[2901] We are incentivizing the wrong people to save

Who does not love big dividends that could be gained through low-risk instruments?

For many Malaysians capable of saving, either voluntarily or otherwise, low-risk investment with high returns of 5%-8% yearly or even more for some, is something that has been taken for granted. This is thanks to years of expectation settings made by a set of institutions the government has put in place to encourage saving.

So much so that in the case of Tabung Haji when the fund could not even pay its depositors high dividend anymore, the previous administration felt compelled to manipulate its accounts so that it could sustain its dividend level and avoid the political backlash from its base. In fact when ASB under PNB announced a reasonable dividend of 5.5% for 2019, enough Malaysians expressed unhappiness how that was unacceptably low and how that it would remove arbitrage opportunity that existed through low-cost borrowing to invest in higher yielding but low-risk investment, like those provided by PNB.

I for one believe the way and quantum these dividends are given need to change.

The reason: the state is encouraging the wrong people to save. Specifically, the existing system encourages those that do not need to save more to save further. This in turn places a downward bias on consumption growth and the size of funds available for productive investment (not the financial ones). I have a suspicion that if we stop encouraging the wrong (and rich) people to save, we could bump consumption growth and possibly funds for productive investment up, and boost economic activities on the ground. I am suggesting the economy could grow faster if we correct this flawed incentives.

What do I mean by encouraging the wrong people to save?

This is plain to see from the distribution of wealth in two big funds in Malaysia.

Based on the latest annual report from the EPF, that is the 2018 publication, the top 10% biggest depositors owned approximately half of all of EPF fund. And EPF is the biggest fund in Malaysia, and one of the biggest in the world.

It is worse in Tabung Haji. Based on data contained within the TH Recovery and Restructuring Working Plan document, about 1% of depositors owned half of the fund. A particular news report went on to cite that one depositor (likely the top depositor) had RM190 million saved in Tabung Haji. He or she could afford to live in Mecca luxuriously just on the Tabung Haji dividends alone!

With so much money, it is a no-brainer to put excess cash into these relatively high-returns low-risk funds. And dividend rates do spike up when it comes to election times previously, which indicates that the government do have a say in determining the dividend rate if it wants to through various means.

I am arguing that the high dividend for low-risk instruments is unhealthy to the wider economy. The relatively high-returns low-risk fund creates artificial incentive to save, which leads to excessive saving behavior by the rich. That artificial incentive to save translates into artificial disincentive to spend and invest in actual economic activities beyond financial instruments.

If we could rationalize and structure the dividend in a more reasonable way – such as reducing the dividend rate progressively the higher the size of savings is or capping the amount of savings at a reasonably high but not too high level – I think we can correct this, and unleash more money for spending by the rich, or encourage them to be more adventurous with their money by investing in real economic activities, like productive start-ups and new businesses, instead of things like the stale old and safe banking and other GLC stocks.

And after all, the financial-type people are complaining that Malaysian stocks are overpriced. Is it a wonder why that is so when the size of EPF funds is outgrowing the size of assets available for investment in Malaysia?

We could still encourage people to save. But let us incentivize the right people to save. My favorite way of doing so is to raise the dividend rate for the bottom and mid-savers, and progressively cut for the top ones (after passing beyond a certain level).

2 replies on “[2901] We are incentivizing the wrong people to save”

ASB does this in a way – max investment is capped at RM200k. After that you’ve got to look somewhere else to put your excess savings to work.

It’s more than possible to have it above RM200k, especially through reinvested dividend. That max isn’t a hard limit. You can check this info in ASB prospectus.

And those all >RM200k savings get the same dividend rate.

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