Thursday 28 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on March 30, 2020 - April 5, 2020

IT may not be entirely fair to say that the government’s move to give wage earners the choice of using their retirement savings in the Employees Provident Fund (EPF) to tide them over during the Covid-19 crisis achieves little beyond providing a sizeable RM50 billion headline boost for the stimulus packages announced on Feb 27 (RM10 billion) and March 23 (RM40 billion).

After all, members can choose to keep their contribution rate at 11% (instead of the reduced 7%) and not withdraw the RM500 a month from their EPF Account 2 for one year starting April 1.

This is at least the fifth time that the government has looked towards EPF savings for a consumption boost and up to 50% of members chose to make the lower contribution the last two rounds it was implemented — presumably because they needed the extra money then and had no choice but to tap into their old-age savings.

Still, the largest ever headline number of RM50 billion — thanks to the “up to RM40 billion” that could be taken out via the i-Lestari Account 2 Withdrawal Scheme — grossly overstates the potential benefit, especially for the bottom half who need the aid most.

A total of 1.38 million, or 18.8%, of EPF members did not have a total of RM6,000 saved up as at end-2018, let alone have that amount in Account 2 for withdrawals for one year, data in the EPF’s 2018 annual report shows.

At least 2.8 million, or 38%, of the 7.36 million EPF members as at end-2018 (7.6 million as at end-2019) did not have enough money in Account 2 to withdraw RM500 a month, or RM6,000 per year, a back-of-the-envelope calculation shows.

That is based on the assumption that 30% of savings are in Account 2, which means that one would need to have RM20,000 savings in total to have RM6,000 savings in Account 2. By extension, at least 1.23 million members will not have enough (RM1,500) in Account 2 to last even three months.

The actual number of EPF members who may not qualify for i-Lestari may well be larger than 2.8 million because some in the lower and middle-income groups may have already used money in their Account 2 for education purposes or to make a down payment for their home — which means less than 30% of their savings is in Account 2.

In fact, EPF data shows 1.75 million members withdrew just over RM2 billion to reduce the monthly instalment for their home mortgage in 2018 while 140,769 withdrew RM1.32 billion in total for education (including to PTPTN, or the National Higher Education Fund Corp) and 91,074 withdrew RM2.15 billion to buy their first house.

The lack of retirement savings is just one reason why calls for greater government-funded aid for vulnerable groups hit by Covid-19 have gained momentum.

Some 52% of Malaysians would have difficulty raising RM1,000 as emergency funds while six in 10 are self-employed or outside the labour force and not covered by any formal retirement or pension system. Only 24% are able to sustain living expenses for at least three months or more if they lose their main source of income and just 10% can do so for more than six months, according to findings by the Financial Education Network (FENetwork), an inter-agency group led by Bank Negara Malaysia and the Securities Commission of Malaysia.

 

Two years of old-age money

At least two-thirds of EPF members do not have the basic amount of retirement savings recommended for their respective age band. By withdrawing from the EPF, not only will they be using money for their retirement,  but they would also lose dividends plus the compounding power of that lost savings.

Some may even have to pay a bit more personal income tax next year because they may no longer be able to claim the maximum RM4,000 relief for EPF contributions after making a 7% contribution for nine months (April 1 to Dec 31, 2020).

To illustrate, someone who earns RM3,030 a month would have made enough contribution to EPF to claim the full RM4,000 annual relief for personal income tax at the statutory employee contribution of 11%. At the reduced rate of 7% for the remaining nine months of 2020, that person would only have RM2,909 relief for EPF. That would raise the payable tax by RM32.74 for assessment year 2020, assuming only deductions for EPF and the RM9,000 personal relief are made.

In addition, the RM1,455 withdrawn over one year through March 31, 2021 (the amount is the difference between a contribution of RM333.30 at 11% and RM212.10 at 7% — RM121.25 — over 12 months) translates to about RM6,300 in lost EPF savings, assuming a 5% dividend per annum over 30 years. That is six months’ worth of retirement savings, based on the minimum of RM1,000 per month that the EPF recommends every member should have for a period of 20 years (RM240,000) upon reaching age 55.

The lost savings from the RM6,000 withdrawn from Account 2 is even larger. That RM6,000 would have grown to RM16,000 over 20 years and RM26,000 over 30 years, assuming a 5% annual dividend from the EPF, a back-of-the-envelope calculation shows. The RM26,000 is equivalent to more than two years of the basic recommended retirement savings.

