Spending Into Our Future

(Sin Chew, 24/10/2007): A young friend of mine is enthusiastic about buying a house even though she’s worked for less than three years. I asked her how can she manage to do that on a RM2,000 salary apart from having to pay for her car mortgage.

She pointed to a newspaper report which reported that the Employees' Provident Fund's Chief Executive Officer Datuk Azlan Zainol as saying from 1 January 2008, its members are allowed to make monthly withdrawal from the balance in Account Two to pay housing loans.

Obviously, this recent announcement from EPF has an impact on workers. However, an earlier report highlighted the plight of EPF members who have less than RM110,000 when they retire at 55 as this is not sufficient for their retirement.

The EPF has gone ahead to launch eight new changes at one go, giving its members the impression that they would have enough in their twilight years.

Some of these new measures are good for retirees. For example, the EPF plans to introduce a medical insurance scheme at a lower premiums. Another example is its members are allowed to credit accounts of their parents or spouses so that women, especially housewives, would have a pension. Also, senior citizens are allowed to have a more flexible way of withdrawal and employers are required to pay 50% of EPF for those workers who are still working after they have retired.

"What is the main objective of the EPF in introducing these measures? Is it to 'encourage consumption' or 'encourage savings'?"

These measures seem very good and well-planned, like they are meant to allow members to use their pension well with more convenience and choices.

Yet it is this “more convenient and more flexible way of withdrawal” that led us to ask: “What is the main objective of the EPF in introducing these measures? Is it to 'encourage consumption' or 'encourage savings'?"

The main reason for the government to establish the EPF was to make it contributions to pension funds compulsory.

With high inflation and increasing life expectancy, normally the pension amounts for middle income people are merely sufficient for basic needs. If they have any unfortunate illness, RM200, 000 or RM300,000 ringgit would be used up in no time. The money is not even enough to meet basic needs, not to mention to afford a happy twilight life.

Under the new measures, the EPF is currently strongly “encouraging” its members to make withdrawal for housing loans. The money will be automatically credited into members’ accounts. They can also drawdown to pay for another house purchase provided they do not sell the first one.

There are two potential areas for abuse. One is that the amount would be channelled into speculative investments and the other is that it could trigger off speculation on investing in properties that could lead to pushing up house prices.

Speculative investment, whether in stocks or properties, carry an inherent risk. Even if it is really used to pay housing loan, the shortest duration would be 10 years and the longest 30.

This means that the amount of money in EPF account for young people like my friend would have largely declined over the next 30 years. Such being the case, they would still be having not more than RM100,000 when they retire.

If the EPF is really thinking about its members' welfare, it can simply raise dividends income to 6% - 8%. Why can't the EPF do that?

This measure to allow withdrawals for housing loans is just an expedient approach to solve immediate problems. The EPF would not care about your twilight life. Therefore, you better think twice before applying for housing loan.