Malaysia faces retirement time bomb as longer lifespans, shrinking tax base threaten pension system

SHAH ALAM - Malaysia’s retirement system is facing growing pressure as increasing life expectancy, declining savings and a shrinking taxpayer base raise doubts about the long-term viability of the nation’s pension structure.

Worries over Malaysians’ preparedness for retirement have deepened, coming only three years after the government permitted large-scale withdrawals from the Employees Provident Fund (EPF) to help offset job losses during the Covid-19 pandemic.

EPF Chief Executive Officer (CEO) Ahmad Zulqarnain Onn stressed the urgency for immediate action, saying it was crucial “to ensure Malaysians are both financially and socially prepared for longer lifespans.”

Projections now indicate that life expectancy could reach 81 years by 2050 — just 25 years away. With a rapidly aging population and a falling birth rate leading to a contracting tax base, fears are growing that future retirees may simply not have enough to live on.

Malaysia’s retirement savings landscape

Malaysia’s primary retirement mechanism is the EPF, a defined contribution (DC) scheme in which savings are built through employee and employer contributions, along with investment returns.

Civil servants still enjoy a legacy defined benefit (DB) pension that guarantees monthly payouts based on final salary and tenure. While the DB model provides secure retirement income, it imposes significant long-term costs on public finances.

Globally, DC schemes are seen as more sustainable because they shift investment and longevity risk away from governments, give individuals greater control over their funds and are easier to manage fiscally.

The Covid-19 withdrawals hit hard

Economic uncertainty in recent years has tested the resilience of Malaysia’s DC model. During the pandemic, more than 8.1 million EPF contributors withdrew over RM145 billion from their accounts, often to cover immediate expenses such as rent, food and debt repayments.

The result has been devastating to retirement readiness. Half of members aged 55 and below now have less than RM10,000 each, with the median balance at only RM10,898. Many accounts have been emptied entirely.

The lifespan of the average Malaysian has risen, forcing the younger generation to bear the burden of sustaining them through old age for a longer period. Photo: Edited via Canva

Living longer, but with less

Life expectancy in Malaysia has risen sharply over the past three decades. Men now average 74.8 years and women 78.9 years, compared with 68.7 and 73.4 years respectively in 1990.

This longevity comes at a cost. Someone retiring at 60 and needing RM1,500 a month for basic living expenses would require at least RM360,000 to last two decades.

Yet, as of 2023, nearly 74 per cent of active EPF members had savings of under RM100,000. Enough for just five to six years, excluding healthcare and elderly care costs.

A shrinking tax base compounds the problem

Falling birth rates and low tax revenue are further eroding the sustainability of Malaysia’s pension system. The country’s tax-to-GDP ratio was just 12.6 per cent in 2023, far below the Asia-Pacific average of 19.3 per cent and the OECD average of 34 per cent.

According to the Department of Statistics, the live birth rate dropped by 10.2 per cent to 100,732 in the second quarter of 2024 compared with the same period a year earlier. If this continues, there will be fewer taxpayers and EPF contributors in the future, even as more Malaysians retire.

Countries that maintain generous DB pensions do so through high taxation and large reserves — conditions Malaysia does not currently have. Without reform, experts warned, the current system risks becoming unsustainable.

Potential solutions on the table

Experts suggested several measures to safeguard against retirees outliving their savings. These include promoting financial literacy, enhancing saving incentives, creating a modest social safety net and expanding aged-care facilities.

One proposal is to introduce a hybrid pension system. Under this model, employees would keep contributing to EPF, but upon retirement, only part of their balance could be taken as a lump sum. The rest would be paid out monthly for life, similar to Singapore’s CPF Life.

This would reintroduce a guaranteed minimum lifetime income — a feature of the old DB pension — without overburdening public finances.

In addition, tax incentives, matching contributions and voluntary top-up schemes could help rebuild depleted savings.

The urgency for reform is growing. As Ahmad Zulqarnain emphasised, Malaysia must act now “to ensure Malaysians are both financially and socially prepared for longer lifespans.”

Without decisive action, today’s workers could become tomorrow’s financially vulnerable elderly — living longer, but going broke sooner.