That is why even those who have the money in Account 2 should consider the disadvantages of withdrawing their savings.

Even if we were to assume a 4% annual dividend, that RM6,000 that was used instead of saved would have grown to over RM13,000 in 20 years and nearly RM20,000 in 30 years. That is the power of saving early and compounding interest. Moreover, the EPF is tasked with delivering a nominal dividend of at least 2.5% and beating inflation by at least 2% on a rolling three-year basis.

 

Whatever it takes

It is during times of crisis like this that the strength of a country’s reserves is put to the test, as governments are expected to safeguard the well-being and livelihood of its people while helping companies stay in business. This is illustrated by the sizeable fiscal stimulus packages being announced globally, on top of monetary easing to counter the impact of the pandemic.

The pain is obvious. Several business associations are already asking the government to allow them to reduce employers’ contribution to their employees’ EPF account to help prevent layoffs. The Malaysian Employers Federation estimates that a reduction to 5% would help employers’ cash flow by RM2.2 billion per month.

Employers contribute 12% or 13% of their employees’ salaries to EPF every month, just above the 11% by employees. Monthly contribution to EPF (employer and employee) is about RM6 billion, while monthly withdrawals are around RM4 billion, putting net contribution at roughly RM2 billion every month in 2019. That implies that every 1% change in employers’ contribution to EPF is about RM250 million per month, or RM2.3 billion for the remaining nine months of 2020, a back-of-the-envelope working shows.

On March 27, the prime minister said employers could approach the EPF to explore options to delay, restructure or reschedule employer contributions to the EPF, a measure he said was worth RM10 billion and would benefit 480,000 small and medium-size enterprises and save over eight million jobs. He did not specify how the figure was arrived at. Employers will also benefit from the RM600 wage subsidy for workers paid below RM4,000 a month as well as the six-month exemption on contributions to the Human Resources Development Fund , which is estimated to aid cash flow by RM10 billion.

Businesses would not need to ask to make lower EPF contributions if they were assured of receiving aid to help with their cash flow and given alternative ways of lowering costs and keeping staff employed.

“The UK, Denmark and the Netherlands have all put in place large-scale employment retention programmes with very generous funding allocated. In the UK, the Chancellor of the Exchequer has announced ‘unlimited spending’ to pay up to 80% of workers’ wages. Denmark has announced that it will pay 75% of employees’ salaries to avoid mass layoffs, with a total package amounting to 13% of GDP, and economists worldwide are urging governments to do the same,” says Christopher Choong, deputy director of research at Khazanah Research Institute.

Choong reckons that ideally, the Employment Retention Programme (ERP), which pays RM600 to employees forced to take unpaid leave and is an extension of the Employment Insurance Scheme (EIS) for retrenched workers, be extended to cover self-employed workers as well as employees whose salaries have been cut, to tide them over during the Covid-19 crisis. For it to be meaningful, the benchmark should the RM1,200 minimum wage.

“Currently, the ERP targets 33,000 workers, which is a mere 0.2% of employment. The SME Association of Malaysia is predicting 5% to 10% of SMEs being forced to close if no immediate measures are put in place, affecting up to one million workers. I would venture to say that we have to be less conservative here and err on the side of caution,” adds Choong, who reckons the ERP should seek to cover at least 3.5 million people, including two million self-employed workers, affected by the pandemic.

The ideal is indeed a tall order. Such a social and employment safety net would require significant fiscal bullets because the government can only borrow to fund development expenditure but not operating expenditure, which includes cash transfers. Paying RM1,000 a month to 3.5 million people would require RM3.5 billion a month and RM42 billion a year, or 2.7% of GDP, a back-of-the-envelope calculation show. That is more than the RM30 billion in special dividends that the previous government asked from Petroliam Nasional Bhd to repay RM37 billion in owed tax refunds to businesses. But it is during times of crisis that spending is necessary.

Given the country’s fiscal constraints, policymakers will need to make sure all necessary fiscal spending to safeguard the people and bolster the economy can be justified to sovereign rating agencies and the like. Keeping the people employed and businesses running has to be justification enough to raise the fiscal deficit during times of crisis, just like how the previous government reasoned that refunding taxes owed could boost investments as well as economic growth.

If workers, especially the ones earning below RM4,000 a month, receive adequate help, more people can avoid dipping into their old-age savings in the EPF. Otherwise, policymakers would need to ensure that the social safety net for an aged society in future is wide enough to cope with the problem of a lack of retirement savings aggravated by workers dipping into their savings now.

 

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