Securing our pension system in the face of rising life expectancy and economic realities

In Malaysia, the average life expectancy in 2023 is 76.65 years, which is something you should know if your parents are about to retire at 60. That represents a 19 per cent increase from 2022 (76.51 years). The group of people aged 0 to 14 years is declining at a rate of 17.5 per cent, while the group of people aged 15 to 64 years shows a growing tendency to 69.7 per cent. These trends are consistent with the life expectancy trend.

Although the pension system in Malaysia is well-organised, there may be some challenges in the future given the country’s rising life expectancy and the fact that the majority of its population is in the senior citizen age group. The first challenge for Malaysia’s pension system is that, given the rising trend in life expectancy, the Malaysian pension system must at the very least provide its retirees with an additional 16 years of saving after they leave the service.

Accordingly, the pensioner needs to have at least RM576,000 for 16 years given the RM 3,000 monthly living expenses for senior citizens in Malaysia. They do, however, require RM600,000 due to their ageing health and fragilities. In light of this rising trend in life expectancy, it might be prudent to change Malaysia’s pension system so that retirees can reap the benefits over an extended period of time.

The second challenge pertains to Malaysia’s continuously rising cost of living. According to the Belanjawanku 2022-2023, a senior citizen’s anticipated monthly budget is RM2,520 for a single person and RM3,210 for a pair. Therefore, to meet the senior citizen’s current monthly expenses, the last received pay should be at least RM5,500 based on the current Malaysian maximum pension computation of 60 per cent.

However, the worker who was only able to receive RM1,500 as minimum pay was unable to reach RM5,500 as maximum pension. Raising the next generation’s level of education and basic pay is one way to ensure that Malaysia benefits from the country’s pension system. The mean pay for young people with tertiary education is RM4,643, the highest of any degree of education, according to RinggitPlus Malaysia (2019).

In the meantime, young people with primary and secondary education earn an average wage of RM1,929 and RM2,372, respectively. Hence, higher educational attainment, a higher basic salary, and the highest eligible pension amount.

The final challenge is the portfolio management of the Malaysian pension fund. The rising trend in interest rates in the US, coupled with lower interest rates in Malaysia and most other nations, will make managing the Malaysia pension fund’s portfolio more difficult.

It will be increasingly difficult to predict which domestic or foreign investments have the potential to yield larger profits. When allocating the Malaysian pension fund to the appropriate investment portfolio, Kumpulan Wang Persaraan (KWAP) Malaysia needs to be more robust and analytically proficient.

In conclusion, the confluence of rising life expectancy, shifting demographics, and economic uncertainties necessitates a proactive re-evaluation of Malaysia's pension system. As we acknowledge these challenges, it is incumbent upon policymakers, financial institutions, and educational bodies to collaboratively chart a course toward a more sustainable future.

We call upon the government to initiate a comprehensive review of the pension system, considering adjustments that align with the increasing life expectancy and the financial needs of our senior citizens. Simultaneously, businesses and educational institutions should work in tandem to elevate the earning potential of the younger workforce through enhanced education and improved basic pay.

Furthermore, the portfolio management of the Malaysian pension fund requires a strategic overhaul, and institutions like KWAP must enhance their analytical capabilities to navigate the evolving global economic landscape.

In embracing these proactive measures, we not only safeguard the financial well-being of our retirees but also fortify the foundation for a resilient and equitable pension system that serves the needs of all Malaysians, present and future. The time for action is now, and by working together, we can ensure a secure and prosperous retirement for generations to come.

Dr. Adilah A. Wahab is a Senior Lecturer at the Department of Finance, Faculty of Business and Economics, Universiti Malaya, and may be reached at [email protected]. The views expressed in this article are the author's own and do not necessarily reflect those of Sinar Daily.

Sinar Daily dives deeper into the retirement dilemma faced by many Malaysians in this episode of Sinar Specicals. Watch now!