Sunday, November 22, 2020

Alternatives to withdrawing from EPF Account 1

EPF savings are created for the future.

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These are indeed unprecedented times, which is why instead of succumbing to panic-driven policies – such as allowing a huge amount of withdrawals from the EPF Account 1 – we should make careful plans for assistance to those who really need it, in a way that prevents wastage by those with poor financial literacy that may undermine their future social safety nets.

Reports say that Umno Youth chief Asyraf Wajdi Dusuki and former prime minister Najib Razak have called on the government to allow EPF contributors to withdraw a maximum of RM10,000 at one go from Account 1.

Asyraf said total cash flow of RM40 billion would be available should four million contributors be allowed to withdraw RM10,000 each. But from the perspective of the EPF, it would also mean losing funds worth RM40 billion.

As tempting and convenient as this sounds for contributors, withdrawals would affect the cash flow that the fund management institution can sustain for the people in the future through investment activities.

If this proposal is pursued, and if contributors are allowed to perform one-off withdrawals of RM10,000 from their accounts, it could create a significantly unhealthy cash balance that would cause it to be unsustainable for the government to continue generating income for the country, fund government spending for the people and grow the people’s retirement savings.

This is a critical matter, especially in these unprecedented times during which the government needs to take unprecedented measures to assist.

Although an exact figure of total collections from monthly EPF contributions is yet to be available for this year, RM40 billion worth of withdrawals is a huge sum of money. As reportedly mentioned by EPF CEO Alizakri, access to EPF Account 2 via i-Lestari has already resulted in withdrawals of more than RM11 billion by more than 4.7 million members since April.

This is also given the existing optional reduction in EPF contribution rate from 11% to 7% beginning April this year.

EPF savings are created for the future. A large withdrawal from Account 1 now would sacrifice future safety nets to address near-term temporary expenses, mostly attributed to Covid-19, which may translate into larger problems as people start to age. This is particularly true for Malaysia as it has an ageing population.

The government is already planning for Covid-19 vaccinations in the upcoming Budget 2021. A successful nationwide vaccination plan is expected to provide the means for normalisation and bring the economy back on track.

Retirement savings are a longer-term safety net that should not be eroded due to what could be a temporary problem, albeit a serious one. Of course, those who have lost their jobs and have no other sources of funds may have no choice.

Instead of a blanket approval for all, this should be limited to individuals who can prove loss of job or a serious reduction in income. Allowing all workers who still have sources of income to withdraw from Account 1 would mean gambling their long-term financial security.

According to EPF operations division deputy CEO Mohd Naim Daruwish, around 54% of EPF contributors aged 54 have savings of less than RM50,000 for their retirement.

Let’s say some of them with RM49,000 worth of savings opt to withdraw up to RM10,000 at one go. They will then be left with RM39,000 for the coming years.

Implementation should also be made a temporary measure and capped according to age group. Perhaps a staggered withdrawal over six months could be allowed for members aged 40 and above with withdrawals not exceeding 20% of the total savings. For those aged below 40, a higher cap could be considered at 30% of total savings.

These control measures are important as some people may not have the financial acumen to plan their financials properly, jeopardising their own future.

Are there alternatives to this Account 1 proposal? The answer is yes.

As mentioned, the government, through EPF, has embarked on relief measures through the i-Lestari programme by allowing members to withdraw between RM50 and RM500 a month from Account 2, subject to funds available.

Since the pandemic, the government has provided abundant direct financial aid through various initiatives such as Prihatin, Prihatin SME+, Penjana, and Kita Prihatin.

Alizakri also mentioned that these initiatives have amounted to RM55 billion for all income groups, particularly the B40 and M40. The government has been empathetic to the needs of the people since the beginning and will continue to do so.

Alizakri also said that retirement advisory service officers can help members with the necessary financial planning, and will provide any readily available assistance in helping members to better navigate these trying times.

The government has thus far continued to disburse financial aid to the people, such as through Bantuan Prihatin Nasional payouts. Prime Minister Muhyiddin Yassin commented on the Account 1 withdrawal proposal, saying it would be challenging to implement as the government had already disbursed billions in cash aid to ease the people’s burdens.

He also assured that more aid is expected to come as “billions more” are targeted to be disbursed to assist the people.

So, it is advisable for the people to make full use of existing incentives alongside improvements in awareness level of the available incentives. Let’s see how Budget 2021 turns out, and together assess the post-Covid future with rationality before pressing the panic button at the cost of our future social safety net.

Ameen Kamal and Sofea Azahar are part of the research team at independent think tank EMIR Research.

The views expressed in this article are those of the author(s) and do not necessarily reflect the position of MalaysiaNow.

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