This article first appeared in The Edge Malaysia Weekly on November 16, 2020 - November 22, 2020

ONE of the most hotly debated items in Budget 2021 is the unprecedented move to allow a “targeted withdrawal” of funds from Account 1 of the Employees Provident Fund (EPF), which, according to the Minister of Finance Datuk Seri Tengku Zafrul Aziz in his budget speech, is projected to see RM4 billion being withdrawn by approximately 600,000 members who have lost their jobs or are badly affected by the Covid-19 pandemic.

If it was just RM4 billion, the government could please both supporters as well as opponents of the proposed withdrawal by not going ahead with the move and coming out with the amount in targeted cash aid, which would increase the projected budget deficit of 5.4% of GDP to 5.67%, our back-of-the-envelope calculations show.

During the budget debate in parliament, it was proposed that the withdrawal amount be increased to RM10,000 from the proposed RM6,000 (RM500 x 12 months starting January 2021). The amount required would not push next year’s projected budget deficit beyond the 6% estimated for this year.

Yet, the amount of cash needed to help those in need may actually be much larger. If data from the i-Lestari Account 2 Withdrawal Scheme that began in April is any indication, the number of people who need to take money out of Account 1 may well be closer to five million — some eight times more than the “approximately 600,000 members”.

When tabling Budget 2021 on Nov 6, Zafrul said 4.7 million EPF members had collectively withdrawn RM11.6 billion from Account 2. That works out to an average of RM2,468 per person in just over six months — this is less than the maximum of RM3,000 (RM500 x 6) that can be withdrawn — which points to the lack of savings among the lower income members.

Account 2 constitutes 30% of statutory contributions, from which selected types of withdrawals can be made. Account 1, which constitutes 70% of statutory contributions, was previously off limits until one hits retirement age.

If there are indeed more than five million applicants, the government may have to set aside or guarantee up to RM30 billion to RM50 billion (1.9% to 3.2% of GDP) in cash aid if it wants to extend cash assistance of RM6,000 to RM10,000 per person instead of allowing withdrawals from Account 1, our back-of-the-envelope calculations show.

At the time of writing, the EPF was still “refining and improving” details and requirements of the withdrawal facility and it is not immediately known if it will be extended to EPF members who still have a job but are in need of emergency cash to tide them over during the Covid-19 pandemic.

“Allowing EPF members access to their EPF retirement savings other than what is provided for under the EPF Act 1991 is unprecedented and has never been done before … Given the complexity of the situation, it was not an easy decision that could have been made in a hurry. However, we found a middle ground to allow members access to their savings without jeopardising their future retirement,” EPF CEO Tunku Alizakri Alias said in a Nov 6 statement. He described the Account 1 withdrawal facility as a “short-term facility” that provides “some measure of relief for the most vulnerable and unprotected groups, while maintaining the EPF’s mandate to safeguard members’ retirement savings”.

If economic conditions do not improve significantly in the coming months, there may well be a need for more short-term cash assistance from the government, on top of Account 1 withdrawals.

In June, Alizakri said the majority of the 4.1 million who applied to withdraw funds from Account 2 were from the bottom 40% (B40) income group — some of whom exhausted their savings after two withdrawals of RM500 each.

It is likely that at least 38%, or 2.8 million, of the 7.36 million active EPF members as at end-2018, did not have enough money in Account 2 to withdraw the maximum RM6,000 per year (RM500 x 12), according to The Edge’s estimates based on data for active (contributing) members’ savings appended in the EPF’s 2018 annual report. The EPF had yet to release its 2019 annual report at the time of writing.

There are also the medium to longer-term concerns over the lack of retirement savings among private-sector wage earners, which generally stems from low salaries.

As it is, some 42% of active EPF members have less than RM6,000 in Account 1, Zafrul said in an interview on TV3 after tabling Budget 2021, describing the lack of retirement savings as a “structural issue” that the government needs to tackle. Worryingly, 32% of EPF members have only RM1,000 in their Account 1 while 10% have only RM5,000.

