NORMAS DE COMPETENCIA CAPÍTULO I

Scenario B explores the second flexible parameter, which is the contribution rate. Different contribution rates were analysed under this section.

7.4.1 Full Employment

Table 7.5 and Figure 7.3 below shows the results for different contribution rates made by women employees in Malaysia, with three different levels of education, having full employment years, making no withdrawals, and retiring at the current statutory retirement age of 58.

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Table 7.5: Results: Scenario B (Ch 7): Contribution rates with full employment

20% 23% 25% Age-profile

Figure 7.3: Graph: Scenario B (Ch 7): Retires at 58 with different contribution rates

Source: Author’s calculation

In the simulation, the employer and employee contribute at a constant rate every month to the employee’s retirement savings fund and the contribution amount is calculated based on the employee’s monthly salary. The current contribution rate in Malaysia is 20% (until end of 2010), lowered from 23% in January 2009, due to the global economic downturn. Based on the results in Table 7.5 and Figure 7.3, low monthly contribution rates tend to result in lower savings for retirement, thus a lower monthly income during retirement years. For example, women with Degree qualification that makes 20% contribution results in 34.02% from their last drawn salary. Whereas, with the same qualification and contributing at 25%, their replacement rate level increased to 42.53 (refer to Table 7.5).

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Retires at 58 with different contribution rates

SPM Diploma Degree

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The results also suggest that high percentage contribution rates at a young age could lead to higher amount in one’s fund at retirement. This is based on the Age-profile contribution rates where the rates reduce as age increase. This also shows that it is worth saving a higher amount earlier in employment or at a younger age to benefit from the accumulated income.

From the overall results in Table 7.5, Age-profile contribution rates for all three levels of education yield replacement rate levels of above 40%.

It is known that increasing the current contribution rate to 25%, which is only 2% higher than the previous rate used (23%), the results for the three levels of education showed replacement rate levels above 40%. For example, a Degree graduate who contributes 25% in her first year of employment only needs to contribute an extra RM25 per month to achieve a replacement rate level above 40%. Moreover, that extra contribution made during employment could result in an estimated RM187 more per month during retirement.

This is illustrated in Figure 7.3 that shows the higher the monthly contribution made to the fund, the higher the replacement rate levels. While the Government’s decision to reduce the contribution rate from 23% to 20% may have helped employees now by increasing their monthly income, but in terms of adequacy of the retirement income, it is questionable. Since the population is increasingly ageing and will have to spread their retirement income over extra years during retirement, Government’s action to reduce the contribution rate is questionable, as based from the results, employees will have less income to live on during their retirement years.

166 7.4.2 5 Years Disruption

Table 7.6 below shows the results for different contribution rates made by women employees in Malaysia, similar with Scenario B (i) (Section 7.4.1), except with a 5-year interruption during their career. The contribution rates used in this simulation were also similar to those used in Scenario B (i).

Table 7.6: Results: Scenario B (Ch 7): Contribution rates with 5 years disruption

20% 23% 25% Age-profile

Contribution Rates

EPF RR EPF RR EPF RR EPF RR

SPM 991.12 36.09 1,139.78 41.50 1,238.90 45.11 1,341.69 48.85 Diploma 1,074.45 29.30 1,235.61 33.69 1,343.06 36.62 1,437.37 39.20 Degree 1,378.27 25.81 1,585.00 29.68 1,722.21 32.26 1,832.22 34.31

Source: Author’s calculation

According to the simulation findings in Table 7.6 above, women with all levels of education contributing 20% to the retirement fund can expect the lowest replacement rate levels compared to other contribution percentages. With a 5 year gap during employment due to care-taking responsibilities, the replacement rate level decreases by between 8% and 10% for SPM, Diploma and Degree holders. This shows that 20% contribution rate does not provide women with a comfortable standard of living during retirement as the replacement rate levels are all below 40%.

On the other hand, for 23%, 25% and Age-profile contribution rates, the replacement rate level that is above 40% is only for SPM holders. However, this is not the case for Diploma and Degree holders. The results show that those with a Degree would have to contribute more in order to have a similar standard of living before and after retirement. Furthermore,

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Age-profile contribution rates does result in a higher retirement income and better standard of living during old age for all levels of education (refer to Table 7.6).

Based from the results in Scenario B, four conclusions are drawn. Firstly, a 2% contribution rate increase from 23% to 25% results in a 3-4% increase in replacement rate levels.

Secondly, a 3% contribution rate decreased (from 23% to 20%) by Government results in about 5%-7% lower replacement rate levels and thirdly, if the Government decides to continue with the current statutory retirement age, it should introduce a 25% contribution rate or Age-profile contribution rates to provide a comfortable standard of living during old age.

The fourth conclusion drawn from this scenario is; although women SPM holders have the highest replacement rate levels, their estimated monthly retirement income is still low, due to a low monthly salary during employment. Therefore, the more contributions made during employment, the more the estimated amount for retirement income.

7.5 Scenario C – The impact of changing the amount of Pre-retirement Withdrawals