This article first appeared in Forum, The Edge Malaysia Weekly on March 16, 2026 - March 22, 2026

Pension reform is often seen as a painful choice between unpopular cuts to payouts and forcing people to work or save for longer. In Malaysia, there is another way: Build a fairer and more sustainable pension system by using clear incentives and gradually reshaping existing schemes, rather than imposing sudden, rigid rules overnight.

Malaysia is ageing fast. Families are having fewer children, people are living longer, and the share of older Malaysians in the population is rising. This puts pressure on public finances, the health system and, crucially, how people support themselves in old age. The 13th Malaysia Plan already recognises population ageing as a big development challenge and calls for stronger social protection and more resilient systems. Work on a National Ageing Blueprint shows the government wants a more coordinated response. But the current set-up for old-age income is not keeping pace.

Today’s system is fragmented and does not match how people live and work, with direct consequences for old-age poverty. Some interrelated structural problems stand out. Many workers earn low wages, making it hard to save enough over a lifetime. The incidence of low wages in Malaysia exceeds 30% of the workforce, more than double the average among members of the Organisation for Economic Co-operation and Development, a wealthy nations group.

The majority of working age Malaysians — about 57% — are not covered by any contributory pension at all. Among members of the Employees’ Provident Fund (EPF), many have low balances by the time they retire. On top of this, people can withdraw EPF savings in full at age 55, even though they may live for more than 20 years after that. Heavy use of lump-sum withdrawals means savings can be used up quickly, exposing people to poverty in their 70s and 80s.

The result is that many older Malaysians remain financially vulnerable, even with the expansion of existing social assistance such as Bantuan Warga Emas and Sumbangan Tunai Rahmah. These programmes help, but persistently high levels of poverty among senior citizens indicate that they are not generous enough to guarantee a basic income floor in old age.

Many older Malaysians still depend on financial support from their children. Survey evidence shows that more than half of senior citizens receive regular financial support from their children, with average monthly transfers amounting to almost one-fifth of median income. This, in turn, puts pressure on working age adults who are supporting both children and parents — the classic “sandwich generation”.

A more coherent way forward for Malaysia is to think in terms of a multi-tier system. Many countries combine many layers of support, each with a different purpose. In Malaysia, as envisioned in Figure 1, the foundation of the system is a non-contributory income floor that guarantees basic income security in old age, directly addressing coverage gaps associated with informality, unpaid care work and interrupted employment histories. Above this foundation, a contributory level supports income replacement during retirement, but requires reform to strengthen adequacy and reduce reliance on lump-sum withdrawals. As savings levels and institutional capacity improve over the longer term, additional tiers can be introduced to enhance protection against the risk of outliving one’s savings.

The first priority is to build a Social Old-Age Protection Floor (SOAPF). In simple terms, this means merging and simplifying existing social assistance for older people into a single, flat-rate, tax-financed pension for all senior citizens.

This basic pension would sit at the bottom of the system and guarantee that no older Malaysian falls below a minimum income level, regardless of their work history or contribution record. Our analysis suggests that the SOAPF would sharply reduce old-age poverty, especially among those with low lifetime earnings or weak attachment to formal employment.

Importantly, the estimated fiscal cost — starting at about 0.6% of gross domestic product (GDP), and rising only modestly over time — is manageable in the context of Malaysia’s overall budget and low and declining level of public expenditure (see Figure 2).

International experience suggests that such social pensions can also be politically durable. In many countries, broad, visible pensions that pay regularly have strengthened public support for governments and for wider reform. By contrast, cutting or narrowing existing pensions has proved politically costly. In Malaysia, a basic pension could help build trust and create space for more technical reforms elsewhere in the system.

The second strategy focuses on the EPF. Life expectancy has risen, but the full withdrawal age has stayed at 55. Combined with low balances and the dominance of lump-sum withdrawals, this exposes many retirees to a prolonged period of little or no income protection (see Figure 3).

A practical fix is to shift from full lump-sum withdrawals to phased and periodic payments, at least for part of people’s savings. Under this approach, a defined portion of accumulated EPF savings would be paid out in monthly instalments over a fixed period in early retirement. This would provide a more stable income stream and reduce the risk of using up savings too quickly. Crucially, as illustrated in Figure 4, these changes would be coordinated with the new basic pension. The SOAPF would provide a lifelong income floor, while the EPF instalments would top this up, ensuring continuity of income protection across retirement while preserving incentives for savings and labour market participation.

Because pension reforms touch on people’s savings, they are highly sensitive and require careful policy packaging to mitigate political and public resistance. In this context, the increase in the withdrawal age, the introduction of instalment-based payments, and coordination with the SOAPF would be implemented as a single, coherent reform package.

The proposed reforms would rely on incentives rather than compulsion. For new EPF members, the new rules would be mandatory and apply from the start. For existing EPF members, the package would be voluntary. Those who opt in would accept a higher withdrawal age and phased payments on part of their savings, in exchange for a guaranteed lifelong basic, inflation-adjusted pension for themselves and their spouse from age 70. This “deal” aims to balance individual choice with better protection against old-age poverty and the risk of outliving one’s savings.

In summary, the conditions would be:

1.    The full EPF withdrawal age raised to 60 years.

2.    Up to RM100,000 of savings disbursed in monthly instalments of about RM1,000 over a 10-year period, adjustable based on declared dividends.

3.    Savings above RM100,000 could be withdrawn as a lump sum at age 60.

4.    Members opting into the package would become eligible at age 70 for a monthly SOAPF pension of RM700, plus an additional RM700 for their spouse, both indexed to inflation and paid for life.

This incentive-based, phased approach balances fiscal and social protection goals with political feasibility (see Figure 5). It encourages voluntary participation and minimises backlash while transitioning Malaysia’s pension landscape towards a more inclusive and sustainable multi-tiered system.

The third strategy looks further ahead. Over time, as savings levels rise and institutions strengthen, Malaysia could add new instruments to provide more robust lifelong income, such as life annuities or a contributory pension with built-in solidarity elements. These would sit alongside the EPF and the basic pension, offering additional protection against longevity and improving redistribution between higher- and lower-income groups (see Figure 6).

Taken together, these reforms would move Malaysia towards a clearer, more inclusive and more sustainable pension system. The key to success is not to dictate behaviour through blunt compulsion, but to build a structure in which good choices — saving, accepting phased withdrawals, supporting a universal basic pension — are rewarded and visibly linked to better financial security in old age.

In an ageing society, this incentive-based, tiered approach may prove both more effective and more durable than a system built on one-off fixes and hard mandates.

Dr Amjad Rabi is visiting expert at Universiti Malaya’s Social Wellbeing Research Centre (SWRC). Prof Emeritus Datuk Norma Mansor is the director of SWRC. Dr Aiko Kikkawa is senior economist at Asian Development Bank.

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