Tiered Dividend to Help Low Income EPF Members?

Sometime back a newspaper report carried an interesting proposal on tiered dividends. It suggested that for EPF to help members with lower incomes and savings is to implement a tiered dividend payment scheme which, in short, pays a higher dividend rate to those with low savings, and a lower rate when the savings grows above a certain threshold. The rationale for this is like a progressive tax, where those with a higher taxable income fall under a higher tax bracket and hence, pay more tax (The Edge, 14 Dec 2020).

A 21-year-old with a basic salary of RM1,000 at the turn of the millennium (year 2000) who had enjoyed a 5% annual salary increment in the past 20 years, for example, would have saved RM95,230 (including employers’ contribution) with EPF and seen his savings grow to RM166,937 when he turned 40 by the end of 2019, helped by the generous dividends the provident fund had paid in the past two decades as well by the power of compounding.

If he continued not to withdraw any of the money, he would reach EPF’s basic recommended savings of RM240,000 by age 45, on a back-of-the-envelope calculation. That savings would grow to RM526,578 by the time he reaches age 55 — provided he continues to enjoy a 5% annual salary increment to reach a final basic salary of RM5,253 and assuming that EPF continues to pay a blanket dividend of 4% per year.

If a tiered dividend had been implemented from year 2000, that same 21-year-old would have reached EPF’s basic recommended savings earlier at age 43 and have about RM27,000 more savings at 55.

Some would argue that this tiered payment is “unfair”, saying that members who contributed the most funds to be invested by EPF should get higher returns and not less. Yet, as the challenge for EPF to pay every 1% of dividends grows, even as its total fund size approaches RM1 trillion, it may well be time for it to recalibrate its strategy to help members who need a leg-up to survive retirement. That’s what the proponents of the proposal say.

While a lower dividend rate for members with high savings could cause those with savings nearer or above RM1 million to withdraw their funds, they would be taking additional risks in doing so.

There are those who reckon that it may be easier for EPF to get a better return on investment without having to put as much money abroad if the pool of funds it needs to manage is smaller. They note that currently, it puts about 30% of its funds overseas because there is a lack of suitable investments in the country.

The proposal is expected to have real merits for social development of the country, given the low savings of the B40 and M40 income group. After all, those who are able to accumulate over RM1 million with the EPF alone are believed to be “ well educated” and "financially savvy” and may well have income from sources other than the EPF, an observer says, adding that “people should not be using the EPF’s investment capability as a free ride”.

However, even if the lower-income group does benefit from a slight leg-up from tiered dividends, the latter alone does not make the EPF’s job of protecting and growing its members’ retirement savings easier. There are still more that needs to be done by the government to better prepare people for retirement.

 On balance, this is a dumb idea—tiering dividends. The real issues are the low starting salaries for fresh graduates and others because we still want to project the idea that this is a low-cost economy; then our productivity levels are not improving as it should; in addition, inequalities are addressed on income earned and wealth rather than on savings. Ideas like these come up because the Government addresses low disposable income in a crisis with “raids” on hard earned savings, like the I-sinar account. Try and get real!

 

Reference:

1.     The State of The Nation: Tiered dividend necessary to help low-income EPF members, 14 Dec 2020, The Edge

2.     Varied response to whether EPF should implement tiered dividends, 28 Dec 2020, The Edge