THE debate over the special Employees Provident Fund (EPF) withdrawals, amid the Covid-19 pandemic and monsoon surge, continues after so long as themes like sudden income loss and pension adequacy appear to dominate the discussion. More often than not, the arguments are generally inductive, but valid nonetheless.
This article consists of three parts; firstly, it will set the stage by explaining, albeit very briefly, why (we think that) the special EPF withdrawal idea came to light.
Secondly, it will explain why we should differentiate between poverty or income loss reliefs and the need for consumption smoothing. And finally, this article will conclude that the state, and nothing else, must supplement poverty or income loss relief efforts.
Let us begin with some numbers. In 2021, the total gross issuance of government bonds was RM163.9bil, lower than MARC Ratings’ projection of between RM170bil and RM180bil. Our figure is based on the government’s fiscal deficit estimate of 6.5% of nominal gross domestic product (GDP). In essence, one could infer that from the perspective of deficit spending, the government did not raise debt as much as it normally should, notwithstanding the prolonged lockdowns and the floods.
As it stands, Malaysia’s tax revenue to GDP (10.9%: 2020) is the lowest compared to similarly-sized economies like Chile, Hong Kong, and Singapore. Based on official statistics, Malaysia’s annual household income per capita (US$4,820 or RM20,195: 2016) is the lowest but the highest in terms of household debt to GDP (93.2%: 2020) among the said economies.
As such, raising revenues via taxes can be tedious, untimely, and disposable income-eroding in the immediate term. We can safely rule this out since it is highly politically sensitive.
Therefore, we can conclude that the idea behind the special EPF withdrawal is to supplement the people’s income loss outside the ambit of debt and taxes amid deficit spending control.
Household debt
In order to weigh in on the special EPF withdrawal idea, we must first distinguish the difference between income loss reliefs and the need for consumption smoothing.
On the one hand, poverty and income loss reliefs should be state-funded, either through taxation, debt, zakat, or assisted by state-owned enterprises. The primary reason for this is that it involves a redistributive wealth feature in an economy.
We see that there is still ample elbow room for the government to resort to debt to address this issue, but perhaps the government’s self-restraint to incur more debt takes precedence over everything else. We should not be worried about a downgrade by the international rating agencies since the economic damage amid the Covid-19 pandemic is not exclusive to Malaysia alone.
In any case, the market would have priced in the change in the global economy anyway. Bond yields have been rising in anticipation of a rate hike in 2022. Under the present circumstances, the right policy move is to borrow more to cushion the economic damage and prepare the stage for a stronger recovery. Fiscal consolidation cannot be brought into play at the expense of future growth.
The government’s non-ringgit exposure is limited and we have ample liquidity to support higher issuance of bonds in the near term. The current low rates environment gives us a lot of room for this as well, even though it would not stay this low for far too long.
We should not forget that Malaysia has had much higher debt-to-GDP levels in the 90s. Our “fiscal consolidation” then was to turbo boost infrastructure development and it worked tremendously. Malaysia can afford to go on this route again as long as the government continues to expand our economic pie.
On the other hand, the primary purpose of EPF contribution is to encourage consumption smoothing, i.e. to stabilise the spending pattern of its contributors throughout the productive working age. In economic terms, the contributors’ marginal propensity to consume should be closer to zero.
We cannot emphasise enough the need for consumption smoothing. Consumers have imperfect information on whether to spend today or tomorrow, thus they are generally more rational for the future but less so at present. The high level of household debt to GDP is a function of low income while prioritising the maintenance of a “socially accepted” standard of living over affordability.
Tax revenues
Simply put, it is natural to value instant gratification over long-termism, hence consumers tend to make uneconomical purchases today instead of preparing for retirement. EPF withdrawals should only be allowed for income or wealth-enhancing and nothing else. Now this is what EPF contribution is all about.
A sudden income loss, especially at the aggregate level, cannot be construed as a drop in consumption pattern because it could likely be policy-induced or simply underinvestment in public infrastructure. Therefore, we should separate the two issues concerning poverty reduction or income loss and consumption smoothing.
The purpose of defined contribution (DC) via the EPF is to allow for a smoother consumption pattern over the working age of contributors. Thus, to “replenish” the loss in retirement savings, the government should either push for higher wages, raise the retirement age, or increase the DC rate in the future.
We should also note that the government last raised the DC rate in 1996, but with intermittent cuts over the years. Raising the present DC rate can be politically challenging even when the economy gets better as wage hikes take time.
Furthermore, the failure to separate the two issues will exacerbate the issue of pension inadequacy – the (in)ability to financially sustain a basic living standard in a specific locality – further.
Official statistics show that 15% of the Malaysian population will be above 60 years old between 2030-2035, less than 13 years away from today. If the retirement age remains constant until 2035 ─ albeit that is highly unlikely due to longer life expectancy ─ EPF members who are 45 years old and above today would have to work much harder to replenish the forgone retirement savings.
To conclude, this article attempted to uncover the rationale behind the special EPF withdrawal idea as objectively as possible. It then explained the key differences between poverty reduction or income loss and the need for consumption smoothing as they both require different policy tools. Based on these premises, this article concludes that the EPF withdrawal should only be allowed for activities that maximise its contributors’ future earnings capacity or wealth in one’s working life. Financing for income loss should come from the state.
If not, the government should pave the way for a combination of either increasing overall wages, raising the retirement age, or increasing the DC rate in the near future.
Firdaos Rosli is chief economist at Malaysian Rating Corp Bhd (MARC). The views expressed here are the writer’s own.