THE GLOBAL FINANCIAL crisis of 2008 had a brief negative impact – through asset values and inflation – on retirement savings, but luckily in Malaysia, retirement plans largely stayed their course. The situation then was not rosy but it pales in comparison to the protracted economic downturn Malaysia faces today, brought on by the Covid-19 pandemic. Unlike in the past, when unemployment was mainly concentrated in the export sectors, it is widespread this time around.

Employment income determines if one can retire comfortably with sufficient funds to last through the “golden years”. But in the time of Covid-19, workers have lost their jobs or been forced to take pay cuts, and their retirement savings have taken quite a hit. Not only are they unable to save as much as they had hoped to, they may soon be forced to dip into those savings after exhausting other saving pots.

This is a very real possibility as lockdowns continue to disrupt economic activity and unemployment rates maintain a tandem rise. In fact, Malaysia’s unemployment rate was at its worst last year, at 5.1%, since 1989, shooting up from 3.2% in 2019. As of March 2021, it remains elevated at 4.7%.

Even if workers are able to retain their jobs, their family members may not be so lucky. Adult children moving back in with parents or spouses losing income affects retirement savings as household members draw on their funds to support each other.

Adding to this concern is the recent surge of young graduates who have decided to further their studies while waiting for the job market to recover. It may be the case that parents are liquidating assets meant for retirement in order to fund their children’s tertiary education.

Where health is concerned, painful sacrifices have to be made as well. Those who are not able to work from home are faced with a dilemma: do they press on and place their lives and that of family members at risk, or do they resign during the downturn and take a gamble with their livelihoods?

This question cannot be ignored, especially if one shares a household with aging or immunocompromised family members. Leaving employment, for some at least, could be the lesser of two evils.

Age is another pivotal factor for income adequacy during retirement. In the event of a layoff or an unexpected market crash like that in March 2020, retirement funds may fall short of expectations. When that happens, older workers simply have less time to make up the difference compared to younger counterparts.

One way older workers have been making up for the shortfall of funds is to postpone retirement. Between 2017 and 2019, labour force participation rates (LFPR) had remained largely stable for most age groups. With the onset of the pandemic, however, LFPR rose for near-retirees (55-64 years old), indicating that senior workers are opting to stay longer in the labour market, or are rejoining the workforce (Figure 1).

A recent survey by Penang Monthly found that respondents whose jobs are affected by the pandemic have chosen to postpone retirement; this allows them more time to rebuild their savings. Debt is another critical consideration. Two-thirds of Malaysians aged 50-59 years old still have car and housing debts.¹ This not only hampers their ability to save for retirement, it makes them financially vulnerable as well should they lose their jobs.

But delaying retirement will only offset some part of the loss in retirement funds. Even if a senior worker decides to stay longer in the labour market, this does not necessarily guarantee a suitable job, or an employment for that matter. The harsh reality is that seniority is not always an advantage.

In the same survey, and for various reasons, working adults aged 39 years and above agree that an older age works to their disadvantage. Though older workers command a higher pay by virtue of their experience, they are not as efficient, tech-savvy or adaptive as their younger cohorts.

Since Q2 of 2020, changes in the unemployment rate for senior workers (> 55 years), when compared to the same quarter in the previous year, have been consistently above that for total unemployment (Figure 2). This shows that job security of older workers is more sensitive to negative shocks. To compare, when economic activity resumed in Q1 of 2021, the changes moderated at 1.3 percentage points for the overall workforce while for senior workers, this shot up instead, suggesting that they are at higher risk of long-term unemployment.

This data is telling; a delay in retirement is not always an option. Some will be forced into early retirement due to a lack of suitable job offers or prolonged periods of unemployment; this places retirement incomes at an even greater risk. Compounding this issue further is the ability to withdraw funds from the Employees’ Provident Fund (EPF) through emergency facilities like i-Lestari and i-Sinar. Granted, these will support present income, but only at the expense of tomorrow’s income.

