13/05/2024
EPF’s New Withdrawal Policy Is Not The Great Heist
EPF's recent policy change allowing members to divert up to 10% of their savings into a new withdrawal-friendly Account 3 has sparked widespread alarm. While the opposition is understandable, it risks making a rather arbitrary judgement that prioritising future survival is more important than addressing current needs which is equally important.
There's an understandable knee-jerk reaction to any move that could potentially undermine long-term retirement security. But we have to consider the nuances here. For those who are young and financially stable, the prudent path is clear - keep saving diligently and let those savings compound over time. But for the low-income segment struggling to make ends meet, having the option to tap into a portion of their EPF for essential expenses today could be a lifeline.
The crux of the matter is not the withdrawals themselves, but rather the larger issue of poverty. The key to financial security lies in having sufficient income to cover basic living costs and climb above the urban poverty line. In that light, the EPF withdrawal could facilitate a crucial stopgap for those in dire straits, allowing them to fund short-term needs with their own money.
We're familiar with the concept of using capital or loans to kickstart a new business in the hopes of future returns. Why not extend that same logic to individuals funding their own living expenses, especially when the alternative is grinding poverty? After all, the statistics already show that even those who have dutifully saved for decades often fall short of having enough to maintain a decent standard of living in retirement.
It's easy to get caught up in the maths - RM100 saved monthly at 5% interest could grow to over RM80,000 in 30 years. But that lump sum might not go far in the face of inflation. A quick retirement calculator exercise reveals that preserving a monthly purchasing power of RM2,250 in 30 years would require a nestegg of around RM1.5 million. To get there, one would need to save an average of RM1,800 per month. So for the low-income segment, enforcing modest EPF contributions today may not make as much of a difference as we'd hope.
In the end, this is not about encouraging reckless withdrawals or abandoning the principle of saving for the future. It's about acknowledging the harsh realities faced by those struggling to survive in the present and providing them with the flexibility to use their own money to meet essential needs. As long as the withdrawals are used judiciously and the bulk of contributions still flow into Accounts 1 and 2, this policy change could be a net positive for those who need it most.
To promote better retirement planning, effective policies play a crucial role. Models like the US's 401k, Australia's Superannuation, and Singapore's Supplementary Retirement Schemes (SRS) offer tax incentives to individuals for voluntary retirement savings. These schemes not only foster a culture of saving but also discourage hasty spending in retirement by implementing a progressive income tax system on withdrawals. The less you withdraw, the less tax you pay, incentivising prudent financial management and preventing scenarios where individuals exhaust their EPF funds prematurely.
It's worth noting that Malaysia's current Private Retirement Scheme (PRS) falls short of incentivising voluntary retirement planning due to its limited tax relief capped at RM3,000 annually. But it’s still better than nothing.
A redistribution of revenues from the plan to eliminate subsidies wouldn't hurt either. By redirecting these freed-up funds towards essential programs, we can optimise resource allocation and enhance social welfare without the need to dip into our hard-earned retirement savings.
Investing in education, healthcare and social assistance can address pressing needs more effectively while promoting economic growth through human capital development. Crucially, utilising subsidy elimination revenues in this manner allows for support of citizens' wellbeing and economic opportunities without compromising their long-term financial security or drawing upon the retirement funds they have diligently set aside.
A critical aspect of policy lies in enhancing income opportunities, as increased earnings can significantly raise the ability to save. By creating more job prospects and improving income levels, the foundation for robust retirement planning can be strengthened.
