Blurb from the author: The recent cut in workers' EPF contributions, announced in early March, has cast a dark shadow over the country's economy and future. It may sound harmless, but writing this piece made it clear to me that there is a deeper discussion.
This new implementation will take place from April 2020 and should reduce the contributions from 11% to 7%.
All of this is expected to take until December to cushion the blow COVID-19 has inflicted on our economy.
Releasing some money may sound good to some, including me, but then I wondered what our more experienced financial bloggers think of it.
I got the expert opinion from:
A question of perspective
Although this could be a good move in the short term, Suraya agreed that some adverse effects can be expected in the long run.
"I am aware and happy that different ministries and organizations are taking different measures to increase economic participation and income potential at the individual level," she said.
Money Stories From Malaysians is a compilation of personal financial stories across the country that Suraya himself curated (left). She is also no stranger to BFM's podcasts, here she is pictured with Aaron Tang (right) / Photo credit: Ringgit Oh Ringgit
"However, I am concerned that for some reason a significant number of people will still not benefit from these measures, which will burden future government-funded (i.e. taxpayer-funded) support networks as they run out of money after retirement."
For Suraya, who is self-employed, she will continue to monitor her spending only on the basis of strict self-regulation.
On the other hand, Aaron told us that he chose to keep his contributions at 11%. This can be achieved by completing the Borang KWSP 17A and presenting it to your employers.
Sara is also self-employed and already loosely follows the demand to save 11% of her income and will continue to do so. Yi Xuan told us that he practices frugality with his own savings.
Those who benefit against those who don't
Here's the thing. This step to reduce contributions? It is not new at all.
The Malaysian government has done this several times. This happened in 2001, 2003, 2009 and 2016 – often to stabilize our economic and financial structure.
Aaron told Vulcan Post that the act itself, although the storyline itself is not new, is unsettling to say the least.
“What can be different this time is the impact of the corona virus on the economy. If you believe in what many data scientists and doctors say, we may find ourselves in a situation that is once a century or worse. "
Aaron runs mr-stingy.com where he explains how to set a healthy budget, invest and other financial hacks he has learned / Image Credit: Aaron Tang
However, for all bloggers, they can still understand how this move works in favor of those who are already living from paycheck to paycheck.
Suraya gave us a little glitch.
"If we do the calculations, the lower income group or the B40 group, which earns a median of RM 3000 per month, will be exempted from the reduced EPF contribution an additional RM 140 per month," she said.
“This is very important, especially if you have difficulty making a living and are dependent on credit cards and personal loans. You will definitely benefit if you are responsible for resource allocation. "
Suraya Zainudin from Ringgit Oh Ringgit
Sara explained this in a bit more detail, illustrating that those who are short of cash could allocate this to things like medical care, medication and better nutrition to take care of their health.
Sara runs her financial blog Jewelpie to talk about her own personal investments and spending habits / Image Credit: Jewelpie
“It could mean that the elderly get a flu shot or pneumonia at home. It could mean buying more nutritious food. This extra money means a lot to some people, ”she said.
It's great if the hypothetical RM140 can be used to replenish much-needed supplies.
However, if this is not properly allocated or only wasted, it will be 1,260 RM (140 x 9 months) that could be saved by the end of this year.
What should have been done
You have mixed feelings about that
Decision to change the overall contribution rate.
"This step should be reduced back to the default rate after the end of this entire crisis, as the Malaysians do not have sufficient financial knowledge," said Yi Xuan.
Yi Xuan is a full time day trader and investor. He also trains investment sessions (left) to teach other enthusiasts / Image Credit: No Money Lah
Last year, 53% of Malaysians admitted that their savings could not survive for more than three months. So terrifying that we are lacking in this area.
Suraya repeated Yi Xuan's opinion. "Personally, I don't think the government should have introduced reduced premiums. It's like using a patch to close a big, gaping wound," said Suraya.
"If we are heading for a recession (as
many predict) I would like to see the government provide more protection for
those who could lose their jobs, ”Aaron interfered.
He also emphasized more sensitively that another step in the right direction could be to address equal income between employees and top managers / CEOs.
Suraya fully agreed, according to a source that the average CEO salary is 148 times the average worker.
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Personally, I anticipate some potentially negative consequences.
Your EPF is a "forced" savings account. Which means, whether you like it or not, it works.
So if you end up reducing your contributions (converting 4% into disposable income), you can understand how harmful this can be to your savings, depending on your spending habits.
If you already feel comfortable financially and are a bit economical with your expenses, this may have less impact on you.
If you don't, you may be spending this valuable 4% on things that are completely unnecessary.
Such as panic buying. Can you imagine explaining to your grandchildren that you panicked some of your savings to buy toilet paper?
Bottom line: As the bloggers have shared, there are some ways the government can reduce the financial burden on its people, but I believe that EPF reduction is something that works for the sole reason that it takes effect almost immediately, and it does struggling Malaysians to gain access to more disposable income for necessities.
- More information on other finance-related topics can be found here.
Selected image source: (from left) Sara Khong / Aaron Tang / Ringgit Oh Ringgit / No Money Lah by Yi Xuan