In turbulent times, Malaysians weigh EPF withdrawals. Is short-term relief worth the potential long-term financial risks to retirement?
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21 Aug 2024
5 Min Read
Afrina Arfa (Alumni Columnist)
In turbulent times, Malaysians weigh EPF withdrawals. Is short-term relief worth the potential long-term financial risks to retirement?
In a time of unprecedented economic turbulence, Malaysians, much like during the COVID-19 pandemic, are once again confronted with mounting financial debts and a surge in living expenses. Having exhausted various avenues of income, individuals now face a critical decision: Should they access their retirement savings to alleviate immediate pressures, or safeguard these funds for the future? As a cornerstone of Malaysia's retirement system, the Employees Provident Fund (EPF) has become a go-to option for many, allowing them to tap into their long-preserved savings in hopes of easing some financial burdens.
Established in 1951, the EPF is more than just a savings mechanism; it is a financial security tool for the elderly, ensuring that retirees can maintain a certain standard of living. Any individual employed under a contract of service or apprenticeship, earning more than RM10 on any given day of the month, is required to contribute 11% of their total monthly wages, with employers making an additional 12% contribution on their behalf. With decades of success, this system has long been regarded as a vital component of Malaysia's social safety net.
However, the economic struggles brought about by multiple crises have led to increased early withdrawals aimed at addressing immediate financial pressures. With a total of RM6.98 billion withdrawn in just two months since its introduction, individuals now face a different yet equally crucial question: Is alleviating short-term pain worth jeopardising long-term security?
Upon reaching their 55th birthday, individuals are allowed to withdraw all or part of their savings from one of the three accounts under the EPF structure. These accounts include Akaun Persaraan (Account 1), which serves as the foundation of EPF and is intended for retirement investments. Akaun Sejahtera (Account 2) offers some flexibility for pre-retirement financial needs such as purchasing a house, migration, incapacitation, and education. In response to the economic downturn, EPF has introduced a new account, Akaun Fleksibel (Account 3), to address short-term financial needs. Withdrawals from Akaun Fleksibel became available starting 11 May 2024, subject to terms and conditions. An individual's monthly contribution is allocated across these three accounts: 75% goes to Akaun Persaraan, 15% to Akaun Sejahtera, and 10% to Akaun Fleksibel.
While withdrawals for daily expenses can only be made from Akaun Fleksibel, transfers into this account from the first two accounts are permitted. By increasing the available cash in consumers' wallets, the government aims to relieve financial pressures, boost household discretionary spending, and, in turn, create opportunities for market players to benefit from enhanced consumer purchasing power.
As many across the nation scramble to the steps of Kumpulan Wang Simpanan Pekerja (KWSP) offices to withdraw up to 10% of their EPF contributions, they are walking a fine line between personal survival and the potential collapse of the national economy. Access to EPF funds–even as little as RM50–has enabled individuals to cover urgent expenses such as medical bills, essential living costs, and debt repayments. According to data from withdrawals made during the pandemic, the EPF estimates RM20 billion to RM30 billion were withdrawn. This substantial amount would subsequently be injected into the economy, boosting overall consumer spending.
In the short term, this cash infusion can help mitigate the effects of slow global growth and offset the current higher costs of living. Furthermore, to address concerns from both the public and policymakers about the reduction of pension funds, the recent restructuring of accounts increases the contribution to Akaun Persaraan from 70% to 75%. This aims to protect long-term savings while still accommodating the need for short-term funds. Nevertheless, many question whether this adjustment will be sufficient to maintain balance or if the new withdrawal scheme will eventually tip the scale toward future financial instability.
As a result of the series of withdrawals over the years, the number of people meeting the basic savings benchmark of RM240,000 by age 55 has significantly decreased. Currently, 6.3 million, or 48% of EPF members under 55, have savings of less than RM10,000 in their accounts. The introduction of the third account in the EPF structure, which represents 10% of all contributions, means that individuals who continuously withdraw from Akaun Fleksibel could deplete their savings before retirement. Coupled with the ongoing rise in average life expectancy, this situation may leave contributors with insufficient funds to support themselves for 10 to 20 years post-retirement, placing them at significant risk in their old age.
Moreover, the majority of those making withdrawals are from the B40 income groups, leading to a concerning trend where the poor become poorer, especially in their later years. The Social Protection Contributors Advisory Association Malaysia (SPCAAM) has criticised the withdrawal scheme as akin to 'stealing from the poor to benefit the rich', with billions of ringgit being injected into the economy, primarily benefiting businesses rather than addressing the needs of the less affluent.
The introduction of Akaun Fleksibel for EPF withdrawals has ignited a complex national debate, pitting immediate financial needs against long-term financial stability. While some are eager to access their savings, others are concerned about the potential impact on their retirement funds. As this restructuring faces scrutiny from both the public and experts, the Malaysian government has assured that other initiatives, such as Bantuan Sara Hidup, which provides up to RM300 per month to eligible applicants, as well as health insurance schemes, will help support the public amid rising living costs. Achieving a balance between current financial needs and future financial security requires not only strategic planning from policymakers to protect the public's social safety net but also a commitment from individuals to improve their financial literacy, practise responsible financial management, and spend wisely.
Afrina Arfa is a Bachelor of Finance and Economics (Honours) alumna of Taylor's University. She spends her time indulging in economic news, hoping to inspire others to think beyond the constraints of society.