A discussion on raising the withdrawal age

By G. Sharmila

Recently, KINIBIZ’ P Gunasegaram had a discussion on business radio station BFM with BFM’s David Chew, Julian Ng and Melisa Idris on EPF’s proposal to raise the full withdrawal age limit to 60. Below are excerpts from the interview.

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Guna: This will be an interesting topic for everybody, but perhaps not those in the pensionable scheme in the government service. This is about EPF and the specific thing is: should the withdrawal age for EPF be raised to 60 from the current 55? And I think EPF is having a consultation process for the entire thing. EPF has become terribly unpopular among a lot of people, especially in social media for suggesting that the withdrawal age be raised by five years to 60.

Of course the background behind this is that the retirement age itself has been raised to 60 for more or less everyone. So it is in this context that EPF wants to raise it to this figure. We had two differing opinions on this, one was for and one against. It depends on how you look at it, I suppose; the argument against is “look, it’s our money”. Well, it may be your money, but also remember that employees pay a significant portion towards that, in fact more than the employer.

Melisa: Thirteen percent, right?

Guna: Yes, 13% for those earning below RM5,000 a month and 12% otherwise. The other thing is, one has to look at the purpose EPF was set up for in the first place; it is a provident fund after all, and a provident fund is supposed to provide for you in retirement. Not to make your life now better, but to make your life in retirement better.

Anyway, what do you all think, if you were to take a poll among the three of you all here, would you want the EPF withdrawal age to be raised to 60?

David: (laughs) Why, because I’m the closest to 55, or what? To a certain degree, I would rather have EPF make it selective – you get to choose whether you want it at 55 or 60, for the simple reason that by keeping your money in the EPF itself it’s also more or less guaranteed – well, not guaranteed, but you do get some returns from there. So should you decide to leave your money there, then you’ll be assured of a certain amount of returns. However, should I choose to take it out at 55 and then do something with it, I might be able to make even better returns. The problem is a lot of Malaysians are not yet savvy enough to be able to do that. And the reason for that is because they blow it all away within the first couple of years. I think that’s the problem as well. What do you think, Melisa?

Melisa: (laughs) I’ll keep mine very quick. I think that I’m for raising the age limit for full draw-down. Because I think that the longer we contribute to EPF the better, the more money we have at the end of the day. Like you, Guna, I believe that EPF is for retirement so I’m game to wait until 60.

Julian: As it is, the EPF accounts don’t have enough money to support retirement so a lot of these people, if they withdrew all – and David raised a good point as well – a lot of them wouldn’t know how to plan for retirement. They may spend all their money in one day. In fact, a lot of them do. So I think that while there are “big brother” aspects to this that the government wants to control (our money) – hey, this is my money, why should the EPF control it – while that exists, there is also the fact that the cost of a retirement fallout will be very costly to the government and therefore it may be logical for the government to actually put the withdrawal age to the retirement age. It makes sense, I think.

Guna: I would tend to agree more with Julian and Melisa. But the underlying thing is that EPF is a forced savings scheme. That is what it is, it is forced simply to … I think, basically, help yourself. Help you against yourself, rather.

Julian: To save you from yourself.

Guna: So, if you look at the amount in savings that most people have, 68% (of EPF members) have RM50,000 or less in their accounts as at the age of 55. They already have a very, very low threshold for retirement and if they were to just go into retirement with this amount, this is not going to last them a long period of time. So, probably within five years – I think EPF has some statistics on this – most of those who have withdrawn their EPF money have run out of money. So that is the big problem, and according to EPF’s own calculations you need almost RM200,000 to have enough for retirement.

Julian: This is very interesting, I made some calculations – if you take RM200,000 as your basic savings at age 54 or 55 and you assume you are going to spend it over the next 20 years, it only amounts to RM900 a month.

Melisa: Wow, that’s minimum wage!

Julian: That’s minimum wage, right? So, while it’s good that you have some base there, you also need extra savings on top of what you have put into EPF.

Not enough in retirement

Guna: So I think that no matter how good a job EPF does, for a vast majority of people the sad fact remains that they will not have enough in retirement. So if you allow these people to withdraw their money at 55, you could push it up to 60 and give them a lot more to have at 60. Why allow withdrawal at 55? So if you give them the option like David says, it’s our money, let’s have the option to withdraw or not, because they are living very close to the poverty level, they will opt for the withdrawal. But that will put them in major danger when they retire at the age of 60.

Julian: I guess this also raises the question of the role of financial advisory. I think that in a blue sky scenario there is a better way to do this. You can actually allow people to withdraw their EPF much earlier; not to spend it but to invest it according to risk preference. Because what is being done right now is that EPF gives a standard return to everybody. But if you choose to, if you’re a younger person and you have the time to tide over economic cycles, you can take out your money and increase your return rate over the next 20 to 30 years and that may address some of the retirement sufficiency issues that we have today. So a financial advisor can come in and advise you what to do today. In the States and even Hong Kong, you can go to a website and you can actually put your money in there very cheaply according to your risk preference. They act like advisers for you. So there are all those options.

Guna: If you look at it philosophically, essentially EPF is taking out a portion of your savings to provide for your retirement. So that is your less risk-averse pool of funds that you are investing in. And on top of that they already have provisions for withdrawal for house purchase, for investments, for education.

Melisa: That’s Account 2.

Guna: So there’s already a substantial amount of provision for withdrawal and I think that there is still the current provision for one-third of all funds available at the age of 50. So it might be a good idea to push this up (one-third withdrawal) to 55 now and then the rest of it you can withdraw at 60.

