Allowing Withdrawals from EPF in Light of Covid-19 Crisis Ill-advised. More Effective Relief Measures Needed

Published on 24 Mar 2020

By Voon Zhen Yi, Research Director, KSI Strategic Institute for Asia Pacific

By allowing withdrawals, EPF members will lose out at least RM34,460 in retirement savings over 30 years
Not all Malaysians have EPF savings. More holistic approach needed to include SMEs in the informal sector, the poverty-stricken
Government should consider stronger fiscal measures to lessen negative multiplier effects
Cash handouts or distribution of necessities in-kind is necessary, not expect citizens to use their own future savings

The Malaysian Prime Minister on 23^rd March 2020 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 with long-term ramifications to the country due to insufficient savings when these members retire.

While it is acknowledged that withdrawals are limited for Account 2 and savings from Account 1 can only be withdrawn strictly after retirement, there would be a high number of EPF members who may have already withdrawn from Account 2 for housing, education, and medical payments, with little left to sustain a long-duration of little or no revenue. Hence, even if withdrawals from Account 2 is possible, it is only effective as a form of short-term relief at the savers’ expense.

Allowing early withdrawals from EPF has long-term effects on a member’s potential to grow their savings as EPF operates based on the effects of compounding interest. Even if small amounts are withdrawn, it adds up to a loss of a larger sum towards the end of a member’s working career. For example, if a member withdraws the full possible amount of RM6,000 (RM500 each month for 12 months) and assuming an average 6% dividend returns annually, not factoring amounts already saved, an EPF member will have RM34,460 less in retirement savings over 30 years. In other words, making “small” withdrawals in the short-term will deprive EPF members of higher amounts of future retirement savings.

We must remember why a savings scheme like EPF exists in the first place. It not only provides its members with post-retirement savings, 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, the burden falls on society which may in turn cause the government to end up spending more of the tax payers’ money instead. Hence, the EPF 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 announced similarly allows withdrawal of superannuations (the Australian version of EPF) of up to AUD$20,000 per individual who has been laid-off (AUS$10,000 a year)[1]. Critics have similar lambasted the move as Australians can potentially lose AUD$120,000 over the course of 30 years[2].

The government’s immediate focus on patient recovery and annihilation of COVID-19 must operate in tandem with its long-term economic posturing. The injections of larger, more substantial stimulus measures are 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 more importantly to enable employees’ jobs to be retained. This can be done by providing businesses with cash payments, with a mandatory condition that salaries continue to be paid out to employees and to ensure minimal retrenchment.

However, it must be acknowledged that such reliefs may not reach those in the informal sector due to the lack of documentation which will pose a major obstacle to these groups receiving financial relief. Those living in poverty are especially at risk. A solution to this is to provide cash handouts in a similar fashion to BR1M (Bantuan Rakyat 1 Malaysia) or BSH (Bantuan Sara Hidup). Distributions of necessities in-kind like food and medicine can also be considered, though 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 public coffers, as it already is. Other leading countries have committed significant portions of their GDP as lifelines to their citizens (Australia 9.7% of GDP or AUD$189 billion[3], Canada 3% of GDP or C$82 billion[4], France €45 billion[5], Italy €25 billion [6], Japan $137 billion[7]). The Malaysian government, which has thus far committed to a RM20 billion 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 salary or being laid-off is not only unable to purchase basic living necessities, pay rent, utilities, etc, each of the intended recipients are similarly deprived of their own forms of income. This is a recipe for recession, which is an equally crucial matter the government must attempt to mitigate.

Even if the goal of allowing EPF withdrawals from Account 2 is to provide more disposal income, it is important to point out that not all Malaysian 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 not in the labour force. There are only 13,790,216 members, 7,110,517 of whom are inactive (as at 2017)[8]. Malaysia’s working-age population numbers 15.83 million with a labour force participation rate of 68.9 percent. The remaining 31.1 percent or approximately 4.923 million are housewives, students, retirees and those not seeking work[9]. This implies that at least 2.04 million or as many as 8.72 million Malaysian residents do not have EPF savings to begin with. Instituting measures using EPF as a form of temporary relief is quite simply forgetting about a large portion of the population that lack such savings. Earlier suggestions of cash handouts or the setting up of relief centres for the distributions of necessities in-kind may be the only viable solution for these segments of society that risk being left out.

However, providing people with disposal income shouldn’t come at the expense of EPF savings for their future as it will lead to negative effects for both EPF holders and the government down the line. Despite the Prime Minister’s announcement, EPF members still have a choice whether to make withdrawals or to maintain their savings. The government should take the long-term effects into consideration.

[1] https://www.theguardian.com/australia-news/2020/mar/22/australia-is-easing-superannuation-access-for-those-worst-hit-by-coronavirus-but-can-we-afford-it

[2] https://au.finance.yahoo.com/news/coronavirus-super-policy-under-spotlight-011536824.html

[3] https://www.abc.net.au/news/2020-03-22/coronavirus-second-stimulus-economy-federal-government/12078982

[4] https://www.bloomberg.com/news/articles/2020-03-18/trudeau-said-to-plan-virus-support-worth-1-of-canada-s-economy

[5] https://www.politico.eu/article/france-injects-billions-into-stimulus-plan-amid-coronavirus-chaos-bruno-le-maire-economic-catastrophe/

[6] [6] https://www.bloomberg.com/news/articles/2020-03-15/italy-set-to-pass-new-tax-unemployment-measures-in-virus-crisis

[7] https://www.thestar.com.my/news/regional/2020/03/23/japan-to-spend-over-us137bil-as-virus-hits-economy-boj-eyes-more-stimulus

[8] EPF Annual Report 2017

[9] https://www.dosm.gov.my/v1/index.php?r=column/cthemeByCat&cat=124&bul_id=Qkpyc3lFbWcxRmVObGk5dkhRMTZrUT09&menu_id=U3VPMldoYUxzVzFaYmNkWXZteGduZz09