Employees Provident Fund – the _

National Union of Bank Employees (Nube), the banking union in Malaysia, wants the government to “return monies withdrawn by B40 and M40 members under the Covid-19 relief package.”^[1] I take that as demanding the government to directly replenish EPF contributors’ savings that were depleted by government Covid-19 withdrawal programs. The news report does not mention when the union spokesperson wants the replenishing to happen, but I assume as soon as possible.

For the uninitiated, the Employees Provident Fund (EPF) is a compulsory retirement scheme for private sector workers.

I disagree with the withdrawal EPF schemes, and along with many others, instead have advocated for the government to raise its borrowing and commit to greater spending instead in order to provide greater assistance.^[2] But the government was too worried about its fiscal deficit, too fresh to learn all the economic levers it had, and too desperate to find ways to relieve the spending pressures they felt. Among the chaos, they heard Najib Razak’s bad advice and took it.

But it is done now. A mistake has been made. While too many EPF contributors find their account depleted as a result, the overall economic circumstances have changed. During the pandemic, we needed economic programs guaranteeing everybody a certain level of welfare, particularly when a significant part of the economy was shutdown. With the private sector disabled so thoroughly, it was the responsibility of the government to secure everybody’s basic needs. It was a hibernation policy: lockdown and government assistance.

Now that the economy is back operating albeit weakly, priorities have changed. We need to strengthen the economy. Instead of hibernating, we need more spending and investing by the both the public and the private sectors.

This of course assumes we will not make any more mistake on the health front. While there is a real room for optimism going forward, with vaccination rate running high, and that we know more about the virus, after the government’s naïve V-shape recovery blunder, we can never be too careful.

Having the government replenishing EPF savings, especially if immediately or the near future, runs contrary to current priority of economic recovery: pushing for greater spending, investing in capacity building, and simultaneously creating jobs.

Why?

Because putting government revenue (or borrowing or both, since the government unlikely to enjoy any kind of fiscal surplus) into EPF savings would store the money into passive activity for an extended period of time (due to the nature of the scheme, which savings could only be withdrawn at retirement age under normal circumstances; for the macro-inclined, you would remember S=I, but here I would argue S=aI where a<1 since EPF typically invest in equities and debt, and not directly, and if directly definitely in the very minority, into new productive assets like factories and infrastructure). It would go into the financial market, but that is not the most productive of all options available out there. In other words, the act of replenishing will take a lot of steam needed to power the recovery.

And it is worth remembering that economy in 2021 will be smaller than it was in 2019: recovery is not complete. This is an important point because it has long-term repercussion on the economy.

To illustrate the point, it is good to go back to the 1998 during the Asian Financial Crisis. The Malaysian economy only truly recovered from the 1990s crisis by mid-2010s: actual GDP only surpassed the what-if-there-was-no-1990s-crisis GDP around 2015-2016. To put it differently, actual GDP level only surpassed the pre-crisis level around 2014. That is close to 20 years of lost potential.

Actual GDP vs hypothetical pre-AFC growth trend

For 2021, we are still both below pre-crisis level and trend.

For fear of losing more potential, we need to focus on spending and investing. Having the government correcting their EPF mistake by replenishing the accounts will heighten the risk of us losing potential.

The replenishing size, and in turn, potential loss from the replenishing policy, is not small. A report from the Finance Ministry shows the cumulative EPF withdrawal under the 3 programs (i-Lestari, i-Sinar and i-Citra) was RM90.3 billion as of early October 2021. More has been approved but yet to be withdrawn. Replenishing it as soon as possible would take at least RM90.3 billion off the economy in terms of spending and investment, ignoring any multiplier effect.^[3] To put the number in perspective, that is nearly 30% of what the government plans to spend in 2022 and in fact, RM15 billion bigger than the government’s development allocation. Even by spreading the replenishment over 2 or 3 years, such policy would take so much money from most parts of the economy, and into the finance industry that will eventually manage those money.

But that does not mean there is no other way of replenishing it. Two ways I can think of are:

Tiering the dividend, which those with the least savings getting the highest rate. I have suggested tiering because, but it was primarily made out of realization the wrong people are given the incentive to save, and so, disincentive to spend and invest.
Increasing employers’ mandatory contribution. This will increase cost of doing business, but the government, while not doing enough, did a lot for businesses. Perhaps, it is time for businesses to play their role here.

Both however will be a slow replenishing process. Furthermore, increased mandatory contribution, for instance, might reduce take home pay as employers recalibrate their wage structure.

Another way by way of indirect replenishing is to make something like a senior citizen cash transfer bonus, payable by the government upon a person’s retirement, on top of existing cash transfer programs. But done together with dividend tiering, increased contribution and perhaps other ways too, this could reduce the size of the program, while pushing it far enough into the future.

Hafiz Noor Shams. Some rights reserved

[1] — KUALA LUMPUR (Nov 22): The National Union of Bank Employees (NUBE) had on Monday (Nov 22) urged the Employees Provident Fund (EPF) to demand that the government return monies withdrawn by bottom 40% (B40) and middle 40% (M40) segment EPF members to protect their retirement savings at a time when EPF members’ retirement savings have depleted due to Covid-19 pandemic-driven economic challenges. [Shazni Ong. EPF asked by NUBE to demand govt to return monies withdrawn by B40, M40 members during Covid-19. The Edge Markets. November 22 2021.]

[2] — Two experts Malaysiakini spoke to had concerns about allowing such a large number of people to dig into their retirement savings. Instead of tapping into EPF, both opined that the government could have spent more to provide assistance to households amidst the Covid-19 pandemic. Economist Hafiz Noor Shams previously analysed that the government was not spending enough in Budget 2021 to support the economy, by virtue of what he regarded as an overly conservative deficit estimate. [Annabelle Lee. Economists: Why let 8m tap EPF when govt can afford cash assistance?. Malaysiakini. November 27 2020.]

[3] — Laporan LAKSANA ke–76. Page 11. Ministry of Finance, Malaysia. November 17 2020.]

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).