Thursday, October 27, 2016

ICYMI: Malaysia’s Pension Crisis

My latest (excerpt):

Challenges of a pension system

ONE aspect of an ageing society is obvious to everyone – care for the elderly will take on greater importance. How adequate are Malaysia’s pension systems?

In western societies, most countries have achieved universal coverage, with net income replacement values ranging from 29% in the United Kingdom, to 96% in the Netherlands (based on OECD data)….

…The challenge in these western economies is one of sustainability. The problem with DB schemes is that they are based on the principle of pay-go – current workers’ contributions pay for the pension entitlements of retirees. This is not an issue if the demographic profile of the country is relatively stable...

Click the link for the rest.


  1. Before you embark on more cr ap talk dude, why not answer the following:

    What is sustainability in the above context?

    why not sustainable now given it was before?

    what are the economic inputs that maintain sustainability?

    How come sustainability was not envisioned at planning and subsequent review stages?

    If sustainability has always been a concern, why implement a non-sustainable scheme in the first place?

    There are many other Qs but it would be suffice to say that to cloud the issue with econspeak cork talk and mindless spinmeistering wont make the issue go away anytime soon.

    Only by divulging the actual data and facts should one initiate changes that affects the lives of masses while elites remained securely walled off in their penishouses... oops......penthouses. ROFLMAO

    Warrior 231

    1. @Warrior

      Sustainability in the context above is simply the ability to pay off liabilities with your assets:

      "The challenge in these western economies is one of sustainability. The problem with DB schemes is that they are based on the principle of pay-go – current workers’ contributions pay for the pension entitlements of retirees. This is not an issue if the demographic profile of the country is relatively stable. But if a country’s population is ageing, pension entitlements have to be paid by a shrinking pool of workers for a growing group of retirees."

      What is it about the above quote that you didn't understand?

      In the Malaysian context, except for the civil service pension, we don't have a sustainability problem. Did you actually read the article? Because it sure sounds like you didn't bother.

  2. Hisham,

    1) You said "I believe coverage here is more important than trying to meet some impossible standard of adequacy", aren't adequacy and coverage independent to each other?

    With due respect, I feel like it's saying "we should care more about those who are uncovered by EPF than those who have less than RM50k in their EPF accounts".

    I can see that you are trying to focus on the ultimate problem i.e. post-retirement poverty, but isn't it the same if you get the uncovered guys covered but still they have only <RM50k in their account by 54?

    If the lens is on post-retirement poverty, I think solving pension problem is not the ultimate solution for them, because like it or not, adequacy is still the major hindrance. They didn't get adequate income in the first place.

    "Even a modest income supplement would be preferable to leaving people in poverty. Funding such a system would have to be done with care to ensure acceptance and sustainability", that sounds like a plan but a tough plan, especially when our government is at wrong footing right now.

    2) I'm all in for extending retirement age. In fact, I don't plan to retire at all (I'm still in my early 30s though). Warren Buffett taught me about tapping dancing to work everyday and that's what I've been doing. Of cause, not many people are as lucky as I am.

    3) IMO, the third reform you suggested is almost impossible to happen. Why? To keep it simple -- politics.

    1. @Fung

      1) Yes they are. And that is exactly what I'm saying. Better to have full coverage, however inadequate, then to leave some covered and others left to fend for themselves. If you look at other pension systems, it's obvious that full adequacy is prohibitively expensive.

      It's also a very big problem: roughly half of all working age Malaysian adults have little to no pension coverage (neither EPF, KWAP or LTAT savings).

      Your analysis of the situation is the same as ours: this is primarily an income problem, not a pension system problem. Nevertheless, we try to do the best we can within the boundaries of what we can do.

      2) Same here. I want to work til I keel over. But many Malaysians don't think the same way unfortunately. Singapore will be shifting their's to 67 soon.

      3) Don't discount it just yet. Can't say more. Let's just say its within the bounds of reality.

  3. Being crass is not needed. Just stick to topic at hand. Unable to express oneself without being a nuisance, is that the case?

