Regaining our retirement nest


Consequences of early withdrawal: There are two consequences of this. First, members who withdraw will have a lesser sum available upon retirement, and two, for the EPF, they would need to make some provision for this withdrawal, which is expected to be about RM6bil a month for five months.

ONE of the incentives that the government designed to help cash strapped Malaysians and to tide them over during the pandemic is the tapping of the members’ savings in the Employees Provident Fund’s (EPF).

Starting with the i-Lestari scheme in April 2020 and up to March 2021, members were allowed to withdraw RM500 per month for 12 months or a maximum of RM6, 000.

The EPF later introduced the i-Sinar scheme late last year but effective this year, where members were allowed to withdraw up to RM10, 000 over a period of six months, if their Account 1 balances are at least RM100, 000. For members with Account 1 balance in excess of RM100, 000, they were allowed to withdraw up to 10% of the balance but subject to a maximum of RM60, 000, also over a period of six months.

According to the EPF, based on their press statement in early June, almost RM58bil of i-Sinar withdrawals have been approved for 6.49mil applicants, while RM20.8bil has been paid out to 5.27 million members under the i-Lestari facility.

Hence, the EPF itself has seen a total withdrawal of some RM78.8bil from the first two withdrawal schemes alone. After these two packages, we now have the latest package called i-Citra, where members are now allowed to withdraw up to RM5, 000 over the next five months, with the rate of withdrawal of up to RM1, 000 per month.

As it is, and based on the data that was revealed by EPF’s chief executive officer Datuk Seri Amir Hamzah Azizan in an interview with a weekly business publication, 6.3mil EPF members have less than RM10, 000 in Account 1 and 9.3mil members have less than the same amount in Account 2.

Meanwhile, EPF’s chief strategy officer too had revealed that 4.56mil members have less than RM5, 000 left with the EPF and 2.19mil members have less than RM1, 000 in their account. These are indeed dire statistics for EPF members who fall in the respective categories.

Why dig into the EPF, again?

We have to first understand what has led us to this scenario that we are left with no choice but to dig into our retirement savings. There are of course few reasons for this. First is the government’s coffers which are running dry.

The government itself has admitted that they do not have much fiscal space in terms of providing aid to the people and while we had tapped into our retirement kitty last year with the i-Lestari and thereafter with the i-Sinar incentives. We thought that was it. But of course, the spread of Covid-19 remains at a worrying level, and the so-called lockdown that we have been under for the past month doesn’t seem to have helped in flattening the curve.

With numbers remaining high, we have no choice but to enter into an extended period of lockdown. With that, non-essential economic activities are impacted and hence, for those who depend on daily work or for self-employed workers, their income has been affected.

Even salaried employees are feeling the pinch as their employers may resort to a cut in salaries or worse, layoff their staff, and hence the demand for cash aid grew louder.

Thus, when the PM announced that Malaysia is going into the National Recovery Plan under four different phases and moving away from the MCO period, more Malaysians were trapped into making ends meet. Of course, the government announced the big headline RM150bil package but the actual direct fiscal injection was only RM10bil. Among the measures that did not entail the government’s expenditure or spending is the announcement to allow members to withdraw under the i-Citra incentive.

With this, it is hoped that members (note: not everyone that is affected is an EPF member) can use the incentive as a means to make ends meet during this difficult period.

The government expected some 12.4mil members to benefit from the scheme and another RM30bil will be withdrawn from the provident fund. This will be on top of the RM78.8bil that has been approved and mostly withdrawn under the two previous incentives last year and this year.

Consequences of early withdrawal

There are two consequences of this. First, members who withdraw will have a lesser sum available upon retirement, and two, for the EPF, they would need to make some provision for this withdrawal, which is expected to be about RM6bil a month for five months.

But it is believed that the liquidity need of the retirement fund is sufficient and hence EPF is unlikely to be under pressure to meet this short-term withdrawal demand.

However, EPF may not be experiencing a net inflow of funds over the next five months, which would have allowed it to explore new investment opportunities. Hence, if the EPF sees any new investment opportunity, it may need to reduce its current exposure in the market to enable it to make new investments.

