January 20, 2021 House of Trust

Rethink the EPF Withdrawal Scheme

As part of the revised economic stimulus package, Employees Provident Fund contributors under the age of 55 are allowed to withdraw up to RM500 per month from Account 2 for 12 months for the purchase of essential items and for payment of bills and rentals.

Along with the government’s decision to reduce EPF contribution by 4% beginning April 2020, this scheme aims to boost private consumption and cushion the impact of the Covid-19 pandemic on the Malaysian economy. In fact, this i-Lestari Account 2 Withdrawal Scheme is expected to benefit more than 12 million EPF members with a total withdrawal of about RM40 billion. 

However, we strongly believe that this measure is not the right direction to take as part of the economic stimulus package. 

First, the majority of Malaysians needing assistance in these difficult times are those with lower savings in their EPF account. A monthly withdrawal will result in the loss of annual and compounded dividends in the long run. This will eventually deplete the long-term savings of the most vulnerable from  low-income communities. 

Source: Financial Education Network Report 2019

Statistically, 68% of EPF members do not achieve the minimum basic savings requirement of RM240,000 at age 55. More worryingly, about 20% enter retirement with less than RM10,000 in savings. With the lower contribution rate of 7% and a monthly withdrawal of RM500, a substantial number of Malaysians will be in grave financial danger after retirement. 

Second, many Malaysians will not be able to benefit from this withdrawal scheme as they do not have active EPF accounts. In fact, 62% of some 22 million working-age Malaysians are self-employed and not covered by any formal social protection. How then will they fend for themselves as a result of the loss of income during the Movement Control Order (MCO)? 

Source: KWSP Social Protection Insight

A 2019 Financial Education Network Report reveals that 52% of Malaysians face difficulties to raise even RM1,000 for emergencies. More alarmingly, only 24% of Malaysians are able to sustain living expenses for at least 3 months if they lose their source of income. In times of economic uncertainty with more Malaysians being retrenched, how can the government expect Malaysians to bail themselves out and stimulate the economy with their old-age savings? 

Source: Financial Education Network Report 2019

Globally, expecting workers to dig into their own savings to stimulate the economy is a very rare measure. On the contrary, other governments in the world have chosen direct payments, cash grants and business subsidies among others. For instance, Hong Kong is giving HKD10,000 (USD1280, RM5720) in cash to all 7 million permanent residents to boost its recession-hit economy. Australia is giving a one-off AUD750 (USD 444, RM1970) to 6.5 million lower-income Australians, aimed at boosting domestic demand. The Government of Denmark told private companies hit by the effects of the pandemic that it would pay 75% of their employees’ salaries to avoid mass layoffs. 

Indeed, leading economists internationally are calling for governments to act fast and do whatever it takes to fight the economic fallout. Specifically, governments will need to reduce personal and corporate bankruptcies and ensure people have money to keep spending even if they’re not working. This helps in avoiding deep, long-lasting damage to economies. 

Besides that, economic evidence has shown that the most optimal method to ensure people spend to stimulate the economy, as well as to safeguard their welfare, is to basically put more cash in their hands. Apart from the current RM600 for workers forced to go on unpaid leave and RM300 for Bantuan Sara Hidup recipients, much more needs to be given out to help Malaysians stay afloat. 

It is important to remember that Malaysia still has the fiscal space to do ‘whatever it takes’ to rescue Malaysians and save the economy. As evidence, our fiscal deficit is around 3.4%, relatively lower than 7% in 2009 during the global financial crisis. 

Yes, much moral courage is needed to use whatever savings held in trust by many Malaysian Institutions, to pump money directly into the economy. As such, we wait eagerly for the more comprehensive economic stimulus package on March 30. But until then, we urge the government to reconsider this EPF Account 2 Withdrawal Scheme. 

*Benedict Weerasena is an Economist at Bait Al Amanah (House of Trust) 

*Abdul Razak Ahmad, PhD is the Founding Director of Bait Al Amanah (House of Trust) 

**This article has been published in the Malaysian Reserve and The Iskandarian

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