Is Our EPF Retirement Pot in Trouble?

During this pandemic, Malaysians have been cash-strapped. The bright idea from the Government was tap on members’ savings in the Employees Provident Funds (“EPF”). This is using one’s own money to save oneself, and forsaking the retirement nest.

The i-Lestari scheme started in April 2020 up to March 2021. Members were allowed to withdraw RM500 per month for twelve months or a maximum of RM6,000.

The i-Sinar was introduced in late 2020 but was effected in 2021. Members were allowed to withdraw up to RM10,000 over a period of six months. If their Account 1 balance is at 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 EPF, almost RM58 billion of i-Sinar withdrawals have been approved for 6.49 million applicants. And RM20.8 billion has been paid out to 5.27 million members under the i-Lestari facility. Total withdrawals is about RM78.8 billion from these two schemes. Now you have i-Citra, to withdraw RM5,000 over next five months (i.e. RM1,000 per month).

Of all EPF members, 6.3 million of them have less than RM100,000 in Account 1 and 9.3 million members have less than the same amount in Account 2. About 4.6 million members have less than RM5,000 left and 2.19 million members have less than RM1,000 left.

Why has this happened?

The pandemic has left the Government with no room to manoeuvre. For rating reasons or the self-imposed debt ceiling constraint they are unable to help. Fiscal injection in the current lockdown is only RM10 billion. The current lockdown has not flattened the curve. Why? It is not really a lockdown! Then again, we could have been more targeted on factories, construction sites, dormitories and prioritise vaccination of the labour force.

All these withdrawals from EPF has consequences:

1. Lesser sum available for retirement; and

2. EPF needs to make provision for withdrawal- RM6 billion a month for five months. But its own

    liquidity is adequate.

The very purpose of EPF is being defeated if we allow members to withdraw retirement savings. If the average life expectancy is 75-76 years, a retirement sum of RM240,000 is required. And most members have failed to do that. To re-dress, we could raise the contribution levels which is then a “tax” – i.e. less disposable income in a pandemic.

Malaysia’s direct tax revenue as a percentage of GDP is one of the lowest in the world. Direct taxes constituted RM115.1 billion in 2020, while total tax revenue was RM227 billion. More than 80% of the working population and up to 85% of registered companies are not paying taxes. This is a structural issue.

With more freelance workers and the gig economy, it is difficult to bring them under the EPF fold. EPF has some 15 million members but only half are active.

For retirement, the best is to have a fixed monthly payment for the rest of your life while the entire retirement savings is left intact. But under current conditions most members are left with little to nothing. EPF is not in trouble but many members have no “nest egg” to live by in their retirement.

What can be done? Increase dividend payment for those with less than RM100,000 in their accounts? May not fly with those with strong balances and have not touched their EPF. The Government could issue a bond of up to RM80 billion and restore the members’ accounts that were impacted by the withdrawals? That suggests a bail out!  Any other ideas?

Reference:

Regaining our retirement nest, Pankaj C Kumar, Starbiz Week, 10 July 2021