ETH withdrawals should be the option of last resort

Prior to the latest withdrawal, the government had already allowed EPF savers to withdraw up to RM71,000 from their pension funds through three EPF withdrawal schemes, which collectively amounted to RM101 billion. – Photo by Chimon Upon

KUALA LUMPUR: A rule of thumb every employee should follow is not to touch their retirement fund no matter what.

However, not everyone has the financial resilience to withstand the economic shock caused by major events, such as the Covid-19 pandemic and the lockdowns that accompanied it.

The impact of the coronavirus has hit the Malaysian economy hard, with the unemployment rate climbing to 5.3% in May 2020.

The economic impact has since dissipated, as the country’s unemployment rate fell to 4.3% in the fourth quarter of 2021 – the lowest level since the pandemic hit the country – as demand for workforce has surged in the context of the recovery.

The ringgit, too, has been hit hard by the pandemic.

The weakened currency has hurt the purchasing power of Malaysians as more local notes are needed to be exchanged for US dollars.

This means that Malaysians’ standard of living will decline due to declining purchasing power.

Fourth EPF withdrawal

For some people, a pension plan remains a pipe dream. One cannot invest in the future when one’s present situation is bleak.

For example, currently 48% of the 6.1 million Employees Provident Fund (EPF) members under the age of 55 have less than RM10,000 in savings in their retirement fund.

As part of the latest initiative to help those in need, the government has authorized another round of FPE withdrawals of RM10,000. Is this a sensible decision?

Prior to the latest withdrawal, the government had already allowed EPF savers to withdraw up to RM71,000 from their pension funds through three EPF withdrawal schemes, which collectively amounted to RM101 billion.

As the EPF has pointed out, this has led to a total of 6.1 million members now having less than RM10,000 in savings in their retirement funds. The fund further pointed out that as of October 2021, 3.6 million contributors had less than RM1,000 in their accounts.

Of this group, two million Bumiputera members have less than RM1,000 in savings.

CGS-CIMB Research said that despite the positive short-term impact, the latest withdrawal of RM10,000 is likely to deepen the looming pension crisis and the last three withdrawals have reversed more than 10 years of efforts to reach the basic savings goals.

He noted that since the start of the pandemic, the median savings of members aged 54 has fallen to RM37,000 in December 2021 from RM41,000 before Covid-19, a far cry from the basic savings recommended by the EPF of RM240,000 if one were to spend an average of RM1,000 per month for 20 years after retirement.

“In fact, the basic savings requirement is based on the monthly household poverty line income of RM930, which is a modest estimate,” the brokerage firm said in a research note today. .

Only 27% of active members were able to meet the basic savings requirement, compared to 36% before the pandemic, the research house observed.

Therefore, in the midst of economic recovery, EPF withdrawals should only be used in emergencies and as a last resort.

The Institute for Democracy and Economic Affairs (IDEAS) believes that the decision to continue allowing ETH withdrawals was not based on sound economic logic, but was a knee-jerk reaction to a political agenda.

The think tank said such short-term thinking would have a detrimental long-term impact and urged political leaders to consider the negative impact such a policy has on pensioners and future generations.

Impact on FPE

Recently, Finance Minister Tengku Datuk Seri Zafrul Aziz said that the EPF should dispose of more of its investments abroad, as well as suspend domestic investments in the short and medium term if another withdrawal of RM10,000 was to be allowed.

Aimi Zulhazmi Abdul Rashid, associate professor of economics at the University of Kuala Lumpur’s (UniKL) Business School, likened the sale of ETH’s overseas portfolio assets to “killing the goose of gold”, the EPF having announced that 37% of its investment income in 2021 came from abroad because the domestic market was not encouraging.

“So if ETH is forced to sell more of its portfolios overseas, it will affect ETH’s revenue contribution in the long run. The global economy and the financial climate have not fully recovered from the Covid-19 pandemic,” he told Bernama.

Aimi also noted that the Russian-Ukrainian war drove up the prices of commodities such as crude oil, triggering high inflation, and said the US inflation rate of 7.9% in February 2022 was the highest in four decades.

“So with inflationary pressures high, fund managers have to work hard, like the EPF, which not only has to invest strategically to get good returns, but also protect contributors’ savings,” he said. he adds.

The survival of the fittest

Raising the minimum wage, ensuring there are enough jobs on the market, and tackling rising prices for essential goods would be better ways to protect the workforce.

At the time of writing, the government has just announced the much anticipated RM1,500 minimum wage policy which will be implemented on May 1st.

Aimi said a new social safety net is needed as Malaysia is fast becoming an aging nation, even by global standards, according to World Bank projections.

“The stats were already grim even before approval for the one-time RM10,000 withdrawal was given; as many as 6.7 million contributors already had less than RM10,000 in their individual EPF accounts,” he said.

“Furthermore, a very chilling fact has come to light that out of the 6.7 million, about 60% have next to nothing in their accounts.”

He also pointed out that the latest approval of the one-time withdrawal of RM10,000 would further reduce the EPF coffers and impact the investment portfolios of the pension fund.

“It requires a balance, but the worrying situation is the massive pension crisis over the next few years,” he said, adding that the reality is more difficult as the rising cost of living in Malaysia is faster than revenue growth.

“Certainly, it is almost impossible to rely on the minimum balance after retirement from EPF, and from my perspective, most Malaysians can no longer rely on EPF for their retirement.”

Aging society

According to World Bank data, Malaysia had already become an aging society in 2020, with around 7.0% of the population aged 65 and over.

According to the latest projections, Malaysia will become an “aged society” by 2044 with more than 14% of its population over the age of 65.

IDEAS Director of Economics and Business, Juita Mohamad, stressed that it is crucial that Malaysia’s growing population of retirees have an adequate cushion when they reach retirement.

“With the economy recovering and the labor market strengthening in the absence of lockdown, IDEAS believes that FPE withdrawals should be used as a last resort and in emergency situations only,” she said. said, adding that there are various existing funds that can be used at both federal and state levels, such as zakat funds and the National Disaster Relief Fund. – Bernama

Prior to the latest withdrawal, the government had already allowed EPF savers to withdraw up to RM71,000 from their pension funds through three EPF withdrawal schemes, which collectively amounted to RM101 billion. — Image by Shimon on