When EPFO recently announced that PF withdrawals would soon be possible via UPI and ATM cards, i.e., you get instant access to your retirement(!) money, it sounded like a welcome move for many. But while this EPFO 3.0 reform does try to solve the problem of access by eliminating the bureaucratic incompetence, between you and your PF corpus, it also leads to another problem. And a big one actually.
The Provident Fund, is fundamentally meant for your retirement. So making PF money hard to access was, in large part (whether intentional or unintentional), was kind of a blessing in disguise. A retirement corpus that is difficult to withdraw from stays intact and compounds. A retirement corpus that is easy to withdraw from becomes just another account, where you can dip into whenever you need money.
The old system’s inefficiency had an unintended benefit – it kept millions of people from impulsively dipping into their retirement corpus and sabotaging their future retirement.
PF, till now, was a kind of untouchable part of your savings. But if this new change (of giving access to PF money via UPI/ATM) gets implemented, your PF money will become available-on-demand, spendable and exposed to impulsive spending. Running short of funds for a foreign vacation? Let’s dip into the PF corpus as you-only-live-once (yolo). Want to purchase a car but don’t want to take a loan? Thanks to the govt, let’s dip into the PF corpus and buy it.
While people will love to get access to money ‘now’, what many of them don’t understand is that compounding of money, which PF accounts beautifully offer, gets severely compromised.
Let’s take a simple example. Suppose you are a 35-year-old with a PF balance of Rs 20 lakh. Under the new rules, you are allowed to withdraw up to 75% of the corpus. So now say you want to purchase a car, but don’t have any savings and also don’t want to take a loan. So you decide to withdraw Rs 10 lakh now. You have your car.
But, if this rule were not in place and you left that Rs 10 lakh remain in PF, then at the current EPF interest rate of 8.25%, that Rs 10 lakh left untouched for 25 years until retirement at 60, would have grown to much more than Rs 75 lakh. So the car didn’t just cost you Rs 10 lakh today. It also cost Rs 75+ lakh in retirement wealth that will now simply not exist!
The car is just an example. It can be anything. Discretionary non-essential spending like vacations, home interior upgrades, or non-negotiable ones like paying for uninsured medical expenses, much-needed house repairs, etc.
And that’s just one withdrawal. A few more of these over several years, and it’s clear what price your retirement corpus pays for it.
The new rules also mandate that at least 25% of your PF balance must remain in your account at all times during employment. This is presented as a safeguard that ensures EPF doesn’t become a complete free-for-all.
But 25% isn’t enough in my view.
Over a long 25-30 year career, a careless person who withdraws every time life throws a financial curveball (but staying just above the 25% floor), will definitely mess up his retirement and arrive at retirement with a fraction of what his corpus could have been. The 25% rule prevents you from emptying the corpus, but it does absolutely nothing to prevent the slow, quiet death of compounding by a thousand withdrawals, over the next few decades. Honestly, if protecting retirement was the genuine intent, the minimum percentage should have been set far higher. At least 75% mandatory retention, and not the current proposed 25%.
Had there been a mature pension system in India, where all citizens had state-guaranteed pensions or employer-funded annuities as backup, then this new rule of easier PF access would have been fine. But sadly, India doesn’t have a mature social security net for everyone.
Your PF money being one ATM or one UPI QR scan away is not what should be happening. PF money is for retirement and should be (largely) untouchable by design and intent. This new development is solving a problem now, but creating a really big one for later decades for the common man.
This so-called EPFO 3.0 reform, really needs to be reconsidered to avoid future retirement disaster. Not sure why there isn’t much noise against this.