KUCHING: Cashing out Employees’ Provident Fund (EPF) dividends for ‘Raya’ may cut retirement balances by more than half.
Universiti Sains dan Teknologi Malaysia (MUST) economist, Professor Emeritus Dr Barjoyai Bardai, said the proposal raises a trade-off between short-term withdrawals and retirement protection.
The debate follows Arau Member of Parliament, Datuk Seri Dr Shahidan Kassim’s proposal for 100 per cent of current-year EPF dividends to be placed into Flexible Account (A3) so that members can withdraw it quickly for Ramadan and ‘Raya’ spending.
He said the EPF restructured accounts from May 11, 2024 into the Retirement Account (AP), Sejahtera Account (AS) and Flexible Account (A3), with new contributions split into 75 per cent, 15 per cent and 10 per cent, while A3 can be withdrawn at any time.
He added that dividend rates are the same across all three accounts.
“My view is that I do not agree with distributing 100 per cent to A3 across the board. The original mission of the EPF is to guarantee retirement income, and putting all dividends into A3, which can be withdrawn at any time, conflicts with the 75:15:10 design.
“The concern is also behavioural because dividends are easily treated as spendable cash once they sit in a flexible account.
“This increases the likelihood of early withdrawals and reduces the compounding effect that supports retirement adequacy.
“EPF dividends are the main driver of long-term compounding, and moving them into A3 increases the risk of leakage from retirement funds,” he told Sarawak Tribune.
On long-term effects, Barjoyai said dividends that would normally be reinvested could become cash that is more likely to be withdrawn.
He said this would slow the growth of the base balance and create a harmful path-dependency effect over the next 10 to 20 years.
“A3 is designed for easy access, and directing all dividends there would raise the temptation to spend when cost-of-living pressure bites. That would reduce the retirement stock and is not aligned with EPF’s objectives.”
He also flagged a broader risk if it becomes an annual pattern among vulnerable groups.
He said public discussions have acknowledged that many households rely on dividends for current spending, and repeated withdrawals could thin savings in old age.
“Higher withdrawals from A3 could also affect how the EPF invests. If outflows rise, the EPF may need to increase portfolio liquidity to meet withdrawals, which could weigh on long-term returns because less liquid and riskier assets typically carry a return premium.”
On how to balance short-term needs and retirement protection, he proposed a three-layer approach aligned with the 75:15:10 rationale.
He described AP as the anchor that cannot be withdrawn before 55, AS as a purpose-tied account for education, health and housing, and A3 as a shock absorber for cost pressures without weakening the other layers.
“Directing all dividends into A3 would be highly likely to encourage over-withdrawal,” he said.
He attributed this to mental accounting, where dividends are seen as a bonus and are more easily spent than savings meant for old age, and he warned it could send the wrong signal about the EPF’s primary function.
If the policy is still pursued, Barjoyai said flexibility should be limited and conditional rather than universal.
“If the government and EPF want to allow dividends into A3, I suggest a Safety-Valved, Guard-railed Liquidity model.”
Under that model, he proposed an opt-in mechanism where those who genuinely need liquidity apply for a portion of dividends, such as 20 to 40 per cent, to be credited into A3, while the rest follows the 75:15:10 split.
“Eligibility could be tied to stress indicators such as job loss, B40 or M40 households, or serious illness.”
In light of this, he also proposed caps and timing controls to reduce habit-forming withdrawals, including an annual ceiling such as RM2,000 to RM5,000 or a percentage of dividends, and limiting withdrawals to a specific time window such as the second quarter each year.
He added that a minimum post-withdrawal balance floor in A3 would help members retain funds to compound after any withdrawal.
“The default should remain saving rather than automatic crediting into A3, and members should see what withdrawal choices do to their future balances.
“The default should be: dividends do not go into A3, and if members choose it, the i-Akaun app should show projected balances at ages 60 and 65 if they withdraw versus if they do not,” he said.
He further suggested a conditional micro-matching incentive for low-income members who do not move dividends into A3, such as RM1 matched for every RM5 up to RM100 a year.
He also proposed an adequacy threshold system that automatically locks a larger share of dividends back into AP and AS if total savings fall below a safe trajectory.
He added that a 12 to 18-month pilot targeted at specific groups should include an impact evaluation and end automatically unless extended through parliamentary review.
He reiterated that a blanket policy of 100 per cent dividends into A3 is not appropriate because it conflicts with the EPF’s mandate and raises systemic retirement shortfall risks through erosion of compounding and excessive withdrawals.
“The best balance remains the 75:15:10 framework, with targeted flexibility,” he said.
On dividend context, Barjoyai noted that EPF declared 6.30 per cent for 2024, announced on March 1, 2025, and the 2025 financial year dividend rate was reported as expected to be announced this Saturday.
To quantify the potential impact, he said he built a projection model testing 0 per cent, 25 per cent, 50 per cent and 100 per cent of dividends channelled into A3, alongside two withdrawal behaviours.
He said the model assumes either all dividends credited into A3 are withdrawn, or only half is withdrawn.
“The sample profile starts at age 35 and projects balances at ages 60 and 65, using an initial balance of RM50,000, a starting salary of RM5,000 a month, a combined contribution rate of 23 per cent, wage growth and inflation of 3 per cent a year, and a 6.3 per cent nominal dividend return.
“Dividend crediting is approximated monthly to reflect the EPF’s annual method based on average balances.”
Under the status quo scenario, with 0 per cent dividends channelled to A3, he said the model produces about RM1,308,080 nominal at age 60 and RM1,957,065 nominal at age 65, with inflation-adjusted equivalents of about RM624,746 and RM806,285.
“In the scenario where 100 per cent of dividends are channelled into A3 and 100 per cent is withdrawn every year, the model produces about RM555,019 nominal at age 60 and RM710,520 nominal at age 65.
“This implies a decline of about 58 per cent and 64 per cent versus the status quo for that sample profile.”
He said even when 100 per cent of dividends are channelled into A3 but only half is withdrawn, the model still produces about RM828,416 nominal at age 60 and RM1,133,227 nominal at age 65.
“This is still around 37 per cent and 42 per cent below the status quo.
“The pattern is consistent across scenarios: the larger the share of dividends routed into A3 and the higher the leakage, the bigger the loss of the compounding effect.
“The immediate cash benefit comes with a high intertemporal cost through foregone compounding, strengthening the case for guardrails rather than a blanket move.”
On limits, he said the model is based on general assumptions and outcomes are sensitive to dividend returns and inflation or wage growth.
“It can be refined through sensitivity analysis or by using an individual’s actual profile and intended A3 withdrawal plan.”
