Low EPF savings among the young adults and middle-aged – possible cause of bankruptcy?

Tough measures are needed to deal with the low savings issue that may then morph into a possible bankruptcy crisis.

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Published in Astro Awani, image by Astro Awani.

The ongoing Covid-19 pandemic could precipitate or trigger an extensive bankruptcy crisis in the near future. Unsurprisingly, the root cause of a possible mass insolvency is to be attributed to low savings in general – including in the EPF accounts – among some Malaysians, especially those aged between 30 to 45 years old.

This means that once the savings are exhausted, including in relation to the EPF accounts, the risk of bankruptcy arises or rises due to the inability to discharge pre-existing debt obligations and liabilities, let alone for self-sustenance.

Recently, the Malay Mail pointed out that 48% of EPF members below the age 55 have critically low savings – representing an increase of 28% from the pre-pandemic levels.

With regards to this, the Malaysian Association of Borrowers and Consumers Solution warned that many Malaysians aged between 30 and 45 risk bankruptcy by next year. This worrying scenario is especially based on the fact that the application for the i-Citra withdrawal scheme had ended in September and the loan moratorium would not be extended beyond December 2021.

Bankruptcy was previously defined according to the situation when individuals cannot meet their debt obligations of at least RM50,000. Due to the Covid-19 pandemic, the Malaysian Department of Insolvency (MDI) increased the bankruptcy threshold to RM100,000 to provide some protection to those who may not be able to financially survive from the impact of the pandemic.

This provision was temporarily made to the Insolvency Act (1967) in pursuant of Section 20 of the Temporary Measures for Reducing the Impact of Coronavirus Disease 2019 (Covid-19) Act (2020) and time-limited to August 31, 2021.

The RM100,000 bankruptcy threshold has now become entrenched or made permanent under the amendment made to Section 5(1)(a) which came into force on September 1, 2021.

The Insolvency (Amendment) Act (2020) also seeks to empower the Minister (after consultation with the Finance Minister) under Section 5(1A) to amend the minimum bankruptcy threshold in pursuant to section 5(1)(a) of the Insolvency Act 1967 for a specific time period if it is in the public interest. This measure, thus, allows for the flexibility or opens up the possibility for a further increase to the bankruptcy threshold in the future – to meet possible/plausible exigencies.

Other measures provided by the government to forestall bankruptcy include other regulatory amendments.

The Insolvency (Amendment) Act (2017) and the Companies Act (2016) allow for corporate voluntary arrangement (CVA) under Section 2A of Part 1 running alongside Sections 397 and 398 to be read together with Section 366 and the Eighth Schedule, respectively. It’s a pre-bankruptcy rescue mechanism allowing a debtor to negotiate a debt settlement proposal.

Now, the measures under the Insolvency Act (1967) and Companies Act (2016), i.e., the increase of the bankruptcy definition threshold and CVA should be extended in time or duration for up to 2 years and 1 year, respectively.

The extension of the period would allow both the affected individuals and businesses to gain extra breathing space. That is to say, the extension should enable these individuals and businesses to rebuild their crumbled finances.

In other words, what is being proposed is for a bankruptcy moratorium to take the place and role of the loan moratorium when the latter comes to an end.

To further contain the problem, EMIR Research would like to propose the following policy recommendations for consideration to supplement and complement the above:

  1. No More Additional EPF Special Withdrawal Scheme(s)

Generally, the EPF will consider requests and respond with the appropriate facilities that meet the needs of the members concerned.

However, the three EPF special withdrawal schemes (i-Sinar, i-Lestari, i-Citra) have led to a situation whereby, instead of minimising the risk of bankruptcy, it has actually worsened the members’ exposure.

Thus, the EPF should take stock of the situation and reassert its role and responsibility to safeguard the savings of its members – by refusing (the political interference and pressure) to allow for any more withdrawal schemes.

The judgment of the EPF is, at any time, superior to that of any populist politician that is harping for the “button to be pressed”.  

Meanwhile, the EPF should disallow members with critically low savings from withdrawing for any (emergency) purposes such as property purchase, medical expenses and tuition fees. This move should help members with low outstanding funds prioritise the critical need to rebuild and accumulate or replenish their savings. 

  • Provide Incentives to Encourage Members to Continue Working beyond 60 years old

The EPF has indicated that members will need to continue working for an extra four to six years to rebuild savings that have been depleted.

The EPF can encourage them to extend their working-age by providing some incentives.

For instance, the EPF can maintain the 0% statutory contribution rate for employees aged 60 and above but increase the minimum employers’ share of contribution rate from 4% to 6%. The government then should provide tax incentives for this purpose in the form of deductibles and allowances and claims.

Besides this, the EPF should expand the i-Saraan programme – which is mainly geared towards the gig economy and the self-employed – to members above 60 years old because some elderly employees could end up earning irregular income as they might not be able to secure a full-time job.

And the post-60-year-old members can also enjoy a 15% government “top up” subject to a maximum of RM250 per year.

In this, the EPF is also anticipating and contributing to the design of the “future of work” for those beyond the normal retirement age by synchronising and coordinating its efforts on the retirement savings front.

The gig economy is one area which can readily absorb the elderly as we transition steadily to an ageing society.

Furthermore, the post-60 who are eligible to pay tax should be exempted so that the amount payable can then be transferred into their EPF savings, instead.

  • Set Mandatory “Minimum Savings Amount” as an Additional Withdrawal Regulation

The recommended minimum savings amount at age 55 by the EPF is RM240,000 (which serves as guidance only). Many EPF members are unable to meet the recommended threshold.

To ensure that members can retire with sufficient savings, the EPF can mandatorily require them to reach a minimum of RM240,000 in their accounts before finally withdrawing the funds in one lump sum.

The withdrawal requirements should be tiered or structured according to the outstanding sum available. Members should only be allowed to withdraw or rather be paid in instalments, therefore, if the sum available is below RM240,000 under a multi-tiered schedule of withdrawal.

The compound (i.e., as accumulated) interest rate offered by the EPF can then gradually compensate for the shortfall (i.e., below the RM240,000 threshold) of the minimum sum.

Therefore, the EPF members need not worry about the adequacy of their retirement savings whilst at the same time continuing to earn an income beyond the age of 55 or 60.

  • Bankruptcy Moratorium

In general, a debtor can only be declared bankrupt if that person defaults for up to six months after receiving the creditor’s notice – under Section 5(1)(c) of the Insolvency Act (1967).

As stated before, this period of six months should be extended to two years (if individual or 1 year if it’s a business) – as a matter of (“unprecedented”) emergency.

Overall, this will pre-empt a possible bankruptcy crisis from brewing.

To conclude, tough measures are needed to deal with the critical issue of low savings which could then morph into a possible bankruptcy crisis.

Jason Loh Seong Wei and Tan Tze Yong are part of the research team of EMIR Research, an independent think tank focused on strategic policy recommendations based on rigorous research.

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