According to Alizakri, some 5.38 million (43%) active EPF members have less than RM10,000 in Account 1, and 137,000 (54%) of 254,000 members aged 54 in 2020 had less than RM50,000 with the EPF. In an interview with Harian Metro on Nov 11, Alizakri noted how EPF members would not only be losing the amount withdrawn but also the interest and compound power of money set aside over a period of time.

To illustrate the power of compound interest, if a 30-year-old today were to keep his RM10,000 with the EPF, it could become RM32,000 to RM43,000 by the time he reaches 60, if one assumes an average interest of 4% to 5% per annum, our back-of-the-envelope calculations show. That is about three years of retirement savings, going by the EPF’s recommended basic savings of RM240,000 (RM1,000 per month for 20 years post-retirement based on the average life expectancy of 75 years for Malaysians and the retirement age of 55).

The longer-term loss of interest and compound power of the money that went into the pockets of EPF members this year, instead of into their retirement kitty, also applies to the majority of EPF members who chose to keep their EPF contribution at the reduced rate of 7% instead of the original 11% from April 1 to Dec 31 this year. The consumption boost to the economy was estimated at RM10 billion when the first Covid-19 economic stimulus package was announced on Feb 27.

Only 1.87 million, or about 25% of active EPF members, chose to keep their EPF contribution at the original 11% rate as at June 5, according to the Ministry of Finance’s Laksana unit. About half of active EPF members chose a lower employee statutory contribution rate during the previous times it was allowed by the government, Alizakri told reporters in June.

Under Budget 2021, the minimum EPF statutory contribution rate would be 9% from January to December 2021 — which is estimated to release RM9.3 billion into the economy.

Over the medium term, there may well be a need for the government to rethink how it can help the lower and middle-income group better prepare for their retirement, especially if they are disproportionately affected by the Covid-19 pandemic.

Even before Covid-19 hit, the EPF had said that some 68% of its active members did not have the basic recommended savings in the various age bands.

According to its data, EPF had 14.19 million members and RM832.31 billion total members’ fund as at end-2018. That implies that RM219.9 billion, or 26.4%, of total members’ savings, were with 6.83 million non-active members, given that there were 7.36 million active members with RM612.37 billion cumulative savings.

Our analysis of the 2018 savings data among the active members found that 50% of savings were with the top 9.6% — the 707,894 active members with at least RM200,000 saved up. And even among them, not all have reached the EPF’s recommended savings. Only 497,680, or 6.8%, of the 7.36 million active members, had more than RM250,000 in their EPF accounts as at end-2018.

In fact, 39,610 active members with more than RM1 million in savings — who constitute 0.5% of 7.36 million active members — collectively account for 10.9% or RM66.4 billion of the RM612.37 billion total savings pool among active members as at end-2018.

The bottom 25% of active savers (about 1.9 million members), meanwhile, have less than RM10,000 saved up — these may well include young Malaysians who have just entered the workforce and still have a chance to save for their old age.

As policymakers as well as the EPF pore over how they can help those with lower income to better save for their retirement, the question of whether there should be tiered dividends inevitably comes up. One way is for the government to provide a top up dividend for the lower income group, but there may well be a need to find a suitable cut-off point so that the income that the EPF earns to pay dividend helps boost the savings of the lower-income group more than that of those who already have a lot more than the basic recommended level of savings — which is a whole other debate on its own.

For now, that enough people were asking to withdraw money in their retirement kitty to cover their immediate needs, even after being allowed to withdraw money from Account 2, is yet another indication that financial assistance needs to arrive faster and in more meaningful amounts to a lot more people. If indeed the decision to allow the proposed Account 1 withdrawals is passed with Budget 2021, the government will need to work even harder to ensure that it can cast a wide enough social safety net when the population ages in the coming decade.

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