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Why EPF withdrawals could have adverse long term economic consequences for Malaysians

To the younger ones, you probably don’t have an EPF account yet because you’re not working. If you didn’t know, EPF, or the Employees Provident Fund is a fund you and your employer contribute to monthly so you have enough saved for retirement.

If you’ve been following the news lately, you may have heard that the government is allowing withdrawals of up to RM10,000 in EPF’s fund, which you normally would only be able to withdraw for reasons that include, but are not limited to; building a house, funding education, performing hajj or most importantly, when you’re 55 years old.

In this article, we explore what the implications of this “special withdrawal” could be on the Malaysian economy.

The case for withdrawing

On a positive note, financial savvy peers see this as an opportunity to reinvest the RM10,000 to more lucrative investments than what’s offered by EPF, on average a 6% return .

However, with over half a million M40 households falling into the B40 category, the reality is that most Malaysians now seek the fourth and last EPF withdrawal as their final resort.

In essence, most Malaysians had seen a fall in incomes during the past 2 years.

With little to short notice of spontaneous lockdowns over the past 2 years, businesses have descended into chaos as many were shut down or forced to undergo restructuring. 

There is no doubt that unemployment rates were on the rise. Consequently, the average monthly household experienced a decline of 10.3% in the past year. With that, approximately 20% of, or 60,000, M40 households moved into the B40 group.

HOUSEHOLD INCOME CLASSIFICATION

EXPLANATION

MONTHLY HOUSEHOLD GROSS INCOME

B40

Lower-income group. Represents 40% of Malaysians.

RM1 – RM4,850

M40

Middle-income group. Represents 40% of Malaysians.

RM4,851 – RM10,970

T20

Upper group. Represents the top 20% of Malaysians.

RM10,970 and above

Source: Household Income and Basic Survey Amenities Report 2019, DOSM.

Overall, this could provide a short term economic boom in Malaysia.

More EPF withdrawals would bring about more cash . This would definitely help out the general public, especially the B40 community which could utilise the withdrawals for autonomous consumption, hence reducing financial burdens. 

Autonomous consumption: Spending made even when there’s no disposable income. 

This large EPF withdrawal could be seen as an injection into the circular flow (economy) that would stimulate further rounds of spending, resulting in demand-pull inflation which, all things being equal, would generate a short term economic boost.

As quoted by economist Lee Heng Guie, the estimated RM 20 million in the next round of special EPF withdrawals could contribute to 0.5% economic growth based on Bank Negara Malaysia’s Projections. (Free Malaysia Today (FMT))

But should we be worried?

Our Finance Minister oversees RM63 billion being withdrawn from the latest EPF movement. This could hit returns on the EPF’s investments due to the need to rebalance its portfolio and sell foreign investment assets to cover the additional liquidity needs, while in current volatile market conditions.

Given the EPF’s size and dominant position in the marketplace, a sudden increase in selling could hit the local equities as well as bond markets. This would lead to a lower dividend rate and thus lower dividends being distributed to members.

Finance Minister, Tengku Zafurl has also mentioned that the EPF’s role in providing capital liquidity in the government bond market may be affected due to the government’s borrowing cost  rising to 100bps on average from the third quarter of 2020.

In essence, EPF needs to have the funds available for withdrawal, which reduces its ability to invest. Given its large shareholdings of stocks like Tenaga, Axiata, and Telekom Malaysia, they may sell these stocks at discount to achieve liquidity.

Potential Long Term Impact

The purpose of EPF is to ensure that citizens have essential cash flow after retirement. Given that the members decide to withdraw now to make purchases, their accounts might not have sufficient savings for their retirement.

It is known that Malaysia is transitioning to an ageing nation. Therefore, an extensive poor ageing population would be a significant issue in Malaysia in the future. 

In that case, the government would have no choice but to generate revenue by imposing taxes on the population to support the impoverished ageing population. 

As the economic term goes, there’s no such thing as a free lunch.

In the short run, the EPF withdrawal may be an ideal choice to mitigate the current issues and  the burden that Malaysians are facing during this crisis.

However, in the long run, this is not sustainable as it undermines the main purpose of our future retirement fund. 

If more Malaysians don’t have retirement savings, not only will the ageing population lead a less prosperous life during their golden years, but will use up resources in which it could’ve been employed elsewhere for investment.

References: 

Free Malaysia Today (FMT). (2022, April 4th). Latest EPF withdrawal could hit RM20 billion, says economist. Malaysia. Retrieved April 15, 2022, from https://www.freemalaysiatoday.com/category/nation/2022/04/04/latest-epf-withdrawal-could-hit-rm20-billion-says-economist/

B.K. Sidhu (2022) “RM10,000 withdrawal from the EPF has its risks” The Star. doi:https://www.thestar.com. y/business/bu iness-new /20 22/03/28/rm10000-withdrawal-from-the-epf-has-its-risks

Carvalho, M., Rahim, R., & Tan, T. (2021, October 25). Roughly 600,000 families went from M40 to B40 due to pandemic, says Tok Pa. The Star. Retrieved April 16, 2022, from https://www.thestar.com.my/news/nation/2021/10/25/roughly-600000-families-went-from-m40-to-b40-due-to-pandemic-says-tok-pa

BERNAMA (2022, March 14th) Kos pinjaman kerajaan bertambah RM830 juta setahun kerana pengeluaran KWSP. Retrieved April 16, 2022, from https://www.hmetro.com.my/amp/mutakhir/2022/03/820923/kos-pinjaman-kerajaan-bertambah-rm830-juta-setahun-kerana-pengeluaran-kwsp

Pensions and Investments (2021) The World’s Largest Retirement Funds in 2021 doi: https://www.pionline.c om/interactive/worlds-largest-retirement-funds-2021

https://www.thestar.com.my/business/business-news/2022/03/28/rm10000-withdrawal-from-the-epf-has-its-risks


Researchers : Sherilynn Ngerng Siew Fong, Abdullah Fawwaz bin Khairul Nahar, Low Zhiyi, Edwin Oh Chun Kit

Reviewers : Muhammad Bahari

Editors: Julia Yazid, Wee Marcus

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