To cut or not to cut EPF contributions?

It may be a good idea to have a mandatory cut in EPF deductions. This will ensure workers have more disposable income. On the other hand, some would prefer to maintain their rate of contributions.

LOWERING the rate of employees’ contribution to the Employees Provident Fund (EPF) temporarily is part of the Government’s bag of tricks to rouse the economy. We saw this in 2001 and 2003, for one-year periods, and we are seeing it again with the stimulus package announced on Tuesday.

This time around, an employee can reduce his EPF contribution from 11% of his salary to 8% for two years from Jan 1. The idea is to boost private consumption by putting more money in workers’ pockets.

Unlike the last two occasions, the next rate cut will be on a voluntary basis. The Government has estimated that RM4.8bil a year will be freed up for spending in the economy if all EPF contributors opt for the rate cut.

That will not happen. It may even be over-optimistic to expect half of the contributors to make that election. It is likely that the majority will stick to the status quo given the choice.

We do not know yet the exact mechanism that will facilitate the rate cut.

One possibility is that the reduction will be instituted automatically unless the employees instruct otherwise. That does not quite fit the definition of voluntary and it will be an administrative hassle for employers and the EPF.

It may be a good idea for the Government to reconsider the proposal. Why not make it a mandatory two percentage-point cut across the board?

We are clear about the argument that increasing workers’ disposable income is good for the economy.

If a lower contribution rate helps us all, why the need to leave it to our discretion? Do the authorities make it optional when they raise or lower taxes and interest rates?

Macroeconomic management is already hard enough because of the imprecision and lack of predictability.

A compulsory two percentage-point rate cut ensures that the economy will get a RM3.2bil injection. This is far better than hoping that we can have enough of the EPF contributors agreeing to contribute 3% less.

We should bear in mind that the lower EPF contribution rate simply means we have more money in our hands and not that our money is being taken away. It is up to us what we want to do with the extra cash.

Besides, how many times have we heard about the difficulties EPF faced in investing the billions of ringgit it is managing? And how often have we griped about the relatively low dividends?

Of course, there will be those who still want to have their money under EPF’s stewardship. That avenue is still open.

The EPF Act 1991 allows contributors to deposit amounts exceeding the statutory rate. It requires a bit more effort and time, but if setting aside money for a rainy day is important to you, this is a minor hurdle.

If we really believe in the merits of saving for our old age, we need not be legally compelled to do so. But more to the point, what does it say about us if we can’t even trust ourselves to put the extra money to good use when handed back 2% of our salary that would have otherwise gone into our EPF accounts?

By : Errol Oh

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  1. To cut or not to cut?

    For me, EPF is one of many long-term saving options that is unique in terms of how much control does the saver has over his own savings.

    Our own bank account for example, gives us about 90% control. Unit trusts fund is more flexible at about 50-50 controlling power divided among the agent and his/her client.

    From this point of view, the Gomen has total control over its people's EPF or KWSP accounts. We made the choice to give up controlling power the moment we accepted that job offer. And thus, we should trust any decisions made by the person we entrust in the first place.

    This does not mean that we are unequivocal towards bad decisions. Remember, we do have that remaining 1%


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