  4. Nurhisham Hussein, share with us EPF's on-the-ground survey of how the average joe in this country survive month-to-month on his epf savings post-retirement age.

    We know the majority will finish off their epf savings after five years. So if they retire at sixty, how much will they have in their pockets at the end of each month from sixty six onwards that will enable them to pay bills, buy food, support their spouses and so on?

    Share EPF's field study not just for our Malays but also our Chinese, Indians, Bumiputra Asli's and so on.

    Tabulate the items by age, race, location and monthly spends.

    We hope the tabulations have already included items such as petrol, toll and cooking oil as that would allow for assay on multiplier effects that will magnify challenges beyond basal survey of retail prices propping indices announcements.

    Which brings me to the Wiener automation rule. In aviation, the cockpit autopilot plays an important role in flight safety. Its automation algorithm solves small problems and smooth out pilots navigation but at the price of throwing up big problems.

    This analogy can be applied locally. There's too much dependence on systems such that the real world is amiss and people don't close real loops because they don't really care when blame can be assigned to the system.

    By system here, one does not just mean software but also mindset.

    What is the mindset today of the Malay professional towards justification and presentation of policy issues that seem to many to represent a clear and present danger of disconnect to the stakeholders who will be affected by the final design of those policies?

    By the way, since we are moving into the internet economy next year, get the login to the adsl router that will tell you your real internet speed; do not depend on tm's speedtest. Be careful of the subcontractors installing for you at the junction box.

    Just adding a bit to warrior321's comments.

    1. @anon

      I'm not authorised to share stuff that has not been published. Nor do we have much information on what happens to members after they withdraw from the system. Unlike DOSM, we can't compel people to answer our surveys, especially the approximately half the elderly population who've never had an EPF account.

      Having said that, you've given me an idea on how to actually get the data, so thanks for that.

      Also, this article series is deliberately meant to be provocative. My intention was to promote public awareness and debate, because Malaysia's social protection system is need of reform, and I don't want to see change imposed solely from above.

      But let me share some of the data that has been published. You decide whether there is a problem or not:

      Average savings by ethnic group (total membership, end-2015):
      Malay (50.7% share): RM32,841
      Chinese (24.5%): RM85,208
      Indian (7.3%): RM49,927
      Others (17.42%): RM27,348

      Overall Gini coefficient is 0.65, so for most, the averages overstate their savings.

      From KRI's State of the Household report (link), we also have the following:

      "Low savings are not however just a Bumiputera issue. The EPF data show
      that savings are unequal regardless of ethnic group. The savings of the top
      17,061 members are greater than the total savings of the entire bottom
      44%, which comprises 2,854,419 members. For the top, this is a fraction of their total wealth, but for those at the bottom, it is close to their entire life savings.

      Active EPF members in the 51-55 age group, who are on the brink of
      retirement and have careers’ worth of savings, have on average RM147,057
      each. The richest 5,446 members however have on average RM1.56m in
      savings. If these members are excluded, then the average savings for the remaining EPF members would be RM127,460. But the bottom 13.5% have
      average savings of only RM3,580, and the next 7% an average of RM14,848.

      Low savings and low wealth are a result of low incomes. Low EPF savings
      of the bottom 20.5% and high wealth inequality are consequences of
      disparities in income."

    2. r-1

      Thanks for the info, Nurhisham. I think this topic is timely and critical because all factors behind the issue have converged:

      Let us agree those numbers spell a timebomb and not a firecracker.

      The new tax regime has knocked the stuffing off the grey economy presumably subscribed by the non-contributors in the private sector so their situation wont be far off from that of the contributors which as it stands is just trifle savings shaved by the relentless rise in cost of living.

      Any lifeline of monthly support from the next generations has also shortened because they are also not doing well and will soon have their own commitments not to discount new competition decanted from the paper mills for increasingly scarce openings in the job markets in a dysfunctional economy unbuoyed by a low currency.

