By P. Gunasegaram
The proposed third account of the Employees Provident Fund (EPF) is an epic flaw because it does not focus on increasing retirement benefits or future investments but provides an avenue to withdraw at any time up to 10% of contributions from May.
The government wants to palm this off as a superior savings plan which is better than that of the banks at the EPF rates of dividends which are typically much higher. Trouble is, the principal is carved out of funds intended for retirement, reducing them.
It will result in extra withdrawals from EPF from members, leading to a poorer quality of life later at retirement. This instant gratification helps boost the economy through an increase in disposable income but it is at the expense of employees’ future – an intensely shortsighted move.
The proposal was first mooted in the last budget announced in October by finance minister and prime minister Anwar Ibrahim. Last week, stories quoting sources in some media say that a third account – the flexible account – will be introduced in May, accounting for 10% of contributions. (see table)
Table – EPF Accounts Current and Proposed (% of contributions)
| Account Type | Account 1 – Retirement – strictly on maturity | Account 2 – Housing, medical, education, withdrawal at 50 | Account 3 – Flexible withdrawable savings |
| Current | 70 | 30 | none |
| Proposed | 75 | 15 | 10 |
There are currently two accounts, Account 1 (70%) only for retirement and Account Two (30%) for housing, healthcare, education and withdrawal at age 50. The new Account 3 will take 10% of contributions but only new contributions, while Account 1 will take 75% of contributions and Account 2, 15% .
The current situation is already inadequate – while housing can be a long-term investment as an asset that increases in value, healthcare and education, and withdrawal at age 50 are not. The contributions are a percentage of wages monthly – 13% from employers and 11% employees.
If the government had structured this such that the increased contributions came from higher monthly EPF payments proportionately from both employee and employer, then it would have been more acceptable as total savings will still increase.
Even so, it would have been preferable to use that opportunity to increase the retirement savings pool instead of offering an opportunity for contributors to remove one tenth of their future contributions at any time.
Retirement amounts are already woefully inadequate. No less than PMX Anwar warned in February 2023 in Parliament, barely three months after assuming the top position, that over two-thirds of EPF active contributors who are aged 55 and below do not have enough funds to raise them above the poverty level.
An article titled Anwar: Majority of EPF contributors do not have enough funds for retirement, reported him attributing this to four special withdrawals approved during the Covid-19 pandemic.
He added that the number of active members who had reached the basic savings target of RM240,000 by the age of 55 had gone down from 36% in 2020 to 29% at the end of 2022 as a result of the withdrawals, a reduction of more than a third.
“The EPF estimated that members are required to work between four and six extra years to rebuild the savings that were withdrawn during the pandemic,” he said. Those are telling numbers.
That Covid-19 withdrawal was a scam which I wrote about in this article titled “The RM60 billion scam at EPF”. It was an irresponsible act which allowed Muhyiddin Yassin’s backdoor government and the succeeding Umno government of Ismail Sabri Yaakob to reflate the economy using EPF savings.
Worse, it was also a move to garner support ahead of elections by letting all EPF members, whether they lost their jobs or not, to withdraw substantial amounts of money. Retirement funds were used not only as economic stimulus but unforgivably as a reward for voters who were paid with their own money.
Eventually, this figure of RM60 billion was far exceeded. The finance ministry estimated in August 2022 that the impact on EPF savings as a result of Covid-related withdrawals was a massive RM155 billion or over 15% of total EPF funds then. Just imagine the negative impact on retirement savings.
EPF is a provident fund and the word “provident” means carefully providing for the future, not for the present needs and so-called emergency withdrawals. The previous unelected governments obviously did not know the meaning of “provident” or just ignored it.
Inexplicably, in the budget for 2024 announced in October last year, Anwar went down the same route as his two predecessors and announced that a third withdrawable account will be set up. Now, workers will have to slog even longer to recoup the amounts lost.
Politically, it will improve economic growth and will give people a sense of well-being because they have a bit more money to spend – short term effects. But all this will bite them back at retirement. The last two governments did these but still lost at the polls.
In 2023, the EPF collected nearly RM100 billion in members’ contribution, an increase of 15% from the previous year, according to this press release on the EPF website.
If 10% of contributions go into Account 3, then some RM10 billion of members’ savings will be available for full withdrawal a year in future. This grows because of returns and continuing increase in members and their incomes.
If we assume just a 10% yearly increase in contributions, and a 5% return on investments, my calculations show that over 20 years, that figure would balloon to RM1 trillion plus, representing the loss in savings of current and future investors in EPF, an epic blunder.
The simple solution is to bite the bullet and go forward – eschew short-term gain for long-term benefits by pushing savings up for workers through increased contributions for retirement.
Simultaneously push for better wages, accompanied by adjustments in the workforce such as decreasing reliance on foreign workers, and increasing productivity through better training and improved work procedures.
Sadly the Madani government is adopting short-term palliative, symptomatic measures at the EPF – an expensive mistake – instead of a cure of the basic problem of too little wages and too little contributions.
The prudent thing for members to do is not to withdraw from Account 3. But they won’t follow the advice. That’s why we have the EPF – to protect them from themselves so that they have enough at retirement.
Our leaders have shown shortsightedness and selfishness by forcing the EPF to do the opposite and derelicting its duty to increase and protect our long-term savings so that they will look better in the short term.
(P Gunasegaran says there is no short-cut to improving quality of life – the road will be rough but the rewards will be worth it.)
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