Julian: That’s a sensitive issue, Guna (laughs). Listener Michelle just SMS-ed us as well. “But many people like to retire at 55, like me. Then, how?” she says. You have to make sure that you have enough money to subsidise or to fund your retirement. Actually, one of the things that is emerging as well is that people have incorporated work into their lifestyle; they’re blending work and lifestyle. Work is no longer something that you hate to do, but at 55, with your vast experience, you want to, hope to find a job that you enjoy and continue working and continue saving.

David: That is in a very nice situation my friend, but how many of us out there can really say that we are enjoying our work? You know what I mean?

Julian: I think a lot of people do.

Melisa: I think a lot of people say that.

Julian: A lot of people do.

Melisa: I’m optimistic.

David: And so there have been pros and cons to the whole discussion, haven’t there Guna?

Guna: I think one of the key things to look at is the changes in life expectancy over the years, and that’s crucial. If you look at 1960, the life expectancy on average for both men and women at birth was 60, and the retirement age in 1960 was 55. So after retirement, on average after five years of retirement, you’re dead (laughs).

But let’s look at it at 2010. The life expectancy has increased to 75, so even if your retirement age is 60, you still live, on average for about 15 years, during which period you have to provide for yourself. This is three times more than what it was previously.

So there is actually a crying need to do something about this. So perhaps one could look at intermediate solutions. Let’s say you have a base figure of RM200,000 at the age of 55, then you can withdraw anything above that amount if you so wish to; so it is more a safety net for those who don’t have enough rather than for those who have a lot. And if EPF is concerned about accumulating too much money, perhaps you may have a cut-off period beyond which you do not contribute.

David: A couple of people have tweeted in responses. Reid did say: “Not enjoying work right now and definitely want to have control of my own money”. Raj says: “The timing for this is wrong, thanks to 1MDB.” If EPF’s performance is good, they cannot just sweepingly move the target which a person has worked for for 20 to 30 years, and has been planning for it, basically.

Julian: I guess there’s a lot of suspicion right now given what’s going on in the country with other things, things like 1MDB.

Guna: True, but look at EPF’s performance. From 2010 to 2014, their interest (dividend) rates were 5.8% to 6.75%.

Julian: Which is very good.

Guna: It’s fantastic. I keep my spare money in EPF; I’m technically retired. I get a very good return, much higher than the bank deposit, FD rates, and it is totally and utterly secure. I think 1MDB has given a bad name to many government departments. EPF is relatively clean, it’s relatively efficient. It is now largely independent from the government, and I don’t believe that they are actually doing this because they want more funds. They are looking at it in terms of benefits to the contributor.

Julian: But there is a problem in that trust in the 6.5%. This is not guaranteed, the 6%-6.5% is not guaranteed. The statutory guarantee is 2%. A lot of people don’t know this, but they want risk. They might not be able to verbalise it that way. If you’re 25 years old, this person may not want 6.5%. They may want 8% or 10%. The KLCI, over the last 20 years, every year they have returned about 8%. So if you want to take more risk, putting in your money in EPF especially from a compounding aspect would reduce your retirement money at the end of 30 or 40 years.

David: True, but you see, if you were to pull out your money and invest in the KLCI or the market itself, you have to have a certain amount of knowledge, you’ve got to be active.

Julian: No, you don’t. You put your money in KLCI and let KLCI do the work for you.

Guna: You become a sort of passive investor.

Julian: Correct. Which you are in EPF also, right? You are a passive investor in EPF as well.

Guna: Correct. But EPF is much safer than the stock market.

Julian: That’s my point, you don’t want safety.

Guna: Your contribution to EPF is 11% of your disposable income. So what you’re doing is the 11% you’re putting is in very safe investments in the EPF. Some people advise saving a third of your salary.

Melisa: That’s right.

Guna: So the other 20% of your income, you can actually invest it on your own in other instruments.

Julian: Yeah, but if we’re dealing with retirement sufficiency, every percentage point counts. If the bulk of your money is returning 6.5% compared to the possibility and potential of, let’s say, 8% or 10% per annum over 20 to 30 years, it goes a long way into actually addressing retirement sufficiency.

David: It can go the other way, my friend.

Melisa: Yeah.

Julian: So can EPF. That’s why there is a danger in relying on 6.5%.Two percent cannot support your retirement. Two percent is less than inflation, it is less than the FD rate. If you put your money in fixed deposit, that is safe, almost guaranteed. That is 3% to 3.5%. But there is no guarantee…

David: If you put money in the KLCI and it goes south…

Guna: Yeah, I think my point is that this is a portion of your funds. So 11% of your disposable income goes to safe investments. You should maybe put another 10% of those disposable income that you have in other instruments. So you sort of diversify your investment base. But even then, not many people do it. Most people don’t even save, especially if you’re earning RM2,000 or RM3,000 a month. That’s the vast majority of the country, they don’t have anything to save.

Julian: So it goes to show that we need financial advice, we need to be familiar with concepts such as asset allocation and so on.

Guna: Also to come right down to the basics, we need higher incomes. EPF officials have said that we can only do so much, you know. Unless the income for the entire country increases, we can’t do anything about it.

Julian: Well said, that’s so true. Robert just wrote in and this is a point to ponder: “How much of the EPF funds is loaned to the government?” he wonders.

Guna: EPF is a major source of funding for the government. They’re a very large investor, probably the largest investor in government securities. But these are very safe instruments and they provide a very good, safe base source of income for EPF. There’s nothing wrong with it.