An ATM-Style EPF Account?

The proposal to introduce a third account in the EPF savings that can be withdrawn as and when the members want is nothing more than a populist move. The retirement fund officials have repeatedly warned of very low EPF savings among most of its members, especially those earning average or low wages.

The proposal calls for a percentage of the members’ contributions to be put into this new account which can then be withdrawn as and when they like. In other words, it will be like your personal ATM. You can take out any money left in the account.

It may not be surprising to see members applying to take out the money from their third account on the day the mandatory contributions are credited into it. Some may accumulate it and withdraw periodically even if they don’t need it badly.

Source: https://ms.wikipedia.org

Major retirement funds in the world don’t have this facility or feature because it defeats the whole purpose of having a retirement scheme. During Covid there were some retirement schemes in other countries that did allow withdrawals.

Currently 70% of EPF contributions goes into Account 1 and the rest into Account 2. The first account cannot be touched for other than investment in selected funds. That too only a percentage of an amount which is above a certain level of saving. Account 2 is strictly to help the members or their next of kin for education, health or housing purposes.

Under these circumstances, contributions to the proposed third account could be drawn from funds meant for the first or second account — or worse, the government may opt to increase the contribution rate, a move that will not go down well with both members and their employers.

The problem of low savings was not created by the government in the first place. It’s the people who wanted withdrawals because of financial problems brought about by Covid-19. As a result, their account balances have been reduced to alarming levels. Unfortunately, the governments in power have always caved into pressure as they had feared it would affect votes. Perikatan Nasional even included allowing special withdrawals in their manifesto at the general election in 2022. Total withdrawals by 7.4 million members (about 50% of total members) was RM101 billion. Now 6.1 million members have less than RM10,000 in the accounts. And of this, 3.6 million members have less than RM1,000.

Only 16.4% of EPF members between the age of 50 to 54 have achieved the basic savings threshold of more than RM240,000 in their savings. The country’s low-wage structure is another factor. More than 79% of EPF members earn a monthly salary of less than RM5,000, thus many of them have low EPF contributions, which means they have less money to manage their post-retirement living. This is compounded by the fact that around 40% of Malaysia’s labour force – equivalent to about 6.1 million individuals – are not covered by formal retirement schemes.

To solve the problem of nil or low savings (less than RM10,000), the Government must provide a new ‘safety-net’ which is basically a welfare support of RM200 p.m. or so to the B40 group. This is only available at age 60 (and beyond) and will follow certain defined criteria for implementation by EPF. How will EPF fund this? By a new issuance of Rakyat bonds subscribed by high net worth individuals, corporates institutions. This is to be issued by a Government entity or EPF. The quantum could be huge! If you assume there are two million members who qualify and each member gets RM2,400 a year, that works out to RM4.8 billion annually. How will EPF repay? Only through employer/employee contributions being raised.  The rate could mirror one-year fixed deposit rate plus one (percent). Isn’t this raising Government’s debt? That’s possible but will depend largely on who is the credible issuer! 

Covid-19 has caused severe issues for individuals and SMEs. Other ways may include extend retirement age to 65; staggered withdrawals in the future; and providing support in kind (vouchers or the like) for the very poor to purchase essential items. We need to find ways to assist the B40 or we are not really Madani!

References:

ATM-style EPF account an unnecessary populist move, K. Parkaran, FMT, 18 October 2023

8.1 mil EPF members see 50pc drop in median savings due to Covid-19 withdrawals, Hana Naz Harun, Teh Ahtira Yusof, Nor Ain Mohamed Radhi, New Straits Times, 16 February 2023