Nevertheless, logically speaking, any withdrawal programmes that are designed not to pressure EPF to the extent it needs to rebalance its asset allocation or to liquidate its investments to meet members’ needs should be fine. But, we must, at the same time, recognise that the EPF is our retirement fund and not an ATM where we go to every time we run out of cash.

The very purpose of the EPF will be defeated if we keep allowing members to withdraw their retirement savings as this may result in the EPF having no choice but to revisit its Strategic Asset Allocation or SAA.

We need to address our structural issues – low income and taxes

Historically, the EPF has played its role in providing a retirement nest for its members and it also guides members to understand what is the minimum amount that they should have in order to draw at least RM1,000 a month during our time of retirement age, i.e. assuming one do retire at the age of 55, and up to the average life expectancy of 75-76 years of RM240, 000.

Even that, most members failed to achieve. Hence, with all the various withdrawal schemes, most members are unlikely to achieve this minimum balance. Of course, there are suggestions that perhaps we should raise the contribution level but that is at the expense of both employee and employer’s cost, and in the current scenario, that is not the answer.

What we have as a problem is our low wage structure where we are not paying enough to our workers. First, we have very low minimum wages of RM1, 200 per month for urban areas. We have graduates that are paying the same starting salary today as it was 20 years ago. Second, we don’t tax enough our workforce due to too many tax reliefs that we provide to all, be it individuals or companies.

Our current direct tax revenue as a percentage of GDP is one of the lowest in the world, simply because more than 80% of the working population and up to 85% of registered companies are not even paying a single sen in taxes. This means we have a huge structural issue when it comes to taxes, wage structure, and income levels.

Our low wage structure too has impacted our ability to be able to afford some finer things in life, which include owning a home, which is on average, beyond the reach of a median income salaried employee.

Short-term measures to regain our nest egg

The labour market today is very different than what it was 10, 20, or 30 years ago. The days of being employed with a salary are fast becoming less of a trend as we see the emergence of more freelance status workers and gig workforce. According to the Department of Statistics, Malaysia’s May 2021 labour force data shows that we have some 15.37mil employed persons with 728k others as unemployed. Of the total employed, another 7.4mil is actually outside the labour force and hence our labour force participation rate is just about 68.5%.

An employed person is deemed as anyone who at any time during the reference week worked at least an hour for pay, profit, or family gain (as an employer, employee, own-account worker, or unpaid family worker).

As the definition of an employed person is rather large, persons who are subjected to compulsory EPF contributions are disappointingly low.

Based on December 2019 statistics, EPF had some 14.59mil members but only 52% or 7.63mil are active members. From here we can see that although Malaysia has total employment of 15.37mil, only about half contribute to the EPF as many in the workforce are not EPF contributors.

The question is, how do we ensure that they too have a retirement nest build-up through legislative measures where income earned by them is deducted and saved via the EPF scheme?

With more Malaysians adopting the freelance status and turning into gig workers, they are also typically left out of the EPF contribution scheme as most of them are paid on an ad-hoc basis and are not salaried workers.

One way is to make all sorts of compensation schemes, be it ad-hoc payments, commissions, fees for services rendered to have an element of compulsory EPF contribution from both the employer and the employee as this will help them to build up a retirement fund.

For existing members, we should enhance the EPF Account 1 and Account 2, which have been used for various schemes and build up a truly untouchable retirement fund. We should re-designate either of the accounts as untouchable until a member achieves the age of 55. This was the case for Account 1, but some of the schemes that were introduced due to the pandemic had encroached into Account 1, leaving some members high and dry.

We should also perhaps look at withdrawal schemes at the age of 55 as allowing members to withdraw everything seems to have failed as statistics shows that members exhaust their withdrawals rather quickly.

Hence, one of the ways to address this is to allow a hybrid withdrawal method, let’s say 50;50, where you can withdraw half the other half goes into an annuity scheme, allowing members to withdraw funds on a monthly or quarterly basis for them to meet their post-retirement expenses.

Of course, the best is to leave the entire retirement savings that one has in the EPF and let EPF be your “monthly paymaster” for the rest of your life via a fixed monthly payment.

This could be structured either just to receive the dividends that EPF credits to one’s account and leaving the principal amount intact or a combination of the annual dividend and principal amount if the dividend alone is insufficient to meet a member’s monthly expenses need.

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