Impact of an aging society

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Having insufficient savings is a big concern, but withdrawing money prematurely will only compound the problems of the inevitable aging society that Malaysia will face in the decades to come.

In October 2021, the country’s chief statistician, Datuk Seri Dr Mohd Uzir Mahidin, pointed out that Malaysia is expected to transition to an aging nation sooner than expected, with the population aged 60 and over expected to reach 15.3% of here 2030.

A World Bank report in 2018 had noted that Malaysia’s low retirement age and high life expectancy would lead to a gap between life expectancy and pension – which is 19.2 years in Malaysia, higher than in other countries in the region.

“Lack of pension coverage as only half of the working population contributes to EPF, leaving the other half without pension coverage. Financial awareness of retirement in Malaysia is low,” the World Bank report said.

Managing Director of Datametrics Research and Information Center Sdn Bhd, Pankaj C. Kumar, said the tipping point where net inflows of ETH funds are lower than net outflows, due to shrinking work, will take a long time to happen.

“Wages increase over time, which means net inflows may be higher overall. The other function is the contribution rate,” he said.

Pankaj noted that excluding one-time pandemic-related withdrawals, the EPF is still very healthy in terms of net inflows each year.

He added that to improve income security after retirement, the government could consider extending the retirement age for the workforce beyond 60, as well as more efforts to promote literacy. and financial planning.

“Many countries have gone in this direction (to lengthen the retirement age). In addition, financial planning requires a lot of education and understanding. Money that is set aside today, but withdrawn for a short-term gratification will compromise long-term goals,” Pankaj said.

Chief Economist of Bank Islam Malaysia Bhd (BIMB), Dr Mohd Afzanizam Abdul Rashid, said that going forward, one of the challenges was to replenish the EPF savings that had been used following the economic disruptions from Covid-19.

“Over the past two years or so there have been many special withdrawals from the ETH to meet current cash demands. With the transition to an aging nation, the country needs to create more jobs that will enable growth revenue to accelerate. Again, that’s easier said than done, obviously,” he said.

Mohd Afzanizam added that there is a dire need to improve the financial literacy of Malaysians, as it is crucial for people to gain a better understanding of the “risk-return trade-off” in investments, especially since today , it is much easier to access platforms that provide access to digital asset trading.

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He noted that more should be done to promote the tax relief incentive for private pension schemes (PRS).

As part of the 2021 budget, the government had extended PRS personal tax relief up to RM3,000 per annum until tax year 2025.

Regarding the nation’s aging factor, an asset fund manager said he was “completely confident that the EPF is well aware of this, and that the size of their fund would be able to manage the increase in total withdrawal amounts by more retirees in the future”.

He pointed out that in the coming years, while the number of retirees will be greater in proportion to the population of the country, the population will continue to grow and, therefore, the number of people of working age will also increase.

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“In addition, there is already talk of raising the retirement age, which is another measure that can improve retirement savings and income,” the fund manager said.

Dr. Yeah Kim Leng, professor of economics at Sunway University, also explained that when the “demographic twist” happens over the next 10 to 15 years, that’s when the dependency ratio will begin to rise and the EPF will begin to face a higher level of withdrawals relative to new contributions from the working-age population.

“ETH’s asset allocation will need to shift more towards liquid and fixed-income assets rather than longer-dated, higher-returning but riskier assets,” Yeah said.

He added that it would be more difficult for EPF to maintain high returns in domestic and foreign markets, as economies facing aging population issues tend to be less dynamic and stagnate or grow more slowly.

“Young EPF members will need to diversify their savings to include private retirement savings tailored to individual needs in order to meet their expected lifestyle or maintain the desired standard of living when they reach retirement age. If they face insufficient retirement savings, they will have to extend their working lives or find additional sources of income to retire comfortably,” Yeah pointed out.

UOB Kay Hian Malaysia research director Vincent Khoo says an aging workforce combined with the growing trend of young population joining the gig economy will ultimately cause the fund to dwindle. pension.

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However, Khoo pointed out that the aging of the population, in theory, should not have a significant impact on the performance of the pension fund, as the fund’s investment allocations should not be significantly influenced by contributors. aging, although unusually large drawdowns over short periods can disrupt investment allocations and render investment returns suboptimal.

He said existing contributors should look forward to EPF’s consistently impressive investment performance.

“Hopefully, the young working population would become more active in their financial planning for retirement, which is absolutely essential given this phase of high inflation,” Khoo said.

Dr Liew Chee Yoong, a researcher at the Center for Market Education, also said the EPF will need to ensure it has sufficient funds for contributors to withdraw, in tandem with an aging nation.

“Unless ETH can continuously maintain its excellent investment performance at home or abroad to grow the fund, the size of the fund will gradually decrease due to increased demand for withdrawals. The government will have to maybe step in financially if this issue arises,” Liew said.

Meanwhile, Malaysian University of Science and Technology economist Dr Geoffrey Williams said an aging nation profile is often associated with slower growth and higher social costs, and for EPF , this may mean that it will have to continue and expand its investments abroad or engage more assertively in venture capital or other types of investment.

“For members with balances and good contributions, the EPF will remain the best option for pensions. But, for those who do not have a balance or who cannot maintain regular contributions, the EPF must offer new products to expand its support for people in this group such as health insurance or other savings options,” he said.

Williams added that the biggest risk is that withdrawals will become more common and that the EPF will be seen as the solution by politicians for funding gaps.

“It’s very dangerous and risky for EPF members,” he said.

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