Between 2020 and last year, due to four rounds of COVID-19 withdrawals, 8.1 million Malaysians withdrew RM145 billion from their pension fund.
By February 2021, the Employees Provident Fund (EPF) reported that approximately 30% of its members had depleted their retirement savings in Account 1, which cannot typically be accessed before age 55.
By the end of the previous year, around 51.5% of members under the age of 55, almost 6.7 million people, had less than RM10,000 in their accounts.
Based on the EPF’s calculations from the previous year, only about 4% of Malaysians could afford to retire.
Calls for further EPF withdrawals have been growing, exacerbated by inflation. Prime Minister Anwar Ibrahim has proposed a new EPF account for flexible access during emergencies.
However, the situation has sparked a debate about whether previous administrations made the right decision to unlock the EPF and whether Malaysia faces a retirement crisis that can be mitigated.
One concern is the opportunity cost of early withdrawals, as the EPF generates returns on investment.
Malaysians who withdrew funds during the pandemic faced an opportunity cost, as the interest their accounts would have accrued was lost.
EPF has delivered an average annual return of 6% for its members since 2011. Those who withdrew funds during the pandemic saw the interest they could have earned erode.
There were extenuating circumstances, as the economy contracted, many small enterprises shut down, and households fell into lower-income categories. However, the government’s decision to tap into citizens’ own money has been met with mixed reactions.
The EPF is not running out of funds; its overall balance sheet remains healthy. The main issue is that Malaysians were not saving enough. To retire comfortably, the EPF recommends saving RM240,000, but many Malaysians are far from this target.
What has been revealed by the pandemic is that Malaysians were generally not saving adequately, and the nation’s low wages contributed to this issue.
Low wages and rising living costs make it difficult for people to save for retirement, contributing to the issue. Measures to raise income levels and improve retirement savings are being explored.
Malaysia has the second-highest household debt-to-GDP ratio in the region after Thailand. Raising the retirement age and increasing employment opportunities for the elderly are being considered as policy mechanisms to boost savings.
The EPF threshold calculated last year for a “decent” retirement in Kuala Lumpur was RM600,000, and those in their 40s or older have little time left to work to reach this goal.
If large numbers of Malaysians retire without sufficient savings, it will place a burden on the next generation and create a sandwich generation.
There is no quick fix to turbocharge retirement savings, but there is a window of opportunity for reform in the next 10 to 20 years.
Malaysians understand the importance of saving for retirement, but whether they have the capacity to do so is another matter.