QUESTION TIME A colleague wrote that we should not let the Employees Provident Fund (EPF) play God by raising the age for withdrawing retirement funds to 60 from 55. But I feel that EPF really is not playing God, and if it does - there are good reasons to do so.

Let’s start with why EPF was set up in the first place. The aim is to provide money for those who have retired and therefore are not likely to receive any income after that. This is done by compulsory deductions as a percentage of salary from both employee and employers.

Currently, this stands at 11 percent of salary of employees while employer contributions are 13 percent of salary for those earning RM5,000 a month and below and 12 percent for those earning above RM5,000 a month. That means a forced savings of 24 percent of salary a month for those in the lower income group. Government employees under the pension scheme stop contributing to EPF.

Now, the reason for this forced, compulsory savings, contributed by both employee and employer has only one purpose in mind - which is to provide something for the employee after he retires, a social safety net, so to speak. To a large extent, it is to protect us from ourselves.

But even this social safety net is inadequate for the vast majority of Malaysian workers mainly because they do not earn enough money to protect them in retirement. What will give them an adequate safety net is if they earned more and/or if they put away more money for savings? That does not seem a prospect now.

Let’s now look at the situation on the ground. According to EPF, 68 percent of all EPF members had less than RM50,000 in their accounts upon retirement, presumably at the age of 55. EPF itself recommends having at least RM196,800 in basic savings, but statistics show only 22 percent of active 54-year-old contributors met this minimum last year.

But consider what has happened since. For most Malaysians, the retirement age has been moved up to 60 but the age at which funds in EPF can be completely withdrawn is still 55. That’s an anomaly considering that the retirement age has been moved up to 60.

If the withdrawal age remains at 55, EPF loses a golden opportunity to increase the safety net by a significant amount - even if most of the members will still not be sufficiently protected, the gap narrows significantly.

Let’s take the example of a person who has RM50,000 at the age of 55 . He could take this out at the age of 55 although he has an income for another five years to age 60. Most likely he will spend it before he reaches 60.

And then what will he have at the age of 60 when he really, really needs income to sustain himself because most people don’t work after that age? Yes, only his EPF savings in the last five years.

Our rough calculations based for illustration purposes on an average income of RM2,500 over that period shows he will have roughly RM36,000 (24 percent of average income over the five years) before interest or about RM41,000 after including interest of 6 percent a year.

Running out of money in less than two years

That’s all and nothing else. If he lives on a reduced amount of say RM2,000 a month, he runs out of money in less than two years. He still has a further 13 years of life left to worry about.

But consider if he had not withdrawn the RM50,000 earlier and it was in EPF for five years. Assuming a return of 6 percent a year for EPF, that sum would have increased to about RM67,000, which together with the RM41,000 in new funds gives him a retirement sum of RM108,000.

That keeps him going, at the same rate of RM2,000 a month for close to five years. And he has still another 10 years of life to worry about.

This is still a lot less than the RM196,800 in basic savings that EPF itself recommends as the minimum savings required for a person as old age retirement, assuming that the retiree does not work - and most of them don’t.

What’s the answer to this problem? As mentioned earlier, there are two - increase wages and/or the amount of EPF contribution. That means workers and employers will have to contribute even more to retirement, not something that is likely to be readily received by either party.

There is one more - increase the retirement age. In 1960, the average life expectancy at birth in Malaysia was 60. The retirement age was 55. On average, the average worker lived for about five years after retirement then.

But in 2010, the average life expectancy in Malaysia had increased to about 75, 15 years more than in 1960. It was only recently that the retirement age was raised to 60. On average, a worker lives for 15 years after retirement - now that is three times more than in 1960 of five years.

So the third way out is to raise the retirement age. This can be done in stages to 65 years but even then a person on average lives for 10 years after that. And the right thing to do is to extend the age of withdrawal of EPF to that age so that there is an increased safety net for retirees.

There is of course the 22 percent who have more than what EPF reckons is the minimum sum they need in retirement of RM196,800. For those fortunate people who have more than, say, RM200,000 at the age of 55, they should be allowed to withdraw any amount more than that if they should wish to do so. But remember that RM200,000 is not cast in stone - it moves with the rise in cost of living.

No, EPF is not playing God by keeping the money of members longer than required - it provides and increases the safety net for most retirees by keeping enough money invested in relatively safe assets so that they have more for their retirement. It is both a rational and humane decision in one - and not many are.

Human beings are frail and weak and often need protection from their own follies.

P GUNASEGARAM is founding editor of business news and views portal KiniBiz .