Agony of EPF earners, bank interests and a solution
File picture of a market with vegetable prices now rising
At the time of retirement, many workers receive their EPF as a lump sum. In addition to the above sum of money, some private sector organisations like the universities pay another lump sum of money called the Gratuity Fund which is calculated on the number of years served and last salary drawn. A person who has served the university for 30 years receives 15 months gratuity. Thus at the time of retirement, a private sector employee, in most instances, receives EPF, ETF and gratuity.
In almost all instances, the employee then deposits the lump sum of money received in banks on fixed deposits, to earn interest monthly for the employee and his family to live on.
Hypothetical calculation of the income of an EPF earner after retirement.
Let us assume that a person receives a lump sum of money equivalent to Rs. 5 million. The whole amount is then deposited in a state bank to earn interest monthly for the person to live; the interest paid is lower than obtaining the interest at maturity at the end of the year.
Currently retirees can deposit up to Rs. 1.5 million at 14.5 per cent interest annually and withdraw the interest monthly. The total interest earned per month for the above sum of money then would be about Rs.18,437. If the interest is withdrawn at maturity, then the interest paid is 15 per cent, and the total interest earned, calculated per month would be Rs.18,750. However, most people obtain the interest monthly, but at reduced rates. The balance of the total lump sum amounting to Rs. 3.5 million would be invested at a lower interest rate of about 5.5 per cent. The interest he earns from this sum would be about Rs.16,041. Thus the total monthly income of the retiree would work out to about Rs. 34,478 (Rs.18,437 +16,041).
Is it adequate to live on?
With the present rate of inflation and the declining value of the rupee, the prices of commodities have increased. Even the locally produced rice, which forms the staple diet of a majority has gone up by about 25 per cent or more; the plight is the same in all other daily needs like mung beans, chillies, vegetables and fruits. On the other hand, an essential item like coconuts has sharply gone up in price. Imported items like flour, dhal, pulses, sugar, turmeric, canned fish clothing’s, utensils, medicines etc have gone up in price due to the depreciating rupee. Thus, the above monthly income is not sufficient at least for one person to live decently. If the retiree is the only breadwinner, the hardships are beyond comprehension.
Temporary solution
The banks until the end of 2019, paid higher interest rates for senior citizens. The rate was about 8 per cent when the interest is withdrawn monthly and about 9 per cent at maturity. Retirees with income from EPF deposits were better off then as the cost of living was relatively low. Before that, the banks paid higher interest rates as high as 12 to 18 per cent.
However, considering the hardships encountered by private sector retirees, the Government must once again grant relatively higher interest rates, at least 8 to 9 per cent for those who are dependent on interest income so that their lives could be comfortable until they die. It is the duty of the Government to help these people as they were never dependent on state pensions. They have earned their pension and banks also earned more money by investing their EPF earnings. Unfortunately, this aspect had not been considered by the Government and the banks. I am aware, that some very eminent university professors, who were dependent on EPF interest income, had to sell their homes and move to small rented places as their meagre interest income was insufficient for their sustenance. I am also one of the victims of the low bank interest rates for EPF deposits. About five years ago I too had to dispose of my home and deposit the money in a bank and then move to a room in my sister in law’s house to live.
Permanent solution
In Sri Lanka, the adult population is growing fast as in other developed countries, so they must have ways to sustain life at old age. State employees, that form about 14 per cent of the labour force, are very well secure as they receive a very lucrative pension of about 90 per cent of their salary, for which they did not contribute at all. Once, around 2004, an attempt was made by the then Government, unilaterally to made it contributory, unfortunately, the next Government reverted it back to a non-contributory scheme, placing politics before the country.
In most countries, old age economic benefit package have different definitions. In the US, it’s called the Social Security Benefits Scheme (SSC), where the employee and employer both pay a certain percentage of the salary to the SSC and after retirement at the age of 65, the retiree receives a monthly income out of the above scheme, which is equivalent to the pensions in Sri Lanka. They do not receive a lump sum of money to invest or deposit in a bank to generate a monthly income as interest rates are less than 1 per cent. However, many people do not retire at the above age as retirement is not mandatory, or after retirement they work elsewhere to earn another salary, but SSC benefits are not affected.
In New Zealand, it is called superannuation where the employee pays 6 per cent of the salary and about 8 per cent is paid by the Government and in the end employees after retirement at age 65 get a monthly stipend. Further, they have another scheme called Kiwi Saver where an employee deposits 3 per cent of the salary in a bank and after retirement receives a fixed stipend monthly.
In Sri Lanka, at present, there is the non-contributory pension scheme for state employees and the private sector scheme when workers receive a lump sum and use that to invest in a fixed deposit to receive a monthly income.
However, the above two systems could be coupled to develop a Social Security System (SSS), where, even in the state pension scheme, the employee too must contribute, may be at 6 per cent of the salary and a slightly enhanced amount, may be at 10 per cent could be paid by the Government. This scheme and the EPF scheme could be coupled together and the entire money diverted to an SSS and the money could be used by the Government for development work, for which an interest could also be paid. Retirees could be paid out of the above SSS which would not be a burden on the Treasury as it is now. It is understood that one third of the GDP is now spent to pay the non-contributory pensions to state employees. The legislature must formulate the above scheme as a bipartisan proposal, where, both or all political parties unanimously agree, so that one of the two main political parties cannot make a political gain out of it as happens in many issues. It happened around 2004 when the pension was made contributory, the opposition vehemently objected to it, promised free pensions and won the next election. Later, when the Government tried to convert EPF funds to a pension scheme, all private sector employees protested and stopped it. It’s the duty of right thinking people to promote such a scheme via the SSS.
(The writer is Emeritus Professor, University of
Sri Jayewardenepura and presently Adjunct Professor, University of Houston, Victoria. He can be reached at
jjinadasa@yahoo.com)