The 15th annual Mercer CFA Institute Global Pension Index (MCGPI), released on 17 October, offers a comprehensive comparison of global pension systems, including those of Singapore and Malaysia.
While Singapore’s Central Provident Fund (CPF) system was heralded as the “best system in Asia” and received its first-ever ‘B+’ grade, Malaysia’s Employees Provident Fund (EPF) ranked 32nd out of 47, with an overall index score of 56.0. This places Malaysia fourth in the Asian rankings, despite its higher dividend rate than Singapore’s CPF.
The CPF’s Special and MediSave Account (SMA) interest rates saw a slight increase to 4.04% per annum in Q4 2023. CPF members enjoyed S$2.8 billion (approximately US$2.04 billion) in retirement payouts in 2022. In contrast, Malaysia’s EPF declared a dividend rate of 5.35% for Conventional Savings for 2022, with a total payout of RM45.44 billion (approximately USD 9.8 billion).
Professor Wong Chin-Yoong from Universiti Tunku Abdul Rahman Malaysia weighed in on Malaysia’s EPF performance, noting that Malaysia’s fourth-place ranking is “not shameful at all,” especially when considering the retirement protection systems of other developed Asian economies, such as South Korea and Taiwan, as well as several Southeast Asian countries and China.
EPF remarkable performance in maintaining integrity and promise withdrawal for its members
“One of the crucial reasons for its comprehensiveness is its broad coverage, encompassing almost all public sector employees, as well as a portion of the private sector.”
He further highlighted, “For example, one of the categories in the rating is the governance and integrity of the pension system, in which Malaysia’s performance is among the best.
This is largely because, over the years, there have been no scandals or mismanagement, and no cases where members were unable to withdraw their funds. This exemplary performance is a testament to its robustness.”
“In terms of sustainability, unlike the pay-as-you-go system in the United States, our pension scheme functions more like a savings scheme. This means that what you save is what you receive, and hence, sustainability is less of an issue.”
While Professor Wong highlighted that the EPF represents one of the best-performing government agencies. However, the major issue lies in its ability to address adequacy problems, which is EPF’s lowest-scoring aspect.
In fact, the EPF board revealed that 51.5% or a total of 6.67 million of its members under the age of 55 had savings below the RM10,000 (approximately US$2,094) level as of 2022.
He stated that the reason might not solely be the high dividend payment as Malaysia’s dividend payments have been consistently better than Singapore’s over the years.
Additionally, the EPF offers a minimum guaranteed return of around 3%, ensuring that it does not fall below this threshold.
“In terms of the performance of your savings and returns, it has consistently been commendable. Few savings schemes can offer such a high, risk-free return. ”
Low wages and lower contribution rates
He explained that It’s evident that the general wages are generally low, and secondly, the contribution rate is not high either.
In comparison, Singapore requires employees (aged 55 and below) to contribute 20%, while employers contribute 17%, bringing the total contribution rate to 37%.
However, in Malaysia, employees below the age of 60, earning a monthly salary of RM 5000 (US$1,046) or less, contribute only 11%, and employers 13%. Therefore, apart from low wages, the contribution rate is also relatively low.
Professor Wong suggested that to address the low score in the adequacy aspect, it is crucial to focus on these two aspects.
“You must find ways to increase the income of the general populace in Malaysia. However, this is not solely an EPF issue anymore, ” he added that EPF need to explore methods to enhance its members contribution rate.
Proposals for a more equitable and progressive contribution scheme
He stated that the current EPF scheme does not consider the individual’s income level when determining the contribution rate, resulting in a flat rate regardless of income.
To address this issue, he suggested reconsidering the contribution rate and making adjustments, particularly in the employer’s contributions.
“For instance, employer contributions could be adjusted in accordance with employee wages. This ensures that the retirement fund for those in the lower-income group is adequate. ”
One possible approach is to increase the employer contribution rate by at least one or two percentage points for this group.
If employers argue that this will increase their burden, they could be compensated by higher-income employees, for example, by reducing the employer contribution rate by 1 or 2% for the group.
“For example, if an individual earns around RM 20,000 per month, reducing their contribution rate by one percentage point can effectively compensate for the lower contribution rate of several low-income groups, without significantly burdening the employer with increased costs.”
In the current system, the employer’s maximum contribution is 18%, which is purely at the discretion of the company itself, possibly as an employee benefit, without being tied to income.
It is entirely a decision of the company. Hence, it’s worth exploring if our contribution rate can be modified accordingly, Professor Wong said.
For example, for those with lower incomes, the employer contribution could be increased to 14 or 15%, while for those with higher incomes, it could be further reduced, for example, to 11 or 10%.
Assessing the need to reform Malaysia’s pension system amid economic challenges and demographic shift
When asked about the urgency for the Malaysian government to reform its pension system, given the challenges posed by inflation, the cost of living, and the continuous devaluation of the ringgit, Professor Wong shared his perspective.
Professor Wong acknowledged that there might not be an immediate crisis, but pointed out the impending challenges, such as the projected increase in the number of individuals reaching retirement age, which is expected to be around 15% of the population by 2030.
He emphasized the importance of preparing the Malaysian populace for their retirement years, as insufficient preparation might lead to various societal issues and an increased burden on the government.
For instance, inadequate retirement funds might lead to a rise in poverty rates, an increased reliance on the public healthcare system, and additional financial pressure associated with healthcare expenses for the elderly.
Moreover, he recommended exploring changes in the current system, such as converting some of the existing cash aid to Malaysians, into a savings scheme.
By doing so, Professor Wong believed that the Malaysian government can promote a savings culture among low-income groups. He suggested that these cash aids could be transformed into a six-month savings deposit, earning interest and instilling a savings habit among recipients.
Professor Wong delves into challenges in implementing extended work years for elderly employees
Singapore government has proposed a gradual increase in the statutory retirement and re-employment ages to 65 and 70 respectively by 2030, up from 63 and 68 today.
According to a Reuters’ report in 2019, many elderly Singaporeans look for jobs after retirement because the Singapore’s CPF retirement saving scheme does not provide enough money for them to survive.
When asked about the viability of encouraging elderly workers to extend their working years to boost retirement savings, Professor Wong noted that this strategy is commonly adopted by most developed nations.
However, while it might seem logical and practical in theory, its execution often faces significant challenges
He emphasized the importance of considering the current realities, such as Malaysia’s demographic projections. While Singapore has already raised its retirement age, Malaysia, which is a relatively younger population, is projected to reach a similar demographic milestone in 2050, which is a matter of 27 years in future.
He cautioned that applying Singapore’s approach immediately might not be well-received by the Malaysian population.
Professor Wong highlighted how the recent allowances for early withdrawals from EPF during the COVID-19 pandemic had already created some backlash and negative perceptions about the fund.
Additionally, Professor Wong pointed out the disparities between blue-collar and white-collar workers in terms of the impact of an increased retirement age.
He emphasized that the labour-intensive nature of blue-collar jobs could make it physically challenging for workers to continue employment until a later age, thereby exacerbating their financial struggles during retirement.
Professor Wong suggested that while increasing the retirement age might seem beneficial for the overall EPF, it could significantly harm those who are already financially vulnerable and unable to extend their working years.
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