      For the poor, it looks like a permanent perpetual poverty trap. I have been with poor families and anguished with them everyday how they struggled to survive on what they could make from day to day for a growing family shrouded in a nutty mixture alternating between youthful naivety and wizened despair. Transport in the rural areas and rents in the urban areas are their constraints.

      Let us also never forget the middle-incomers who are pivotal to economic progress. Those who contribute probably only have the roof over their heads as their only main asset. Downsize? That will plunge the housing sector itself already challenged by a glut yet with non-affordable offerings.

      I also think it's a mistake to simply raise wages without first asking how to justify doing so on basis of productivity measured against global benchmarks because in a self-depleting economy, we will only be cannibalizing ourselves unless we can export to earn more money from overseas.

      There are at least three present effects from having raised wages recently. One, businesses just shave off workers they can no longer afford. Two, foreign workers in critical labor-intensive industries like agriculture have pressured for wage rates raise decoupled from productivity and work attitude. And three, another round of price increases which because of the new tax regime multiplies itself down the supply chain nuking the real disposable income targets.

      All of the above bring me to what i want to say about pension fund reform (read end-life social parachute):

      The approach should not be formulaic; it is not about more monthly income to irresponsibly justify V2020 chest-thumping but about creating more real jobs everywhere regardless of race;

      Therefore, redefine the SMEs which can be more everywhere than the ponderous lumbering MNC; raise their thresholds - AND then drop off all taxes from them and their owners and employees regardless of race. I mean no corporate tax, no income taxes. Zilch.

      The MNC will then disaggregate themselves to be clusters of SMEs? Good for them; they will introduce their management standards and reduce failure risks besides lobbying for no-frills no-leech fast-track processing. Rather than a government collecting and then misspending income taxes, let the people earn and keep all that they make so that they can afford survival today in the twilight of their years.

      The critical thing here is to create jobs so that people wherever and whatever their station in life can get re-energized to start their own final legacy for the next generations.

      This will also be good for the banking, construction, transport and telco sectors.

      Every year i get disappointed no focus has been placed on the SMEs. The incentives given so far are almost gay. It is not just about loans and bureaucratic global marketing. It should be about total support with zero interference, no prying, no toll-keepers, and goodbye taxes.

      I think if we want to defuse the timebomb we got to get real, buck up, revolutionize our mindset, and find that special Malaysian solution that can ignite the world. (ok, pun almost intended but almost only).

    3. r-2

      To ramble on away from a converged topic...the new infrastructure is too much too late. You see so many new but small cars on the road in the klang valley, most still on mortgage. The new mrt about to open must have fares that can make a compelling business case for passengers to leave their cars at home in absence of which would mean higher financing charges on the federal loans to build the mrt, wouldnt it? And who be paying those? The thumb-agile knowledge-zero next generations again. The east coast rail project? For what? People in pahang are not going to trade in kelantan. The only rail project is the fast-speed kl-sg which should have been done much earlier to stretch over a longer time horizon its potential effect of raising kl prices for benefit of getting business from successful but former citizens.

      Lastly, i hope Nurhisham will architect the new pension etc reform blueprint. You are the only person qualified to do so. However if real data available elsewhere are released, they could plausibly incense some cabinet wood-burning on the streets.

      By taking a tanpa-kompromi hard-nosed pragmatic look at the real situation sans sanitized armchair data, we may just be able to save the next generations and leave them a better legacy. All those others in the grey years as captured in your database are already dead. They are just statistics without any hope of going into their respective afterlives with even a modicum of stress-free comfort. Start lighting their incense.

      Btw, when doing the study, turn the question around and focus on what the poor does with his and time in an average day. Start 7am end 12 midnight hour by hour. Then create an economic-time index for all the races in all locations and lap the findings onto incomes earned extended to other countries across the globe.

      Here's to mineral water to fry mee goreng. Its economic time is priceless.

  5. Was my comment being deleted?

    1. @Fung

      No, just caught by the spam filter. fixed now

  6. r-3

    Just to redeem myself a bit.. pension fund for all? No it is not the matter of economic sustainability. It is only the matter of political trust.

    That has gone and with it racial dignity as well.

