Introduction
Globally, young people have recorded lower rates of saving, and this phenomenon is attributed to issues surrounding financial literacy, lower income, debt repayment, etc. This supports the life-cycle hypothesis whereby young people have lower income levels, which results in them having a higher propensity to accumulate debt to consume.
This Views article will highlight three main factors that affect savings among Malaysian youth: lower rates of financial literacy, structural issues surrounding low wages and the accumulation of debt, which collectively result in inadequate wealth and savings.
Factors that affect savings among youth
Low financial literacy
The OECD defines financial literacy as a ‘combination of financial awareness, knowledge, skills, attitudes and behaviours necessary to make sound financial decisions and ultimately achieve individual financial well-being’. Financial literacy is important because it enables individuals to make sound decisions based on their current financial situation, which will ultimately lead to improved outcomes in the future.
As the average life expectancy increases, it is imperative that people have the knowledge of financial literacy at an early age in order to begin to build their wealth and savings earlier. Lusardi (2019) identified three fundamental concepts that are universal and applicable to everyday life and decision-making. These include (1) basic numeracy, to understand how to calculate interest and the concept of compounding interest; (2) inflation, how prices and increases in the cost of living; and (3) the concept of risk diversification. Lusardi argues that the current generation is more responsible for their personal finances than ever as they are faced with the increasing complexity of existing financial products with regard to student loans, mortgages, mutual funds, etc. If an individual has low financial literacy, the amount of wealth they could accumulate through investments and savings is limited, thus increasing their exposure to unexpected shocks such as economic downturns, job loss, etc.
The 2022 Securities Commission survey highlighted that 62% of Malaysian youth had low levels of financial literacy and a lack of knowledge of capital market products. Table 1 shows capital and non-capital market products, which present investment opportunities with their perceived risk level. The study highlighted that generally, there is an awareness of the existing products for investments as well as their risk, although many do not have the means yet to begin investing.
Structural issues surrounding wages
Another major obstacle that prevents the majority of Malaysians from building their wealth and savings is the low wage structure in the Malaysian labour market. The Malaysian labour market has historically been disadvantageous for labour as the compensation of employees (CoE) has been stagnant, at 33.1% in 2023. In comparison, the average CoE in the Euro area was 52.9% in 2022, which highlights a fairer distribution between employers and employees as the latter receives a higher percentage of compensation for their labour.
According to DOSM’s Salaries and Wages Survey report, in 2023, the median wage nationally was RM 2,602, while it was RM 2,076 in the 25-29 age group and RM 1,593 in the 20-24 age group. It is only once you reach the 30-34 age group and are no longer defined as youth, it becomes slightly higher than the national median, at RM 2,702.
This figure highlights the wage stagnation that young people, in particular, experience. Wages in the 25-29 age group have only slightly increased from RM1,500 in 2010 to RM 2,076 in 2023. This is a nominal increase of more than RM40 a year, with it not yet returning to pre-pandemic levels of RM2,206 in 2019.
Furthermore, there is also the ongoing issue of qualification-job mismatch or underemployment that exists among tertiary-educated youth. In 2021, 48.6% of Malaysian graduates were overqualified for their roles, which indicates the under-utilisation of our human capital as many work in jobs that do not require the skills they have attained at tertiary institutions. This can be seen in Figure 2, which highlights the qualification-job mismatch of graduates from 2010-2021. Overqualification diminishes the overall wages of graduates as they are limited to working in semi-skilled positions that offer lower wages. This has a compounding effect on the job market at large as it increases firms’ costs due to a high turnover rate as overqualified graduates have higher rates of job dissatisfaction.
This has ultimately resulted in low savings in their Employees Provident Fund (EPF) accounts among young people. This is because EPF savings are primarily collected through mandatory employer and employee contributions, which are currently at 11% and 13%, respectively, for those who earn RM5,000 and below. The previous threshold for basic savings in an EPF account was RM240,000 by 55, or a minimum of RM 35,000 by 30. This means that with the previous threshold, over 90% of those under the age of 30 did not meet the required amount to achieve basic savings.
Over-accumulation of debt
The last major factor behind the low savings rate among youth would be the accumulation of debt, which may come in the form of student loans, mortgages, and the recent trend of ‘Buy Now, Pay Later (BNPL). When income levels are low, individuals may have to look to external sources of financing to enable them to pursue things such as education for example. With regard to student loans, this would be in the form of loans acquired through Perbadanan Tabung Pendidikan Tinggi Nasional, more commonly referred to as PTPTN. According to PTPTN, nearly 50% of those who enrol in tertiary institutions have opted to acquire PTPTN loans to finance their studies. The emergence of PTPTN as an option for many has allowed for greater inclusion of the population to opt for further studies, but it has also had unintended consequences.
In the case of these borrowers, 51.6% of them earn below RM2,000 or could not even secure jobs after graduating from their respective tertiary institutions. This issue is a national concern as these graduates would find it difficult to repay their debt obligations. This has already been repeatedly highlighted as a ‘brewing crisis’ as 60% of PTPTN borrowers have not consistently been paying off their student loans, with 18% not having paid a single form of repayment at all. Many developing countries are dealing with the same issue as the expansion of tertiary education, and the rapid enrolment has also resulted in a similar crisis as there are not enough high-skilled, well-paying jobs being created in the economy to absorb these graduates.
In addition, the Credit Counselling and Debt Management Agency (AKPK) also reported that there were over 53,000 individuals below the age of 30 were burdened by nearly RM 1.9 billion in debt, with 28 per cent even forced to take on loans to purchase essential goods. While convenient, widespread financialisation has had an adverse impact on households, as the rate of indebtedness has increased, especially among low-income households. If left unchecked, this would have repercussions on the individuals’ credit scores when they are unable to pay their monthly obligations consistently.
Lastly, the increased usage of easy credit schemes such as BNPL can also have adverse consequences. For example, it can reinforce negative behaviours as consumers may spend money that they do not have as users are able to take on multiple BNPL debts across different providers. Critics have argued that this form of finance can become predatory, as it allows for impulsive spending, with individuals overlooking their terms of repayment while continuing on their cycle of debt.
Concluding Remarks
Low savings among youth is not unique to Malaysia. It is a multifaceted issue influenced by both individuals' behaviour and knowledge as well as wider socio-economic factors.
First and foremost, financial literacy needs to improve in order to provide the tools and knowledge necessary for individuals to achieve financial independence and security. Currently, there are already 37 participating financial service providers that have partnered with 10,000 schools nationwide under the School Adoption Programme to promote financial education. However, an impact assessment needs to be conducted to ensure the effectiveness of these programmes in improving financial literacy.
Next, there is a pressing need to address low and stagnant wages within the labour market. The government has intervened through initiatives such as the recent revision of the minimum wage as well as the ongoing progressive wage model. Additionally, there are commendable efforts to improve the quality of local firms through investments within high-value, high-growth sectors that offer higher compensation to their employees. At the same time, change can also occur at the grassroots level through the unionisation of labour. In 2024, the unionisation rate is still low at 8.7%, with only 0.4% of workers covered under collective bargaining agreements.
Moreover, with regard to the accumulation of debt, recent programmes have been introduced. PTPTN have also recently unveiled debt restructuring programmes to advise and negotiate flexible payment plans according to the individual’s financial capacity such as #PTPTNBolehBincang and #PTPTNSediaBantu. These initiatives could help alleviate the debt burden experienced by graduates while also providing the agency with means to recoup its finances to continue to serve future students.
As Malaysians’ life expectancy increases, it is imperative that the coming generations are equipped with the knowledge to make sound decisions while also having the financial means through a fair and decent wage to build their retirement savings.
