The Covid-19 pandemic has pushed many into financial distress. One solution pushed forward by some politicians is the provision for targeted withdrawals from the Employees Provident Fund (EPF).

When facing financial difficulties, it can be tempting to dip into your retirement savings. After all, those accounts are often some of the largest sums of money we have access to. However, while it may seem like a quick fix to your immediate financial needs, withdrawing from your retirement savings early can have long-term consequences for your financial well-being. Let’s break down why.

We first need to understand what the EPF is and how it works. The EPF is a mandatory retirement savings scheme that requires employees and their employers to contribute a percentage of one's salary to the fund. At a minimum, 11% of our paycheck is automatically deducted from our monthly salary and our employer further contributes 12% of our pay into our fund.

Imagine the EPF account as a tabung. Say your salary is RM3,000 a month. RM330 (11% of RM3,000) is taken out from your base pay and added into the tabung. Your employer then adds an additional RM360 (12% of RM3,000). Over time, your tabung grows bigger from these monthly contributions and dividends from the EPF (we’ll get more into this later).

Fundamentally, this tabung is meant for our future post-retirement selves. It ensures access to money and financial stability, so that we can enjoy our old age without working. There are other specific circumstances where withdrawals are allowed such as education, death, disability and homeownership that warrants withdrawals, but those fall within a specific remit.

Many argue that our EPF funds are our money and we should be able to do what we want with it. However, I propose a different view. We are not taking our own money, but we are stealing from our future selves.

It is human psychology to prioritise immediate rewards over long-term benefits and, in line with this, numerous studies have shown that we are exceptionally bad at empathising with our future selves. When we make decisions about the future, we tend to discount the value of those future outcomes, simply because they are distant in time. This leads to a bias towards immediate gratification, even when we know that our actions will likely have negative long-term consequences.

Take a step back and imagine yourself at 60 years old. Note down the date and year you will retire. Most Malaysians have a life expectancy of around 75 years old — that’s 15 years of your life requiring financial sustenance without a paycheck. A bare bones budget of just RM1,500 a month already requires you to have a  whopping RM270,000 to support ourselves till we reach 75. This amount further balloons if you have the blessing of a longer life or fall sick in your old age and require medical treatment. 

As you imagine our future self, where would he or she get this money? How would they survive if not for this tabung that you are building now?

Many would then argue that you can always save more after a withdrawal and replace the money you have taken out. This is indeed possible. However, it would take a long time to build up the tabung to where it was or where it could have been depending on how much was withdrawn because of losses in compounding gains in dividends.

It’s important to understand that the EPF is not a savings account where RM100 stays RM100 in a few years. In the EPF, your money grows over time on top of the amount you put in.

Say you put RM100 in your EPF account in 2020. Every year, the EPF will announce its dividend, a percentage that they will put in your tabung where the actual ringgit value depends on your savings amount. So, if the EPF announces a 5% dividend for 2020, you will receive RM5 (5% of RM100) in your account. Your total tabung amount then grows to RM105.

Fast forward to 2021. You have not added into your tabung, and your savings are maintained at RM105 (RM100 from your initial deposit, plus RM5 from last year’s dividend). The EPF then announces a 6% dividend for 2021. Your dividend amount is not just calculated from your initial RM100, but from the present savings in your tabung. Hence, instead of earning just RM6 (6% of RM100), you earn RM6.30 (6% of RM105). This is compounding in action.

Although it may not seem like a lot in the short term, compounding will see your money grow significantly over time. If you start your EPF at 25 years old and only save RM100 a month, when you reach 60, you would have set aside RM42,100. However, thanks to compounding, your tabung stands at RM108,935.97 (assuming a 5% dividend every year). This is the amount you gain by diligently saving and simply leaving your money to sit.

The key to enjoying compound interest is simple — time is your best friend. The earlier you start, and the more you save, the higher your returns. Withdrawing your EPF essentially restarts your compounding clock. When you reduce the size of your tabung, the amount you stand to gain in return is also minimised. You can slowly rebuild your savings, but it’ll be nearly impossible to catch up to where you could have been had you maintained your EPF amount.

The EPF’s basic saving target is set at a minimum of RM240,000 upon reaching the age of 55. This would allow retirees a modest RM1,000 a month. However, only 19% of EPF members have reached this lower threshold.

Currently, there has been a significant decrease in EPF savings for Bumiputeras by an alarming 70% from RM15,500 to RM4,900 as of December 2022. In contrast, the savings of ethnic Indians have decreased by only 40%, going from RM25,700 to RM14,900, while the ethnic Chinese group experienced the lowest reduction of only 1% from RM45,800 to RM45,200 after the pandemic.

It goes without saying that the ones who suffer the most are the socio-economically disadvantaged. As it stands, those who fall under the bottom 40% household income group (B40) have an average of RM1,225 per person in their EPF account — an M40 has RM25,268, and a T20 has RM260,205. Allowing for EPF withdrawals will disproportionately impact the poor as those who are most likely to be facing financial hardship and withdraw from their already detrimental savings. They will further suffer in their old age due to a lack of retirement savings.

There is no denying the reality that many are currently struggling and need financial support. These concerns are real and policymakers must come together to devise a solution that meets these pressing needs. It is helpful to look at other countries and take from them lessons on how best to tackle these issues through innovative government initiatives. What is not helpful is relying on lazy policymaking promoting pseudo solutions that simply kick the problem of financial insecurity down the road.

Nurul Ezzaty Hasbullah is the 2020 Malaysian Rhodes Scholar. She holds two masters from Oxford University — a Masters in Business Administration and an MSc in International Health and Tropical Medicine.