Malaysia’s retirement savings crisis exposes deeper problems

Structural challenges are hindering social protections for the people

Photograph: mole.my

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By Por Heong Hong

The Asian financial crisis of 1997 revealed critical flaws in the country’s social safety net. But the lesson was seemingly forgotten until the recent Covid pandemic once again exposed the nation’s vulnerabilities.

Despite various forms of support, including government aid, private assistance and community initiatives, the pandemic worsened inequality.

A stark example was the surge in premature withdrawals from retirement savings in the Employees Provident Fund. These withdrawals depleted the retirement savings of workers, especially those from low-income backgrounds.

The launch of EPF account 3, which permits a 10% premature withdrawal, has reignited concerns about inadequate retirement security.

Over the last decade, the EPF has adjusted the benchmark for basic savings, targeted at 55-year-old individuals, on three occasions. Initially set at RM196,800 in 2014, it was raised to RM228,000 in 2017, and then increased to RM240,000 in 2019.

Throughout this period, there has been a concerted effort to encourage workers to bolster their retirement savings. This push has become urgent with the rise of the gig economy and an increasingly precarious job market.

In 2021, then EPF CEO Amir Hamzah Azizan (appointed as deputy finance minister in December 2023) said: “In the EPF, we have started dialogue and partnership programmes with Grab to incentivise Grab’s community of drivers and delivery partners to build their retirement savings via the EPF’s i-Saraan programme. 

“This collaboration has managed to attract more e-hailing drivers to save for their retirement, and so far, 10,000 partners have registered for the programme. We believe that mobilising our resources and efforts together is highly imperative to overcome the pressing problems of the nation.”

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Efforts by both the government and companies to encourage workers to enrol in and contribute to EPF accounts are important.

However, they also place the burden of retirement savings solely on employees. Such efforts neglect to address the sustainability of low-wage policies and other structural challenges.

Unlike civil service pension beneficiaries under Retirement Fund (Incorporated) or KWAP, EPF members do not receive pension benefits. Their retirement savings depend entirely on the wages earned during their working years.

This makes it difficult for many workers to save enough, especially considering the current minimum wage of RM 1,500 per month. So, only about 18% of EPF members have sufficient savings in their EPF accounts. (Sufficient savings is defined as having “at least RM1,000 a month over a 20-year retirement age”.)

Despite recent calls to raise the minimum wage to RM1,600 per month, this higher amount would still fall short of a living wage, estimated at RM2,700.

The large migrant workforce complicates Malaysia’s economic challenges. Despite its middle-income status, the country relies heavily on migrant labour, often characterised as precarious and disposable and with a high turnover rate, to sustain its commercial and industrial sectors.

Official figures from 2019 indicate that migrants numbered over 3.1 million, comprising over 10% of the local population (Department of Statistics, 2021).

But experts say the actual figure may be much higher, up to 15%, if undocumented workers are included (Lee Hwok Aun and Khor Yu Leng, 2018).

Since the start of the pandemic, authorities have deported thousands of migrant workers. Many others have left the country due to the economic slowdown. By 2021, the migrant workforce had dropped to 2.7 million, representing less than 9% of the local population. Over half a million local workers remain unemployed.

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Yet, the Malaysian Employers Federation and the Federation of Malaysian Manufacturers have urged the government to approve the recruitment of more migrant workers.

Bank Negara describes the Malaysian economy as operating on a “low-cost production model” depending heavily on low-skill foreign labour. The central bank says this situation makes productivity improvement difficult, keeps wages low and creates more low-skill jobs.

Migrant workers contribute significant revenue to the Malaysian government. Each documented worker is subject to annual levies ranging from RM640 to RM1,850, depending on the sector.

The notion that migrant workers drive down wage rates is not a new one, as it predates the pandemic.

Local workers unfairly blame migrant workers for undermining the labour market by accepting substandard wages. Employers argue that raising the minimum wage for migrant workers would lead to an outflow of remittances.

The paradox of unemployed locals and a labour shortage may seem strange. It needs to be understood in terms of prevailing low-wage policies and worker-employer tensions.

The prevalent belief that Malaysians are reluctant to take up “three D” jobs  – dirty, dangerous and difficult – conveniently deflects discussions about raising the minimum wage and enhancing social protections. Instead, blame is unfairly dished out to both migrant and local workers alike.

The retirement funds crisis is not a new phenomenon. The challenges existed long before Covid, intertwined with broader structural issues.

Social protection advocates need to address multiple interconnected challenges. These include inadequate retirement savings, low-wage policies, the reliance on low-skill workers, and the precarious nature of migrant labour.

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More substantial reforms are needed, beyond suggesting minimum wage increases and bolstering payroll-based savings.

A key reform would involve moving from means-tested assistance for specific age groups to a tax-funded universal social pension scheme.

It is unclear how much such a proposal would motivate fiscal conservatives and policymakers, given the limited tax base.

Over the past two decades, Malaysia’s tax revenue has surged nearly fourfold, reaching RM180.6bn in 2019 from RM49.1bn in 1996. But despite this growth, the country’s tax-to-gross development product (GDP) ratio has plunged from 19.4% in 1996 to 12.0% in 2019, signalling a shrinking tax base.

Malaysia ranks third in per capita GDP among Southeast Asian nations behind Singapore and Brunei. But its tax-to-GDP ratio is the lowest in the region, behind Cambodia, Thailand, the Philippines and even Singapore, as well as many other middle and high-income countries (World Bank databank).

This means that implementing a tax-funded universal social pension scheme would require a broader tax base (rather than allowing it to shrink further) and a more progressive taxation system.

Do Malaysia’s leaders have the political will to make that happen?

Por Heong Hong
Co-editor, Aliran newsletter
23 April 2024

The views expressed in Aliran's media statements and the NGO statements we have endorsed reflect Aliran's official stand. Views and opinions expressed in other pieces published here do not necessarily reflect Aliran's official position.
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