    Why should anyone these days trust any project or idea from a gomen that smells of schemes wanting your money without a shred of accountability for its use?

    Kwap comes to mind.

  7. From all the spiels on the US election results that I have read, this excerpt encapsulates the most probable reason:

    "Barack Obama helped rescue the US from the financial crash and presided over a record series of consecutive quarters of job growth.
    Unfortunately for Clinton, many Americans simply did not feel as positive. Stagnant wage levels and soaring inequality were symptoms of the malaise felt by many voters."

    But people will say I am late to the table (LOL) Thing is there is a breakdown in the old wage-profit sharing equation as greed takes over. Crimp wage growth and you sent the economy into a tail spin as consumption potential erodes. Worse, put up fiscal absurdities like a consumption tax aka Japan and the economy becomes comatose. I

    Its happening all over the world as economists and policy makers unhinge themselves from reality and nail themselves to delusions. So to fill the vacuum?

    Cue the rabid populist demagogues who will spout everything from immigration, religion, automation and trade deals downwards but do not address the real problem of how to get capitalists to share their profits and be less greedy. Trump, Brexit, Marine Le Pen etc are the vanguards of the demagogues. Things are just starting to heat up after simmering for quite a while. Get ready to go into bunker with popcorn in hand...

    Warrior 231

  8. Warrior 231, you are expecting the worse? Trump is a businessman and I think he will not rock the boat too much least it affect his businesses. So I think he will mellow.

  9. Zuo De, my prognostications have been spot on if you followed this blog over the past few years. No I am not Roubini or anyone, but if you look at it closely and long enough you will see the cracks in the system was expanding while everyone looked away. 2008 was the watershed. If the garbage had been cleared then instead of kicked down the road through QE or whatever, then the global economy would have stood a better chance. Economists might say a different thing but there is no REAL growth actually as the Baltic Index data will tell you post 2008. Whatever growth was for the elite who socialised their losses and privatised the profits. QE threw everything off kilter the more it was prolonged through QE2 and other garbage. The chickens are fully grown now and coming back to roost. Trump is the beginning of the demgogue....there will be more like him and worse.Clinton was never a viable candidate to start with as she was carrying the establishment baggage. There was none on the slate on either side come to think of it. But relax....nukes incinerate fast...hahahahaha

    Warrior 231

    1. @Warrior

      We're all entitled to our own delusions, heh.

      But never mind. To return to the earlier problem and why I think wage stagnation is a cause but can't prove it, here's the problem with the wage stagnation/income inequality thesis:

      1. Has inequality risen?
      Yes and no. In-country inequality has risen since the 1980s, but between-country inequality has actually declined. As a result, overall global income inequality is lower than it used to be, largely due to gains at the bottom of the distribution (effectively: China, India, Africa). But that means you can't really use overall inequality as a proximate cause for the global slowdown of the past decade. Hence my problem with trying to prove wage stagnation is a cause of slower global (as opposed to specific country) growth. It's obvious that the upper middle of the distribution has been badly affected, but is that enough to explain a global growth slowdown? (Google "elephant graph" for reference).

      2. Are wages stagnating?
      Again, yes and no, for the reasons above. Real wages in developed countries are flat, but real wage growth is pretty strong in developing economies. For the former as well, wage share in the economy has dropped, though total compensation has not dropped by as much. Piketty noted this difference in his "Capital" - recent increases in advanced economy inequality has been less about changing income shares of capital owners/workers and more about differences between managers/workers. Even here, research in this area shows differences between big firms and small firms within an industry are a major factor (note: also some recent research into rise of market concentration over the past few decades). And no it's not just finance and tech, but across most industries. Also, some post-"Capital" research show rising house prices as a major component in rising inequality (essentially, imputed rent i.e. nothing to do with wages). Regardless, was the shift towards neo-liberal policies in the 1980s a factor? I wouldn't disagree.

      3. Profits?
      As addendum to the above, corporate profits have recently risen as a share of income, but not by much. And in absolute terms, corporate earnings growth has been poor over the past decade.

