By P. Gunasegaram
You can’t magically provide for most contributors to the Employees Provident Fund (EPF) by merely moving to an instalment plan on the grounds that it takes care of their own foolhardiness.
My analysis of EPF figures show that over 80 percent of EPF savings is in the hands of 20 per cent of savers while there is a huge disparity in savings which show that wages are way too low for most to sustain a decent income in old age by whatever means.
The truth is that most EPF contributors don’t have enough in their kitty to provide a meaningful monthly return on their lump sum amount at the age of 54 from their principal. The only way that can change is for their income to increase by 3-5 times.
A tall order
That’s a tall, long-term order not likely to materialise in the near future or even in 10 years at the current rate at which wages are increasing.
But for those who have a good income, the EPF is probably the greatest and most secure way of securing your future if you intend to continue living in Malaysia and enjoy its many-faceted joys and privileges. Hang in there, we will explain shortly.
The current debate started when the recently released Thirteenth Malaysia Plan (TMP) said that the EPF will consider providing a pension payout plan for EPF members. It may include withdrawal of some money and the rest kept for recurring income.
The EPF’s brief reply: “The proposal is currently being studied, and any decision will be made only after thorough engagement with key stakeholders and careful consideration of members’ long-term interests.
“In the meantime, the current EPF rules and withdrawal mechanisms remain unchanged. Any updates will be communicated through official and timely channels once available.”
Not happening soon
This is not happening anytime soon but it will be good to review the situation and see if something like this is feasible for the vast majority of EPF members.
According to EPF’s annual report for 2023 (the latest), the median savings in the EPF account for active members at the age of 54 (the age before the year they are eligible to withdraw all their savings) is RM154,000, rounded off (see table).
The median is the midpoint where half have savings below RM154,000 and half above. This is better than the average which can be skewed badly if those in the upper category have very large incomes. This is the situation for EPF.
Median savings have not risen much – in 2019, the figure was RM134,000 giving a compounded annual growth rate of 3.5%, lower than the rate of growth of national income during the period of 4.5%. Which means income growth is still very low and remains the underlying problem while the income gap is widening.
Let’s look at what a person can do with RM154,000 at retirement. The only way you can have an annuity, a periodic payment, is to keep all or part of the fund and calculate the approximate amount that can be returned from estimating future returns over a fixed time period – there is no other way.
For simplicity, let’s say all the RM154,000 is invested as an annuity over 20 years or until the age of 75, the expected average lifetime for most Malaysians, and a return of 5 per cent per year which EPF has managed or exceeded over the years (the government guarantees a minimum 2.5 per cent a year).
Using an annuity calculator, that amounts to RM1,000 a month, way too low for anyone to live in any part of Malaysia. Note that an annuity incorporates the principal repayment more or less equally over the 20-year period.
If you want the monthly annuity to double to RM2,000, you must have twice the RM154,000 or RM308,000 and if RM3,000, for a meaningful monthly amount, you need RM462,000. At this stage you are looking at a very small number of people who have that kind of money.
For most annuity is out
For most people under the EPF scheme, this just won’t work and they may prefer to have that lump sum payment to go into business or to use that to supplement help from family and especially children. With income levels so low, probably over 90% of EPF members would prefer this.
For the 10 per cent or fewer remaining, they are likely to be sophisticated enough to manage their own finances and don’t need a pension scheme.
For many of them, they can secure their savings through EPF until they are one hundred and continue to contribute savings into the EPF up to RM100,000 a year until they are 75.
What a great, riskless savings which since 1952 has returned over 5% for most of the years. The government guarantees a return of 2.5% and the principal, which is safer than putting the money in any bank in Malaysia.
Plus, after the age of 55, you can withdraw, with a time lag of perhaps three days any amount and put back up to RM100,000 a year until the age of 75. After 75, you can still keep your money there, withdraw any amount but you can’t put money back into your account.
Realising capital gains
If you are still some years away from 75 you can even consider selling your house and putting part of the money into your EPF account at up to RM100,000 a year to ensure future savings and income which is far better than putting your money in fixed deposits.
That gives you more cash flow and tax free savings to play around with. After all, it is not written anywhere you have to give your house to your children or other inheritors. You have a choice of monetising it for your own expenditure, enabling the realisation of capital gains, using some of it and avoiding potential legal wrangles post your death.
Now, if only all people have enough money in their EPF to do this. But for that wages (and productivity) have to improve and the share between capital at 68 per cent and 32 per cent labour has to shift in favour of labour (see table).
I explained this in an article here where I praised PM Anwar Ibrahim’s move to raise wages. Notice, from the table, Malaysia’s labour share is the lowest. Increasing minimum wages accompanied by productivity improvements is essential.
Labour’s Share of GDP (2022 or latest available)
| Country | Labour’s share of GDP (%) |
| Switzerland | 70.5 |
| Thailand | 64.0 |
| United States | 60.0 |
| United Kingdom | 59.0 |
| Indonesia | 58.3 |
| Philippines | 50.0 |
| Singapore | 43 |
| Malaysia | 32.4 |
Source: Internet search for individual countries
The problem is clearly not the EPF and it won’t be solved by a pension scheme. It is extremely low wages and a very low share of labour income in the overall gross domestic product (sum of goods and services produced in a year) between wage earners and the owners of capital.
If only the Madani government will spend more time solving such problems instead of ill-considered suggestions that won’t work such as a pension scheme for EPF. I suspect the good folk at EPF already know it can’t.
P Gunasegaram says focus on the foundations if you want to build big.
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