IF you are an Employees Provident Fund (EPF) contributor, and most likely you are, it is imperative you read this article.
It is highly irresponsible for the government to use funds from the EPF to stimulate the economy because the vast majority of employees in Malaysia have not lost their jobs, it will lead to erosion of retirement earnings, and may cause structural problems in the financial system by forcing the EPF to sell assets.
It is an extremely ill-thought-out solution which will cause grave damage without making any significant impact on the underlying aim which is to provide financial relief to those who are badly in need of them as a result of control measures taken to fight Covid-19.
Instead, what it does is offer EPF members the opportunity to withdraw large sums from retirement savings and even reduce their contributions to future retirement savings even if their incomes have not been crimped in any way as a result of the Covid-19 pandemic.
But all is not lost if some very simple adjustments are made as we shall see. That would require some right thinking on the part of government policymakers – sorely lacking when we most need it – and some serious push-back against the government by top EPF officials even if it means that their positions are threatened. Let’s explain.
First, here’s what has been demanded of EPF in the name of the pandemic:
1. February 27, 2020 – It was announced that with effect from April 1, employees’ minimum statutory contribution to EPF was reduced to 7% from 11% of salary, a reduction of over one third. Worse, if you want to contribute the 11% anyway, you need to fill up a form, skewing the choice towards the reduced contribution.
2. March 23 – The so-called i-Lestari withdrawal facility from account 2, which is the discretionary withdrawal account (30% of total contribution) which allows a maximum RM500 per month to be taken out from here. It’s effective for a year from May this year.
3. November 6 – This is the i-Sinar budget blockbuster, allowing, for the first time ever withdrawals from Account 1 which is for retirement, ahead of retirement. Generally, eligible members will have access to 10% of their savings in Account 1 subject to always having a minimum balance of RM100.
For those who have RM90,000 and below in Account 1 they have access to any amount up to RM9,000 subject always to a minimum of RM100 left in the account. The amount paid will be staggered over six months. Those who have above RM90,000 can withdraw up to 10% of their Account 1 savings with a maximum of RM60,000.
But, beware! If you have, say, only RM4,500 in your Account 1, you can still withdraw RM4,400, almost all your savings, just leaving RM100. How ridiculous is that – up to RM9,000 you can more or less empty your retirement savings accounts!
Let’s now look at each in more detail. Both 1 and 2 are skewed in the sense that they encourage members to pay less contributions, even if they don’t want or need to and on top of that withdraw from their accounts up to RM6,000 in a year at RM500 per month, even if they still have their jobs.
Unlike the first two, the third move appears to have some restrictions – the EPF, in its announcement says i-Sinar will now benefit two million eligible members and result in a total estimated value of RM14 billion to be made available.
However, this certainly is much more than those affected by Covid-19. The entire unemployment figure given by the Department of Statistics for July was just 745,000 or 4.7% of the workforce.
In March, at the start of Covid-19 lockdowns, the unemployment rate was 3.9%. The increase in unemployment between March and July should therefore be 0.8% points (4.7-3.9) of the workforce of 15.85 million (745,000 divided by 4.7 multiplied by 100) or about 127,000 workers.
That is far fewer than the two million people the EPF says will be eligible for the scheme, just 6.35% of the total unemployed. So, there is no need for the i-Sinar scheme to be so all-encompassing.
By a similar argument, when just 127,000 people lost their jobs as a result of Covid-19 between March and July, what is the reason to allow 14.7 million members (of whom about half are active) to reduce their contributions to EPF from 11% to 7%, and to allow withdrawals of up to RM500 a month for up to a year? Even if the 127,000 figure doubles or triples, or even increases by 10 times, what is done is not justified.
It represents, for the vast majority of those contributing to EPF – over 98%, according to my calculations – a needless withdrawal of retirement savings because it really does not help those who are severely affected. It puts savings into the hands of those who need to save in the name of stimulating the economy.
Those severely affected are the self-employed, who numbered 2.38 million in July 2020, according to the Department of Statistics. They are largely not EPF contributors. This group comprises mostly daily wage earners working in farmers’ markets, night markets and stalls; freelancers; as well as smallholders. They are the most affected group by the Covid-19 pandemic and have received the least amount of help.
While it causes considerable damage to retirement savings, the permitted EPF withdrawal does nothing to help the worst affected, and will cause financial shifts within the economy and forced sales of assets by EPF.
Let’s look at how much EPF will pay out from all these. According to this report, EPF will end up paying over RM60 billion, or some 7% of its total assets of around RM870 billion. It has to sell assets to make available that kind of money to its members. Such shifts in funds will cause financial problems – what assets is EPF going to sell in this current depressed market?
Just imagine this: RM60 billion is being squandered on a spending spree from workers’ retirement savings and this is hardly helping any worker who is suffering from the side effects of the pandemic.
That is incompetence and negligence bordering on the criminal, and if indeed the aim is to hand out goodies to the rakyat ahead of a possible election, it is highly irresponsible and represents a RM60 billion scam.
It’s not too late to change. Simply tweak the EPF scheme to ensure that only those who have lost their jobs or who have their incomes severely curtailed are eligible for all three schemes. EPF already has the data to ensure that – the monthly contribution from employers.
That will ensure the RM60 billion figure drops to a fraction of its value. From my estimate, no more than 2% of EPF’s 14.7 million members, or 294,000 members, could have been affected by job cuts. Remember, the Department of Statistics figures show that jobs lost between March and July were only 127,000.
Two per cent of RM60 billion, or a mere RM1.2 billion at the maximum, needs to be withdrawn from EPF for this purpose.
And if you are an EPF contributor, simply keep your money in EPF to ensure bigger retirement savings – the returns are much better than bank interest rates, the principal is guaranteed, as well as a return of 2.5%. It has returned between 4% and 8.5% annually over the last 60 years. There is no better return for an investment as safe as that.
If you have plenty of money, then you can think about investing for higher returns, which always carry higher risks. — The Vibes, November 19, 2020
P. Gunasegaram is amazed at the kind of solutions this backdoor government comes up with. He is editorial consultant at The Vibes, and has worked as an investment analyst, among others