Preserving wealth in an ageing population

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CHINA is the most populous country and the shrinking of its population is inevitable.

That means even the population-boosting policies to encourage more children does not seem to have worked so far.

But China is not the only country with lower fertility rates and an ageing population. Japan has been on that journey for a long time and so will many other countries that are facing the same situation, and Malaysia is no exception.

Ageing and shrinking population demographics will have major implications on the global economy, investment and risks, and governments will have to spend more on healthcare and social benefits programmes for the elderly, said a report.

As a result, the younger generation will face risks in inequalities of education, health, employment and earnings that will compound in their old age. Besides that, a dwindling younger population has to support an army of older people, said another report.

The United Nations had projected that the number of older persons will double to 1.5 billion in 2050.

Sunway University economics professor Yeah Kim Leng

That explains why the Employees Provident Fund (EPF) believes that by the middle of the next decade, the amount of money on a monthly basis that is going out of the fund will be more than the amount of money going in.

Sunway University economics professor Yeah Kim Leng said the EPF’s projection of higher money outflow versus inflow by the middle of next decade is consistent with the rise in Malaysia’s old age dependency ratio.

The proportion of those aged 65 and above to the working age group between 15 and 64 years is projected to rise from 9.7% in 2020 to around 16.7% in 2035.

“It is not surprising therefore that the cumulative withdrawals upon reaching retirement age are projected by the EPF to exceed the total contributions of the working age population,’’ he said.

It will certainly be more challenging for the EPF to sustain its sterling performance thus far and it will be hard-pressed to generate annual dividend rates that are two or three times above the inflation rate.

Yeah believes that to sustain high returns, the EPF invariably will have to assume higher risks in its portfolio allocation strategy as it is difficult to escape the risk-return trade-offs in its asset allocation.

“While the EPF’s prudent management is a key protection of the retirement savings, the existing schemes allow contributors to channel funds to approved unit trusts as a means of diversification,’’ he said.

This option provides contributors the flexibility to determine who and how their savings funds should be managed.

His belief is that to mitigate over-reliance on a single pension fund and ensure adequate retirement savings, the government could incentivise private retirement savings and innovative instruments such as annuity schemes for those who wish to enhance financial security for their golden years.

Still, as the population ages, the demographic dividend will also be lost in ageing societies. How do we grow our nest eggs and preserve income levels?

There are many ways and Yeah said: “Besides increasing the retirement age, job programmes and income-generating opportunities for retirees with insufficient savings would need to be part of the design of a holistic national old-age social security safety net for the future.’’

The government is still mulling whether to raise the retirement age from 60 to 65. If it does, it will keep more people at jobs for a longer time.

There are also several online job platforms for retirees. One such platform is Hire.Seniors. “We have about 200 job opportunities for seniors for full and part-time jobs and we continue to encourage employers to hire more seniors,’’ director Jasmin Amirul Ghani said.

Jasmin Amirul Ghani director of Hire.Seniors and Amazing Seniors

Yeah believes that community and cooperative-based activities and programmes could also be designed to boost retirees’ purchasing power and assist them to cope with living cost increases, especially healthcare.

He added that in the face of rising uncertainties, diversification of income and savings remains a key guiding principle to grow nest eggs and protect income levels.

“Besides raising one’s financial education and literacy level to grow nest eggs, there is a need to continuously upgrade one’s work skills and productivity in order to have an upward career and income trajectory. In other words, a rising standard of living and old age financial security,’’ Yeah said.

Jasmin said as part of its service to serve the retiree community, which is free of charge, it has also created Amazing Seniors that teamed up with various companies to offer discounts for goods and services. It is also working towards helping seniors with financial literacy.

Given such a scenario, what are the investment options available?

“In facing heightened uncertainties in the investment landscape wrought by demographic transitions, climate change, disruptive technologies and business models, besides getting professional advice, we would need to be attuned to the changing prospects and risks of emerging and conventional asset classes and investment opportunities,’’ Yeah said.

He added that a diversified portfolio and avoidance of risk concentration remains the key to wealth preservation.

Japan has managed to confront the issues of an ageing society earlier than many other countries and there are many valuable lessons to learn from it.

“As the oldest nation in the world, Japan offers many lessons for countries facing the ageing population crisis. Despite strong accumulation in savings, the country finds difficulty in getting the aged population to spend,’’ he said.

The pension funds also faced the challenge of low returns in a negative or near-zero interest rate environment.

“Unlike Japan, we can expect the aging population conundrum to be more daunting for countries that ‘get old before they become rich,’’ he added.

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