Even before the pandemic, studies have shown that nearly 70% of EPF members aged 51-55 have less than RM50,000 in their accounts², a far cry from the recommended RM240,000. Alarming as the case may be, this does not take into account the millions of informal workers in Malaysia who are not mandated to contribute to the EPF and are unlikely to have pension coverage at all. Unsurprisingly, what this also means is that old-age poverty is not uncommon in Malaysia; about 41% of households with heads over 65 years old are living in poverty.³

But to generalise that all who choose earlier retirement do so unwillingly is not true either. Many near-retirees have succeeded in building up adequate pension savings, and moving retirement ahead by a year or two makes little difference financially. For Arjun Banerjee, for example, a 53-year-old professional who started saving up for retirement early, Covid-19 has been a reminder for him of how short life truly is. “You can work longer and make more money, but when you reach my age, you realise that your mental and physical health starts diminishing. What is the point then of having more money when you have less time to spend it?”

Arjun is set to retire this year, two years ahead of his initial plan, in order to pursue other aspirations and skills because “realistically, if you’re lucky, you only have 10 years or so after retiring to enjoy life.” He is right about this of course. Although Malaysians have a life expectancy of 74 years, only 41% of 60-69-year-olds agree that they have good health.⁴

The Covid-19 pandemic has made it glaringly obvious that for many of us, our finances are not strong enough to weather an economic storm, and it puts retirement at risk. For most Malaysians, retirement is not a priority until we touch 50, since excess cash is funnelled towards paying off debts. Even when nearing retirement, 60% of working adults still have to bear housing and car debts, which eat into their pensions.⁵

Turning the retirement situation towards a positive direction takes both policy-makers and would-be retirees themselves to do. The core principles of saving apply – save as soon as possible, start with any amount and deposit consistently in a retirement fund that locks the cash away until retirement. Compound interest, as Einstein puts it, is the 8th wonder of the world.

Apart from that, practising lifecycle investing – investing in riskier assets when young and shifting them gradually towards conservative assets – will help insulate investments from market downturns when workers can least afford it. Malaysia’s private retirement schemes offer to do this automatically, making it a convenient way to invest wisely without doing all the heavy lifting.

But insisting that the only solution is to simply save or to save better is problematic. We are often too easily side-tracked by biases and emotions, and sometimes are subject to events outside our control. Pension funds can play their part by tightening withdrawal conditions or allowing access only to cash that is in excess of what is needed for retirement. We have heard of nudges, adjustments that alter behaviour without changing costs and benefits faced. But withdrawal schemes are where sludges, the opposite of nudges, would be helpful, to make withdrawals harder for those who do not really need them. In a recession like the present one, greater income support by the government should also be considered for workers and employers to be able to continue contributing to retirement savings.

¹ AKPK. (2018). Financial Behaviour and State of Financial Well-being of Malaysian Working Adults. AKPK. https://www.akpk.org.my/sites/default/files/AKPK_Financial%20Behaviour%20and%20State%20of%20Finanical%20Well-being%20of%20Malaysian%20Working%20Adult.pdf
² Mohd Jaafar, N. I., Awang, H., Mansor, N., Jani, R., & Abd Rahman, N. H. (2021). Examining Withdrawal in Employee Provident Fund and its Impact on Savings. Ageing International, 46(1), 70–82. https://doi.org/10.1007/s12126-020-09369-8; World Bank. (2008). Case Study on the Employees Provident Fund of Malaysia. World Bank. https://www.worldbank.org/en/country/malaysia/publication/case-study-on-the-employees-provident-fund-of-malaysia
³ Measured using the definition for relative poverty, which is 50% of the national income. This means that 41.4% of households with heads over 65 years old live on household incomes of less than RM2,558 (based on 2019 income levels from Department of Statistics Malaysia).
⁴ Social Wellbeing Research Centre. (2021). Malaysia Ageing and Retirement Survey (MARS) Wave 1 2018/2019. University of Malaya.
⁵ AKPK. (2018). Financial Behaviour and State of Financial Well-being of Malaysian Working Adults. AKPK. https://www.akpk.org.my/sites/default/files/AKPK_Financial%20Behaviour%20and%20State%20of%20Finanical%20Well-being%20of%20Malaysian%20Working%20Adult.pdf