      4. Deliberate wage suppression
      This is actually a known phenomenon, with identifiable symptoms (large current account surpluses). Germany and China are the most egregious examples. But wage suppression is not the same thing as wage stagnation. It's more than possible to have the one without the other (China for example).

      5. Correlation/causality problem
      Like in the last link you gave, we have the problem of determining the direction of causality. Is inequality/wage stagnation causing slower growth? Or is slower growth causing rising inequality and wage stagnation? It's a math thing, but hope you get my drift.

      Lastly, good luck with the golf, mate. Pretty soon you'll be extolling the merits of different Cuban cigars - you class traitor you.


  11. A well articulated article on the perils that is gathering on the horizon in regards to the Pension system. The pension scheme obviously is operating on the level of formal/organised sector. What data do we have on the informal sector? We see quite a no of people involved in the informal sector. One that comes to my mind is the nasi lemak stalls strewn across various offices. Perhaps these activities help supplement the income levels. Let's also not forget the strong social capital that was alluded in the article ie family support. A cornerstone of the Eastern society is the family and its extended unit. This is what I believe is the "Invisible Hand" that kept everything together. The West had dismantled the family unit and outsourced it to their Governments. This worked well for a time but now it is becoming a burden that is fast becoming the proverbial 'Albatross'. We are unfortunately going in the way of the West and unless this is addressed quickly, as HH mentions we are headed to a massive blowout!



  13. Dear Mr Hisham,

    It seems to me countries worldwide are trying to not pay their taxes or have their taxes cut. There was even talk previously Najib had cut the tax rate for those that do not need it am assuming those who have so much money it will last them for more than a century. And later on have the wisdom to roll back on that tax cut as obviously that will result in the country not having enough income.

    This issue is so important and big because it affects the entire country and all of its citizens. It is well understood that those at the top of the earning scale controls govt. It is also well understood that the economic policies will always favor them. I have no problems with that so long as it serves the purpose of bringing the entire ship up with them. Meaning the average income of every Malaysian.

    If we are to be a developed country and a compassionate society we cannot only have a system where only a few benefits while the rest is living in poverty.

    It has been proven that competent spending and an economic policy that moves up the value chain is absolutely needed to do so. While we have been hearing about the initiatives from the govt which are 1st world the implementation are always 3rd world which in effect means no change at all at the result.

    In real world context and narrative it basically means the govt has no will or interest group within the top echelons of our country fail quite miserably preferring profit for themselves but not for the rest of the population.

    I just cannot imagine us going to be like sweden or norway. While we are not exactly going the winner takes all system of the US there is also a woefully bad record for lifting the rest of the population up.

    With those who benefits the most not paying their taxes as shown and proven in the Panama papers and the rest of the upper middle class taking their income and run to hong kong rather than paying taxes the picture looks bleak.

    This effects not only pension system of Malaysia it effect the entire growth of the nation. While i applaud your care for those not covered in the pension system as it is as you say an impending crisis on retirement. I also cannot help noticing your recommendation seems to leave out who is actually paying for them. By putting those not currently covered by the EPF into the system it basically means those who are paying into the system pays for them is that not true? And you plan to finance this by raising the retirement age. But no where do i see govt using tax to pay for them. It comes back to those who do not pay their taxes even though they benefit the most and controls most of Govt economic policies.

    Another point is what happens to a 55 year old brick layer for example do you expect him to lay a brick till he is 65 or 67 or even 70? What about waiters do you expect a 65 year old waiter to serve you? And if you really go around and talk to average income people there are already people who work till they are 70s even with the 55 year old retirement age.

    You also fail to mention that those of us who pays into EPF effectively is also providing finance to the Malaysian govt on infrastructure projects without it which Malaysia cannot even build our own roads which are then privatised to govt link officials or even the governing party for profits. As i said i do not have a problem with that except now they are not willing to pay their taxes after benefiting so much how do you justify that? And your proposal while good are saying those who benefited from all the GDP growth over the years need not pay a single cent is really what i cannot agree with.