By Chee Jo-Ey
YESTERDAY, my colleagues and I received a memorandum from the Human Resources (HR) department reminding us of the reduction of Employees Provident Fund (EPF) contribution rate of employees from April 1 to Dec 31, 2020.
On Feb 27, then-interim Prime Minister Tun Dr Mahathir Mohamad announced an economic stimulus package that included the measure of reducing the EPF contribution rate for employees from 11% to 7%.
For the uninitiated, a stimulus package is a package of economic measures put together by a government to stimulate a floundering economy. The objective of such a package is to reinvigorate the economy by boosting spending.
So, in the name of saving the Malaysian economy from the financial consequences of the Covid-19 outbreak, employees’ contribution to their retirement savings will be reduced so that they will have more money at hand to spend.
An economist might see the temporary measure as a logical move to help cushion the depressive effect of the virus outbreak on the economy as people travel less, go out less and spend less. By having more cash in hand through the EPF rate cut for employees, people may be able and willing to spend more which would help to drive consumption growth.
But is spending more and saving less the right move for us little guys right now?
In uncertain times like this, should we not be saving more for rainy days? When it comes to retirement savings, we know every cent matters and, not to mention, the compounding interest of our EPF savings.
Take, for example, A who earns a monthly salary of RM4,000. EPF declared a dividend of 5.45% for 2019. The reduction of four percentage points from 11% to 7% translates to A contributing RM160 less to his retirement savings with a loss of RM8.72 dividends every month (assuming a dividend rate of 5.45%). By December 2020, A would have contributed RM1,440 less to his EPF with a loss of RM78.48 in dividends for a total of around RM1,520.
This may translate to a small amount in terms of opportunity cost, but one has to remember that it is important to save for retirement. Even if the reduction is just until the end of the year, and assuming a return of 5% a year, calculations indicate that RM1,520 you could have saved becomes RM6,570 in 30 years. Why lose that for some extra to spend now?
The memorandum also advised that employees may choose to maintain the contribution rate of 11% by completing the form KWSP 17A (Khas).
However, how many of us would really take the extra time to fill up the form and send it to HR? But we advise that you should – the difference in the years to come will amount to thousands of ringgit forgone every time the government wants to “stimulate” the economy by asking you to spend.
Perhaps it should be the other way round, whereby the EPF contribution rate for employees would only be reduced if they fill up a form and not to have their contribution rate reduced by default like now.
It is important to note, however, that this is a common measure to counter economic woes, and it is also the usual practice for the government to revert to a higher EPF contribution rate when the situation is under control.
But I always think it is better to play safe and save as much as you can when it comes to the golden nest egg.
As EPF was set up to help Malaysians save for their golden years, that should be the priority. – March 3, 2020
