Savings scheme

Strengthen retirement savings

THIS is frightening to think of what will happen to our working young adults when RM 101 billion of Employee Provident Fund (EPF) funds flowed to over 7.4 million members to deal with the pandemic, leaving 73%, or nearly three quarters of them, in a serious state of having insufficient funds to retire above the poverty line.

There is also a significant drop in the percentage of members reaching the basic savings threshold of RM 240,000 at age 55, from 36% in 2020 to around 27% by the end of this year.

This led to calls for the government to strengthen the country’s social protection system for the rakyat and for the EPF to be overhauled. But what is sorely lacking is not so much social protection as it is social security, as Malaysia is transitioning to a high-income developed country.

Social protection is defined as a set of policies and programs designed to reduce poverty and vulnerability by promoting efficient labor markets, reducing people’s exposure to risks and strengthening their ability to protect themselves against risks and interruptions / loss of income.

Critics are in the wrong tree because the government, to its credit, has largely factored in the social protection program in the 2022 budget and the 12th Malaysian plan (2021-2025), the latter being aligned with the prosperity initiative shared, encompassing the three dimensions of economic empowerment, environmental sustainability and social reengineering.

On the other hand, “social security” refers to the comprehensive mechanisms and coverage of high-income countries, and is less applicable to new areas such as community and local schemes.

Ensuring that the rakyat has access to a minimum standard of living to cope with life during retirement in a country approaching an aging population, where a relatively smaller number of employable rakyat support a growing number of retirees, that is, is the essence of social security.

And this is where the decrease in the EPF balance of many Malaysians becomes a serious concern. In this regard, Malaysia does not have to reinvent the wheel judging by the many fancy and creative ideas put forward by many parties, which will only complicate the implementation.

The latest report from the Mercer CFA Institute’s Global Pension Index 2021, which ranks the best countries for pensions and pensions, places Malaysia 23rd out of 43 countries, in which Iceland is first, with an index of 84.2, while Thailand is in last place with a score of 40.6.

Malaysia scores 59.6 – a slight drop from 60.1 in 2020 – which means our pension and pension system is better than Spain (24th, with a score of 58.6 ), China (28th, 55.1), Italy (32nd, 53.4), Austria (33rd, 53.0), Japan (36th, 49.8) and South Korea (38th , 48.3).

There will be people who poop in the rankings like it’s done by pro-Malaysia pundits to make the country look good. The point is, this is a scientific study where what puts a country at the top of the list is the weighted average given to three sub-indices – the adequacy sub-index, the sustainability sub-index and the integrity sub-index.

The adequacy sub-index, which accounts for 40% of a country’s overall index score, examines how a country’s pension system benefits the poor and a range of wage earners. It also examines the efficiency of the system, the country’s household savings rate and the homeownership rate.

The sustainability sub-index (35%) considers factors that can affect the sustainability of a country’s pension fund system by examining the level of private pension coverage, public debt, and economic growth.

The integrity sub-index (25%) explores the communication, costs, governance, regulation and protection of pension plans in this country, and considers the quality of its private sector pensions because, without them, the government becomes the sole pension provider. It would be good if these sub-indices were the driving force for our retirement and retirement system to be consistently among the best in the world.

In addition, we can incorporate elements of best practice from top ranked countries, in particular Singapore’s pension scheme, the Central Provident Fund (CPF), into our EPF system. CPF members earn government guaranteed interest of up to 6% per year on their savings. In comparison, other defined contribution pension plans require members to take certain investment risks in order to grow their savings.

It is sustainable because payments depend on savings set aside by each member, unlike many other taxpayer-funded pension systems, which run the risk of default or insolvency given the rapidly aging population. population and the challenges of reducing pension benefits or postponing pension payments. age.

To help cover basic retirement expenses, CPF members can set aside the Basic Retirement Sum (BRS), which refers to the actual expenses of retiree households. And to obtain higher CPF payments, citizens can either top up their CPF from the age of 55, or postpone the starting point of their lifetime retirement payments.

In addition to the individual contribution of 20% of their salary to the CPF, this is supplemented by contributions from employers, relatives and the government. For example, those under 55, for every dollar they contribute to their CPF Special Account (SA), their employer adds S $ 0.85 (RM 2.61), which gives them $ 1.85 S. This will double to S $ 3.70 in about 20 years and S $ 7.40 in 40 years. That’s seven times more than the S $ 1 they contributed. This is calculated using the base interest of 4% per annum on their SA.

A member with a full retirement sum (FRS), currently S $ 186,000 at age 55, can expect to receive a payment of approximately S $ 1,430 to S $ 1,530 per month, starting at age 65 . Those with less at 55 – the BRS, which is half the amount of the FRS, at S $ 93,000 – can expect to receive a payment of around S $ 770 to S $ 830. does not have the BRS amount at age 55, he has the remaining 10 years of activity to fund his retirement account until he reaches the BRS or FRS amount at 65 to benefit from higher remuneration during retirement.

For Malaysia to implement this, it can play around with the basic savings threshold of RM 240,000 at age 50, which in concept is quite similar to BRS, and then introduce a final savings threshold, which doubles the base threshold, as the basis for a higher monthly payment lifetime from 60 years.

Additionally, instead of members receiving dividends, this can be changed to earn government guaranteed interest of up to 6% per annum on their savings along with the base interest for Account 1, which is for the retirement, must not be less than 4%. For the Islamic account, this guaranteed gain could take the form of a hibah.

Finally, a strong social safety net is a prerequisite where a member of “Keluarga Malaysia” in financial difficulty would always receive financial assistance from other family members as a first resort, and failing that, support from the community and finally from the government. last resort. .

This would strengthen the resilience of the poor so that the withdrawal of EPF funds is not used in times of difficulty as the aid is close to this social safety net until the withdrawal age at 50 and 55 to cope with life during retirement.

This idea of ​​a social safety net is ingrained in the CPF system when family members are encouraged to top up the CPF of their friends and relatives, and the government also top up the SA and Medisave accounts of CPF members on a regular basis. periodic, especially when the government reaches a budget surplus.

Jamari Mohtar is the editor of Let’s Talk !, an electronic news bulletin. Comments:

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