Pros and cons to lowering EPF contribution rates

ANY extra cash he takes home is a boon for this 35-year-old engineer who wants to be known only as Ganesh.

The father of two young children in Kuala Lumpur – one of whom is in kindergarten – says an additional RM200 would be beneficial.

“It might not seem like a lot but it provides some breathing space and some room to spend on my family,” says Ganesh, who is the household’s sole breadwinner with a take home salary of about RM6,000 a month after deductions.

While he can get by on that amount, some months can be a squeeze. So Ganesh is receptive to the suggestion that his mandated contribution to the Employees’ Provident Fund (EPF) be temporarily reduced.

Currently, employees contribute 11% of their salary to the fund while employers must put in a minimum of 12% for salaries more than RM5,000 and 13% for salaries lower than that.

Earlier this month, the Malaysia Retailers Association and Malaysia Retail Chain Association (MRCA) urged the government to temporarily reduce workers’ EPF contributions by 3% to mitigate business losses due to the current Covid-19 outbreak.

Similarly, the Malaysian Employers Federation expressed hope that the government will reduce employers’ and employees’ EPF contributions by 2% for the time being due to the novel coronavirus disease epidemic.

The proposals have received a mixed response from EPF members.

A promoter in a KL mall who identifies herself only as Zarina says that while she would be happy to have extra money in her pocket, she would likely save it for a rainy day anyway.

“We don’t know how long this outbreak is going to last and what impact it will have on the economy,” says the 29-year-old. “I’m more worried about whether I’ll still have a job at the end of the year or even in six months.”

For cleaner Siti Zubaidah Othman, who works in a shopping mall in Petaling Jaya, lowering her EPF contribution rate will not make a big difference to her monthly spending.

“My pay is low anyway and I’m struggling to make ends meet,” says the 41-year-old. “Coronavirus will come and go but my problem continues the same….”

This EPF measure is not new and has been introduced in the past, with the government lowering contribution rates in 2001, 2003, 2009 and 2016. In 2016, for example, the government lowered employees’ contribution rate to 8% from March of that year until December 2017.

Economist Prof Dr Yeah Kim Leng believes that if the government were to consider the proposals, employees must be given the option to choose whether to lower their contribution rate or keep to the present percentage.

“I think allowing employees the option to reduce their EPF contribution will be one way to boost their disposable income. But it has to be optional to allow flexibility, as not all employees are affected, only those in some sectors,” says Yeah, a professor in economics who is Malaysian Economic Association deputy president.

However, lowering employee EPF contributions can also have negative effects, he adds.

“Although it is a temporary move, it nevertheless will have the long-term effect of reducing employee savings, which are already currently low for many employees,” says Yeah.

“The concern is for the long-term impact on employee welfare, especially when many employees currently do not have adequate savings for retirement.”

While the Covid-19 outbreak has discouraged overall international travel, the situation in Malaysia is showing some improvement as 17 patients have recovered and been discharged. The total of confirmed Covid-19 cases here remains 22, with only five patients still receiving treatment in hospitals.

The outbreak, however, has taken a toll on the tourism and retail sectors, with the MRCA claiming that many of its members have reported sales drops of 50%, with some expecting revenue to further drop by more than 80% over the next three months.

Prime Minister Tun Dr Mahathir Mohamad will unveil an economic stimulus package on Thursday to mitigate losses from the outbreak so that affected businesses can continue their operations and be ready to reap the benefits when the economy rebounds.

“If the outbreak is prolonged, it could potentially result in a more pronounced (economic) slowdown. The stimulus can be enhanced to support affected sectors to ensure employment can be sustained and businesses do not face bankruptcies,” Yeah explains.

Any attempt to reduce EPF contributions is akin to “adding salt to the injury of suffering workers”, says the Malaysian Trades Union Congress (MTUC).

“EPF acts as a deferred savings account. Contributing to it forces a savings habit and helps build a long-term source of money after retirement or in an emergency,” MTUC secretary-general J. Solomon tells Sunday Star.

“By reducing the contribution, the government and employers are actually converting these savings into disposable income, which could lead to reduced savings and, subsequently, social consequences, including old age poverty,” he says.

Soloman argues that reducing workers’ EPF contributions could hasten the fall into the poverty trap.

“While employer groups seek to reduce their contribution by between 2% and 3% during ‘difficult times’, they have never offered to increase their share of EPF contributions when companies do extremely well.

“Or will they compensate for the current proposed reduction by giving back that amount in better times and further increase that by 2% to 3%?”

The few times that the government implemented an EPF contribution cut, workers were given an option to maintain their contributions at the full rate, he adds.

Financial planner Rajen Devadason says that if the government launches an initiative to reduce statutory EPF contributions, every single wise employee should fill out the needed paperwork to keep their contribution at the present higher rate.

“Our EPF savings are the bedrock of our retirement funding programmes. We shouldn’t short-change ourselves by opting to pay less into EPF today because that will mean we have much less than we otherwise might have in EPF in the future,” points out Devadason.

Devadason says that given the rising levels of longevity risk Malay-sians are facing due to lengthening lifespans, as well as an increasingly expensive future, we need to establish and stick to a budget so that we can live well later in life.

The EPF declined to comment on the proposals but yesterday, it announced its dividends for 2019: 5.45% for conventional savings and 5% for syariah savings. This is the lowest dividend rate for conventional savings declared by the pension fund since 2008.

EPF chief executive officer Tunku Alizakri Alias attributed it to increased “volatility” in the world last year: “As anticipated, we saw substantially more volatility in 2019 compared with 2018. Certainly, 2019 exemplified what it means to be living in a volatile, uncertain, complex and ambiguous world,” said Tunku Alizakri in a statement.

He added that EPF expects 2020 to be just as or even more challenging than 2019, with the full impact of the Covid-19 outbreak likely to drag down already soft global growth.

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