members as well as technology making them easier to be contactable outside of working hours, they have less time to socialise and build their own family units. They are also unlikely to feel secure to do so given all their financial commitments.
- Female participation in the labour force remains low whereby they have a higher earning potential and have taken more educational resources
Only 54% of Women in Malaysia participate in the workforce. This means only 5 out of 10 women work vs 9 out of 10 men. This is alarming when you consider almost 60% of the graduates today are women. This also means they have the best chance of earning more income in higher paying jobs (therefore higher EPF contributions) and yet they leave the workforce never to return.
If it was only to take care of the future generation, it would be great, but we can already see from the above, we aren’t having enough kids with our low fertility rates. I hypothesise they are also affected by the need to care for the elderly as unfortunately in Malaysia, traditionally care duties fall to women. This is related to the above-mentioned life expectancy increase, sandwich families and rising cost of living scenarios. Human Captial Development is in general an interconnected matrix of multiple issues.
- EPF’s actual impact on the whole Malaysian population actually is small.
Additionally, even if you implemented the 2 initiatives mentioned above by EPF successfully – notwithstanding all the other external factors I just mentioned above – it still will not solve the issue as a whole for Malaysia because EPF contributors today only account for about 48% of the population – the current population of Malaysia as at 2022 is roughly 32.7 million people based on Department of Statistics Malaysia. See https://www.dosm.gov.my/portal-main/release-content/current-population-estimates-malaysia-2022
As of December 2022, EPF has only 8.39 million active contributing members and 7.33 million non-active members – making the total 15.72 million members. This means only about 26% of the population is actually contributing to the EPF fund today. We need to increase this coverage to make it more sustainable.
Due to all of the above, the two current proposals by EPF are destined to only be stop-gap measures at best. So how do we move forward?
A more workable solution is the creation of an Akaun 3 in the EPF funds for all newborn Malaysians whose minimum funds will be wholly paid out by the Government progressively as the parents meet certain goals in raising that next generation. See the details of my recommendation here: www.im-possible-solutions.com/epf-account3-alternative/
This cannot be done in isolation. Multiple other additional recommendations must take place alongside the Akaun 3 recommendation as detailed in the above article link. Unfortunately, this involves multiple ministries and agencies looking into this issue beyond their typical traditional considerations. The current ministry leading this issue of an ageing nation is the Ministry of Women, Family and Community Development. Forgive this perspective but this is destined to fail due to ministerial and civil service hierarchy and power dynamics.
We need to take more drastic and holistic measures if we are to resolve this issue. Ultimately this is an interconnected issue that will affect the future of the country as a whole. We need a cross-cutting ministerial committee at the highest levels of Government. Without it, we will fail to solve this issue to the detriment of all future generations in Malaysia.
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