When the coronavirus pandemic started, the whole world shut down. Back then, Malaysians were mostly left to fend for themselves. Because of this, many were forced to reach for savings in order to survive. After that, the government made a radical decision.
Namely, it enabled people of all ages to take money from the pension fund. Billions of Malaysian ringgit were extracted by this, and now many Malaysians are on the verge of disaster, i.e. many pensioners are at risk of poverty.
The British Resolution Foundation is calling on the British authorities to do what the Malaysian authorities did during the pandemic. He claims that in this way the British will be able to overcome financial difficulties. However, enabling cash withdrawals or pension fund loans were successful in America or South Africa, but caused a crisis in Malaysia.
Flexible pension system
Malaysia has one of the best pension systems on paper. Workers pay 11 percent of the total salary to the pension fund, while employers pay 12 percent. The pension system in this country is significantly more flexible than in many richer countries.
Malaysia’s pension system is a “two pot” system. One pot is a fund from which money cannot be withdrawn until the age of 55. The second pot is a fund that is worth almost a third of the total amount of both funds, and can be used to buy a house, to pay for education or medical treatment.
During the pandemic, all Malaysians were allowed to take cash from the pension fund on four occasions, which totaled 145 billion ringgit (54 billion BAM). The Employees Provident Fund (EPF), Malaysia’s main pension fund for private sector employees, has seen its assets shrink by 15 percent after more than eight million people took cash to survive the financial shock caused by the pandemic.
As a result, millions of people are unable to retire. The average amount available for one person’s retirement has been reduced by 50 percent from 2019 to 2022 and is only 8,100 ringgit (3,000 BAM). This means that half of pensioners would live below the poverty line, while the richest two percent could live decently on their pension.
“Recipe for Disaster”
Malaysian Institute of Economic Research economist Geoffrey Williams noted that Malaysia’s failed experiment with a super-flexible pension system should serve as a warning to other countries.
“The example from Malaysia shows that withdrawing (money) from pension funds leads to widespread pension inadequacy and poverty among the elderly. At best it requires a complete rethink and at worst it is a recipe for disaster,” Williams said.
He believes that it is not acceptable to allow everyone to take money from the pension fund and that it is unlikely that Malaysia will do it again.
The Malaysian government restructured the EPF and introduced a third fund, which limited the payment of money to smaller amounts. However, as the British Telegraph writes, major reforms will be needed to guarantee pensioners an income above the poverty line.
The fund with “two pots” was seriously damaged even before the pandemic, and part of the reason for this is that money was withdrawn for housing and other living expenses, Klix.ba writes.
E.Dz.
