What about 9m Malaysians who have no EPF?
Published on: Sunday, March 29, 2020
By: Voon Zhen Yi
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ON March 23, Prime Minister Tan Sri Muhyiddin Yassin announced plans by the Economic Action Council (EAC) to allow members of the Employees Provident Fund (EPF) to withdraw up to RM500 per month for 12 months from their savings under Account 2 as a source of emergency funding during the Covid-19 crisis. 

The move is ill-advised as it merely provides short-term relief while leaving long-term ramifications to the country due to insufficient savings when these members retire.

While it is acknowledged that withdrawals can only be made from Account 2, nevertheless there would be a high number of EPF members who may have already withdrawn from this account for housing, education and medical needs. And even if withdrawing from Account 2 is possible, it would only be effective as a form of short-term relief at the savers’ expense.

Allowing early withdrawals from EPF has long-term effects on members’ potential to grow their savings, as EPF operates based on the effects of compounding of interest. Even if small amounts are withdrawn, they add up to loss of a larger sum towards the end of a member’s employment.

We must remember why a savings scheme like EPF exists in the first place. It not only provides its members with post-retirement funds, but there is also an element of shared responsibility between the EPF-saving workforce and the government, as people having sufficient savings will take the burden off the government to care financially for aging citizens.

Without sufficient EPF savings, this burden will fall on the society and may in turn cause the government to end up spending more of the tax payers’ money instead. Hence, the fund is meant to ensure that the nation’s current account is healthy in the long term.

Malaysia is not alone in considering amendments to its savings schemes. Australia’s second stimulus package to cope with the Covid-19 outbreak, announced   by Prime Minister Scott Morrison, similarly allows withdrawal of superannuations (the Australian version of EPF) of up to AUD$10,000 per individual who has been laid-off. 

Canada took the opposite approach, allowing its retirees to reduce their minimum mandatory withdrawals from registered retirement income funds (RRIFs), therefore allowing fund holders to withdraw less, rather than more. This is indicative of their saving mindset even during a time of crisis.

These are differing national priorities in the consideration of short-term reliefs at the expense of long-term gain, and Malaysia has, at least for now, chosen the former.

The government’s immediate focus on patient recovery and eradication of Covid-19 must operate in tandem with its long-term economic posturing. Injections of larger, more substantial stimulus measures are therefore necessary to ensure that passive economic functions under conditions of restricted movement can be sustained and built upon.

The stimulus should include an economic assistance package not only to provide relief to small businesses and their owners but also, and more importantly, to enable employees to retain their jobs. This can be done by providing businesses with cash payments, with a mandatory condition that salaries continue to be paid and to ensure minimal retrenchment.

However, it must be acknowledged that such reliefs may not reach those in the informal sector due to lack of documentation.

Those living in poverty are especially at risk. A solution is to provide cash handouts similar to the cost of living aid (Bantuan Sara Hidup). Distributions of necessities like food and medicine can also be considered, although mechanisms for disbursements need be carefully devised in light of the crucial need for social distancing.

There is no escaping the fact that this will be a costly affair to the public coffers, and it already is. Other leading countries have committed significant portions of their GDP as lifelines to their citizens (Australia 9.7pc of GDP or AUD$189bil; Canada 3pc of GDP or C$82bil; France €45bil; and Japan US$137bil). 

The Malaysian government, which has thus far committed to a RM20bil stimulus package, is expected to consider more substantial fiscal measures.

It is key for people to have disposable income to keep the economy intact. Breaks in the chain will lead to negative multiplier effects. For example, an employee not receiving his salary or being laid off is not only unable to purchase the basic living necessities, pay rent, utilities and etc, but each of the intended recipients is also similarly deprived of their own forms of income. This is a recipe for recession, an equally crucial matter which the government must attempt to mitigate.

Even if the goal of allowing EPF withdrawals from Account 2 is to provide more disposable income, it is important to remember that not all Malaysians have EPF accounts in the first place. A large portion have inactive accounts. This is especially true for SMEs in the informal sector, the gig economy, the poverty-stricken and those who are not in the labour force.

There are only 13,790,216 EPF members, 7,110,517 of whom are inactive (as at 2017). Malaysia’s working-age population numbers 15.83 million with a labour force participation rate of 68.9pc. The remaining 31.1pc or approximately 4.923 million are housewives, students, retirees and those not seeking work.

This implies that at least 2.04 million or as many as 8.72 million Malaysians do not have EPF savings to begin with. Hence, using EPF withdrawals as a form of temporary relief is quite simply forgetting a large portion of the population that lacks such savings.

Providing people with disposable income shouldn’t come at the expense of EPF savings, as it will lead to negative effects for both EPF members and the government down the line. 

While EPF members have a choice on whether to make withdrawals or to maintain their savings, the government should take the long-term effects of this measure into consideration.

Voon Zhen Yi

Research director

KSI Strategic Institute for Asia Pacific

Kuala Lumpur

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