Author’s Blurb: The recent lowering of employees’ EPF contributions announced early this March cast a grim shadow over the country’s economy and its future. It may sound harmless, but writing this piece helped me realise that there’s a deeper discussion to be had.
This new implementation will take place starting April 2020, and is meant to reduce contributions from 11% to 7%.
All of this is expected to last until December in order to cushion the blow that COVID-19 has dealt our economy.
Freeing up some money may sound good to some including myself, but then I wondered what our more experienced financial bloggers thought of this.
For that, I got the expert opinion of:
- Suraya Zainudin of Ringgit Oh Ringgit
- Aaron Tang of Mr. Stingy
- Yi Xuan of No Money Lah by Yi Xuan
- Sara Khong of Jewelpie
A Matter Of Perspective
Although it might be a good move for the short term, Suraya agreed that some adverse effects could be expected in the long term.
“I am aware and glad to see various measures implemented by various ministries and organisations to boost economic participation and income potential on an individual level,” she said.
“However, I am worried that a significant number of people will still not benefit from those measures for whatever reason, thus will strain future government funded (thus taxpayer funded) support networks as they run out of money after retirement.”
For Suraya who’s self employed, she’ll continue to monitor her spending based on strict self-control alone.
On the other hand, Aaron told us that he opted to keep his contributions at the 11% rate—which can be done by filling up the Borang KWSP 17A and submitting it to your employers.
Also self employed, Sara already loosely follows the requirement of saving 11% of her income and will continue to do so, and Yi Xuan told us that he practices frugality with his own savings.
Those Who Benefit vs. Those Who Don’t
Here’s the thing. This move to reduce contributions? It isn’t new at all.
The Malaysian government has done this a number of times. It’s happened in 2001, 2003, 2009 and 2016—often done to stabilise our economical and financial structure.
Aaron told Vulcan Post that although the act itself isn’t new, the current reason behind it is troubling, to say the least.
“What may be different this time is the effect of the coronavirus on the economy. If you believe in what many data scientists and doctors are saying, we may be in a for a ‘once-in-a-century or worse’ kind of situation.”
For all of the bloggers, however, they can still understand how this move works in favour of those already living paycheck to paycheck.
Suraya gave us a little breakdown.
“If we do the maths, the lower-income group or B40 group, who earns a median of RM3000 per month will see an additional RM140 per month freed up from the reduced EPF contribution,” she explained.
“That is quite significant, especially if they have been struggling to pay for life’s necessities and are dependent on credit cards and personal loans. They will definitely benefit if they are responsible with resource allocation.”
Suraya Zainudin of Ringgit Oh Ringgit
Sara explained this in a bit more detail, by illustrating that those tight with cash could allocate this on items such as medical supplies, medicine and better nutrition to take care of their health.
“It could mean getting the flu shot or pneumonia jab for the elderly at home. It could mean buying more nutritious food. This extra money means a lot to some people,” she elaborated.
It’s great if the hypothetical RM140 can be used to stock up on much needed supplies.
But if that’s not properly allocated, or just wasted, that’s RM1,260 (RM140 x 9 months) that could’ve been saved by the end of this year.
What Should Have Also Been Done
They do have mixed feelings about the decision to change contributions rate as a whole though.
“This move should be reduced back to the default rate once this whole crisis is over, considering the lack of financial literacy amongst Malaysians,” Yi Xuan elaborated.
Last year, 53% of Malaysians admitted that they wouldn’t be able to survive for more than 3 months with their savings. So terrifyingly enough, we do lack in this area.
Suraya echoed Yi Xuan’s opinions. “I personally think that the government shouldn’t have implemented reduced contributions. It’s like using a band-aid to close a big, gaping wound,” explained Suraya.
“If we are headed for a recession (as many predict), I’d like to see the government come up with more protection for those who might lose their jobs,” Aaron also chimed in.
On a more sensitive note, he also highlighted that another step in the right direction might be to address the income equality between employees and top executives/CEOs.
Suraya totally seconded this, as according to a source she had, the average CEO’s salary is 148 times the average worker’s.
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Personally, I do foresee some potentially negative consequences.
Your EPF is a ‘forced’ savings account. Which means whether you like it or not, it goes.
So if you do end up reducing your contributions (and therefore converting 4% to disposable income)—you can understand how detrimental that might be for your savings, depending on your spending habits.
If you’re already financially comfortable and somewhat frugal with your spendings, it might not affect you as much.
But if you’re not, you might just end up spending this precious 4% on things that are totally unnecessary.
Like panic buying, for example. Can you imagine explaining to your grandchildren that you spent a portion of your life’s savings panic buying toilet paper?
Bottom Line: Like the bloggers have shared, there are a few ways the government can ease the financial burden of its people, but I believe that the EPF reduction is something that works, for the sole reason that it takes effect almost immediately, allowing struggling Malaysians with access to more disposable income for necessities.
- You can read more about other finance-related pieces we’ve covered here.
Featured Image Credit: (From left) Sara Khong / Aaron Tang / Ringgit Oh Ringgit / No Money Lah by Yi Xuan