KUALA LUMPUR: It is inevitable that most Malaysians will retire later than at 55 years old, given the country’s demographic and wage levels of most income earners, according to the Employees Provident Fund deputy CEO.
Datuk Shahril Ridza Ridzuan believes the move to raise the private sector retirement age from 55 to 60 years old — through the Private Sector Retirement Age Bill tabled in Parliament mid-June — is a necessity, going by the data on savings rates as well as the amount most people have at retirement.
“People generally are not earning enough,” Shahril, the EPF’s head of investments, told The Edge in a recent interview. “So while the amount they put into the EPF as a percentage of their income is high at 23% or 24%, the real [absolute] amount is actually very small because wages tend to be low in that category.”
As a result, most people do not have adequate savings at retirement, and the issue is exacerbated by the fact that people are now living longer. “At this point of time, people are retiring at say 55, but life expectancy has increased significantly ... When the EPF was formed in the 1950s, life expectancy was probably in the low 60s ... today it’s in the 70s for the average Malaysian.
So you have a 20-year gap that needs to be funded,” he said, relating to how many countries have long ago extended the retirement age for this reason. “You can’t run away from the fact that if you have to fund a 20-year gap when you no longer have steady earnings, you need to save a lot of money. But if your gap reduces to say 10 to 15 years, the money you need to save becomes less,” Shahril said.
“So the increase in retirement age is more or less inevitable.” To illustrate, a person needs to save RM96,000 to have RM800 a month for 10 years, which doubles to RM192,000 if the requirement is for 20 years, assuming interest income is negated by inflation.
Some 86.5% of the EPF’s 6.3 million active contributors had less than RM100,000 in their accounts as at end-2011, according to the EPF’s 2011 annual report. The redeeming factor is 47% of the EPF’s total active contributors are below 30 years old.
Even so, there is cause for concern as retirees reportedly use up the average RM150,000 they have in their EPF accounts in the first three to five years of retirement. On the other side of the spectrum are the 2.2% or 137,149 active contributors who have more than RM300,000 saved in their accounts as at end-2011, accounting for 23.4% of the RM327.8 billion in total savings held by the EPF.
Among them, some 11,174 active contributors have at least RM1 million each in their accounts, making up 5.4% of total savings. The more affluent group are free to withdraw excess savings in their EPF accounts for other investments, including soon to be introduced private retirement schemes, which will cater for people with higher risk appetites who can afford to stomach more risk.
There’s also the option to schedule for periodic withdrawals, instead of a lump-sum withdrawal upon retirement, to help ensure savings last longer. “The flexible withdrawals are getting quite a good response, about 40% of people are now instructing us to pay them on a periodic basis so that they can plan their finances better,” Shahril said, explaining that dividends will be calculated based on the average account balance over the 12-month period.
One of the ways the government is addressing the inadequate retirement savings of the lower income group is through the fixing of a minimum wage as well as tax breaks to employers supporting training for employees.
Shahril considers the structural measures to lift the country’s economy as a whole more critical. “[Improvements to the economy] are actually more important because if we do not [help people earn more], the people are never going to have enough [income for retirement]: that’s a basic mathematical certainty.”
Some 93% of EPF contributors benefited from the government’s move to raise the statutory EPF contributions from employers by 1% to 13% from January this year for those earning less than RM5,000 a month, Shahril said.
At 24%, the combined statutory contribution from employer and employee for those earning less than RM5,000 a month, is at its highest since 1952, according to the EPF’s statistics. The rate is still 23% for those earning above RM5,000 a month, where the employee contributes 11% and the employer gives 12%.
Yet even Singapore — whose statutory contribution rates for its Central Provident Fund Board (CPF) are among the region’s highest of up to 36% (of which 20% is from employee) — is looking to raise statutory contribution rates, for its group of wage earners older than 50 years old so they have more savings for their old age.
In Singapore, in addition to a salary range cap, CPF contributions are tiered based on age. Those between 50 and 65 years old were previously allowed lower statutory CPF contributions of between 14% and 30%, of which at least 7.5% is from the employee.
The rate is to be raised to between 14.5% and 32.5% from September this year, the bulk by raising the employer’s contribution. In Singapore, the retirement age is already 62 years old, while workers in Indonesia are retiring at 60. In Japan, Australia, the UK and the US, the retirement age is above 65.
Singapore had reportedly contemplated pushing the retirement age to 68 at one point. The public sector retirement age is already 60 years old in Malaysia.
This article appeared in The Edge Financial Daily on June 25, 2012.
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