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THE latest withdrawal scheme of up to RM10,000 from the Employees Provident Fund (EPF) has drawn strong concerns on dwindling retirement funds.
This is especially as Malaysia heads towards an ageing society, with a potential retirement crisis where people are financially vulnerable with insufficient savings, investments and income to cover expenses.
Beyond such short-term measures, increasing job opportunities and revenue streams is the long term, viable way to boost income.
If this RM10,000 is not withdrawn, it would grow to RM25,000 if compounded at 4.7% annually for 20 years.
An expected mechanism to deal with the long-term effects of this move has raised further questions especially whether it could be a case of “robbing Peter to pay Paul?”
There may possibly be a mechanism for tiered dividend returns that will lower the returns for higher balance EPF accounts, and the difference to be credited to accounts with lower balances. Or will this involve a higher contribution by employers to EPF accounts, at a time of when they are recovering from the pandemic lockdowns?
The contribution rate by employees is supposed to revert to 11% by the middle of 2022, but it is uncertain how that will take place, following this latest withdrawal scheme.
There are indeed concerns regarding the long-term implications of the many rounds of EPF withdrawal schemes, said OCBC Bank (M) economist Wellian Wiranto.
Even before the latest fourth scheme, as many as 3.6 million EPF members have less than RM1,000 in their accounts. The cumulative effects will not be minimal as claimed, although the marginal effect may be less than previous withdrawals as many do not have RM10,000 left.
If the intent is to allow higher returns from an approach of “robbing Peter to pay Paul,” it may not work as, for example, a 20% return calculated on a near zero balance is still near zero, said former Inter-Pacific Securities head of research Pong Teng Siew.
Based on a conservative life expectancy until age 85, one would need to cover expenses for about a third of one’s life during the retirement years.
- To retire covering basic needs with RM3,000 monthly, RM1mil would be needed.
- To retire covering basic needs and some additional items with RM6,000 monthly, RM2mil would be required.
- To retire comfortably with RM10,000 monthly, RM3mil would be required.
At RM240,000, the EPF required basic savings at age 55, is insufficient; more alarming is only one in four Malaysians would have more than the required basic savings at age 55, said Wealth Vantage Advisory Sdn Bhd chief knowledge officer Stephen Yong.
The younger EPF contributors who have jobs or are self-employed should be able to build their retirement savings over the years, but this is extremely difficult for the older contributors. The only real effective way to help those in dire straits in terms of their retirement savings, is for the government to top up their savings, said Tricor Services (M Sdn Bhd chairman Dr Veerinderjit Singh.
However, that is almost impossible, given the fiscal deficit and the need to manage federal finances.
The EPF may give higher returns on the savings of those impacted but that has various regulatory and perceptual issues.
Agencies that help the poor in general, and are earning returns from their accumulated funds, can help EPF contributors in the B40 category top up their retirement savings.
However, clear criteria is needed for any such scheme to ensure that it is correctly targeted and not end up enriching those who are generally better off. Allowing individuals who really need the funds to withdraw, will have the proper impact now than later.
Retirement issue
The risk is those who are not in such great need and may face a retirement crisis later on.
A case-by-case evaluation is a better way to manage the issue, which is administratively prohibitive, said Etiqa Insurance & Takaful Bhd chief strategy officer Chris Eng.
Overall, we really need to ensure that Malaysians are financially literate and understand the compounding factor as well as the opportunity cost of withdrawing unnecessarily from their EPF savings.
The EPF has been giving out competitive returns all these years and this issue of yet another withdrawal is very unsettling, said another observer. WIth so many preceding withdrawal schemes, employees actually need time to recoup their savings.
The government needs to put right the economic ship first, by providing the proper stimulus and incentives for corporate growth especially in the small and medium enterprises sector, said Yellowshorts Consulting Sdn Bhd director Nicholas Chan.
With unemployment still seriously impacted by the recent lockdowns, this has taken a toll on the workforce and the economy.
This reminds us of some European countries with huge ageing populations and high social welfare expenses.
We should create more jobs and opportunities; allowing people to live on future retirement savings is not a long-term solution, said Areca Capital Sdn Bhd CEO Danny Wong.
While encouraging more foreign investment, higher taxes are not welcome by the foreign investors.
We should, instead, look at increasing revenue and investment from foreign sources; ultimately, with better business and more robust economic activities, tax revenues will increase.
The full extent of this “kick the can down the road” approach will come home to roost in the coming 10 to 20 years, said Pong.
It will coincide with a time when returns from all EPF asset classes drop as economic growth and hence, equity and property returns drop in the years ahead.
We may shortly see another recession in quick succession in the year ahead or so, while the private sector’s fortunes have not recovered at all from the devastating effects of the lockdowns.
Taking charge
People need to take charge of saving and investing for their retirement years, said Yong.
Besides EPF contributions, they should target to save and invest at least 20% of their take home pay. Those not contributing to the EPF, should consider setting up an EPF voluntary fund, and/or increase to save and invest at least 40% of their take home pay. With the uncertainties ahead, there is an obvious requirement for better long-term planning for growth and sustainability.
Source: https://www.thestar.com.my/business/business-news/2022/04/11/increasing-concerns-over-epf-withdrawals