By Joachim Ng
Who do you think are the big losers in this move to permit active contributors to withdraw RM10,000 from their EPF savings in Account 1 next year? The silver-haired people in our silver state and all other states.
The reason you put money into EPF is so that you can live on the dividends for the remaining years of your life after retirement. You need a 6% dividend to pay your bills — the smaller the savings, the fewer the bills you can pay.
But with at least RM45 billion projected to flow out of the fund through withdrawals next year by young active members, the fallout could be that EPF members may get only a 4% dividend for year 2021 and beyond.
The reason why EPF has been successful is that it looks after the interests of every member as one collective grouping, by investing their savings in a spread of assets that earn stable dividends. Unless EPF has RM45 billion in cash lying idle, it will have to sell assets to raise the money and this may result in a lower dividend rate for members.
You need to have RM240,000 in EPF savings earning a dividend rate of 6% so that you have RM1,200 a month to pay for all your household, food, insurance, and health bills. Only one-third of EPF members have this much savings — below the minimum you need to avoid spending the last 20 years of your life in Beggar Lane.
But even for retirees who have RM240,000 in EPF, a 4% dividend rate will earn them only RM800 a month. Shopping in Concubine Lane will then be just a faint memory to retirees who number more than one million.
In addition to the adverse impact on retirees, active contributors who withdraw RM10,000 next year will be sacrificing their future as the withdrawal makes it all the more unlikely that they can reach RM240,000 by the time they reach 60 — the current retirement age.
Analysts concerned with the dark clouds gathering at the horizon have described this move to allow premature RM10,000 withdrawal of EPF savings as a financial earthquake in the making. It truly is. The move is akin to breaking one leg from a chair to use as a stick.
One way out of this dilemma is to extend the working age till 75. Although several Asian countries and many European countries are pushing the envelope, Malaysia is making no move in this direction because we are stuck in the “tiger vs crocodile” river battle mindset. The crocodile (the oldies) must die so that the young tigers may live. Our economists still can’t accept the sociological findings around the world that oldies do not steal jobs from the young—on the contrary, they mentor young workers and contribute to the national economy while taking a hefty pay cut of more than 50% for half-day work.
A much better solution than EPF withdrawals has always been there. The solution is for EPF to invest RM45 billion in the Federal Government at a 5% guaranteed dividend yield per annum. The Government in turn lends money at zero interest to the needy who have lost their jobs or suffered income reductions, but they must repay the loan within a set number of years. The obligation to repay in full will spur borrowers to job hunt or climb back to a higher income level.
Where will the Government obtain funds to pay EPF a 5% dividend yield on the RM45 billion? Use a triple-step approach. Step One: Ensure borrowers repay in full within a set number of years. Step Two: Compel borrowers to find jobs or raise their income, and pay tax. Step Three: Raise the working age ceiling to 75 and continue taxing the oldies, albeit at a much lower senior rate.
The saving grace in this solution is that the retirees (who should be at least 76 years old) will get a 5% EPF dividend which is just 1% short of target.
So, why didn’t the Government and EPF adopt this solution? It is because this solution requires strong confidence and political will to enforce repayment of all loans disbursed to borrowers. Does the Government have such confidence and such political will? It can’t even get university graduates to pay back their student loans after they have gotten jobs.
Right now, EPF members feel happy that they are permitted to eat their own retirement savings at a young age. But a nation, like a person, is great only if it saves for the future. Eat your own future and you are destined for a life in Beggar Lane.
On a global scale, more retirees are fast rolling down the hill as a result of decisions by central banks to push interest rates to near zero so that businesses can obtain cost-free loans for expansion. The roll-down effect is that retirees are getting near-zero dividends on the pension fund savings that they depend on for survival.
The tiger vs crocodile battle rages in all corners of the human world.