Written by Lau Zheng Zhou, Research Manager of IDEAS
Public responses are mixed following the Prime Minister’s announcement on 23 March 2020 to allow Employees Provident Fund (EPF) members to make withdrawals from their second account as part of the government’s strategy to cushion the impact of Covid-19 on households. The aptly named withdrawal facility i-Lestari, translated as “sustainability”, allows depositors under the age of 55 to withdraw up to RM500 each month for the next 12 months.
The self-directed withdrawal scheme is a follow up on a flurry of measures previously announced by the government to increase household disposable income, including initiatives to reduce EPF contribution by 4%, one-off cash incentives for affected individuals in the tourism sector as well as monthly financial aid for workers forced to take unpaid leave. The government will also extend PTPTN loan repayments by another 3 months, targeting nearly 1.5 million Malaysians, many do not have a strong financial capacity upon graduation.
Yet many disagree with the Prime Minister’s tinkering with the retirement fund, which would lead to an estimated withdrawal of RM40 billion, as means to “put more money in workers’ pockets”. Instead, it is argued, the government should be more aggressive in its stimulus package by deepening direct spending on social assistance. It is also not a morally right thing to do, according to the Malaysian Trades Union Congress (MTUC) secretary-general J Solomon, for the employees’ savings to be “robbed” so that the government can weather the Covid-19 crisis.
Concerns over the depletion of one’s long-term savings is warranted, after all, about 70% of EPF members aged 55-60 years who, upon retirement, opt for lump-sum withdrawals, and half of the members exhaust their savings within just five years. For many, increasing social spending seems reasonable, but it is not without cost. There is already allocation made for cash benefits and more government spending today will be countered with higher tax burden in the future – there is no such thing as a free lunch. Furthermore, the targeted recipients for cash benefits seem to be those who may face sudden loss of income; therefore, the government’s objective is more about income preservation than stoking consumption indiscriminately.
On the other hand, it is crucial to recognise that the i-Lestari scheme, in addition to the option for reduced EPF contribution, only serves as a stop-gap measure so that those in need can better cope financially now rather than treating it as supplementary income for the longer term. More importantly, EPF members have the absolute freedom to opt-out of these measures so that self-selection based on income needs will follow.
But would you consider making a withdrawal?
The answer to that seems to depend on whether you view the extra pocket money, a windfall, as wealth or as income. According to behavioural economist Richard Thaler, if people think of it as wealth, they are more likely to save than spend it. In this case, it may be bad news for policymakers if those with lower financial literacy, who presumably behave more myopically, are found to make more frequent withdrawals than those with higher financial literacy, thereby aggravating future welfare problems with retirement.
But in the short-run, there is no denying that unexpected income losses will push households at the margin into poverty, thereby creating a larger societal issue.
It is also possible for those who remain in employment to save more than usual because of the ongoing uncertainty and therefore not likely to splurge on non-essentials using extra money withdrawn from EPF.
The Malaysian economy is not in recession, yet. Just last quarter, private consumption and investment grew 8.1% and 4.2% respectively, signalling a strong demand trend which has since been artificially suppressed in order to mitigate the risk of Covid-19. Hence, the policy priority remains to break the chain of infection in the shortest time possible so that businesses can resume hiring and production. While measures such as i-Lestari can provide temporary income relief, the sustainability of these stimulus packages will hinge upon the speedy containment of the coronavirus and a return to normalcy not just domestically, but also globally.