Why you should not opt to cut your EPF?

Money in your EPF account is sacrosanct because it provides for you in old age. Make sure you make the right choice for yourself and keep your contribution to the EPF at the higher level.

In tough times, tough decisions are required. Sometimes these are made in such a haste that all the ramifications are not properly thought through. And they are implemented in a manner that those affected do not fully realise the implications.

One such decision is to allow employees to opt to reduce their contribution to the Employees Provident Fund (EPF) for two years from Jan 1, 2009 from 11% of salary to 8%. That has good effects from the standpoint of the nation, but bad ones from the point of view of the individual and his long-term retirement savings.

It is plainly evident what the Government is trying to do here. There are two prongs – to increase the amount that wage earners have to spend and by spending the extra income to contribute to economic activity.

While those aims in themselves are noble, they have not taken into sufficient account the negative effect it will have on the retirement savings of those affected, which is already too low for the vast majority of EPF contributors.

There is a great need to give a better savings security net in retirement, particularly since the retirement age has been set so low – at 55. With life expectancy at least a good 20 years beyond, most people already cannot depend solely on the EPF for their retirement needs.

First, some figures. If a family earns RM4,000 a month and assuming that they contribute to the EPF, and they opt to lower their contribution, the extra disposable income or money they have to spend is 3% of that or RM120 a month or RM1,440 a year.

That’s admittedly not a huge sum of money but it would provide some relief in difficult times and when cash is needed.

However, there will be positive effect, assuming all the money is spent, on the country’s output of goods and services.

Some economists maintain that if all those eligible opt for reduced contributions, the impact on national income will be to increase it by half a percentage point, which is not nearly enough to avoid a recession which is a contraction in income.

From the national point of view the increased spending will help, in a very small but significant way, to keep economic growth in positive territory, that is help to ensure the production of goods and services increases.

But it comes at a cost in terms of effects on the over 10 million people who contribute to the EPF.

For our example of the person who earns RM4,000, the contribution foregone to the EPF is RM1,440 a year or RM2,880 for two years.

Assuming an average return of 5% a year from the EPF, which is not unreasonable, that amount, over 20 years will become more than RM7,500.

That means if you are 30 and earning RM4,000 a month now and opt for lower contributions, you will get RM7,500 less in EPF retirement benefits at 55, assuming the average interest rate from the EPF is 5% a year.

Some people would argue that it is a relatively small amount and therefore would not figure much in the overall scheme of things, but that’s not the right way to look at things.

Considering longer life expectancy, people, especially wage earners, should be looking to put aside enough for their retirement years.

Every little bit helps. In fact there is a strong case for increasing both employers and employees contributions to the EPF so that the retirement nest egg becomes bigger.

Therefore every effort should be made to resist any change that would make the retirement benefit smaller.

One other thing that is disappointing is the way the Government has decided to go about doing this. If you want to keep your contribution at 11%, then you have to fill up a form to let the EPF know your wishes.

That clearly is designed to ensure most people unwittingly agree to opt for the lower contribution by not doing anything.

The right way to have done this is to require those who want a change from the current practice to fill up the form.

In its haste to keep the economy going and using all means, however small their effect, to do this, the Government has neglected its duty to the working person – helping to ensure he has enough for his retirement.

No matter how little or how much you earn, it is important to ensure you save some of it. For most of us, the EPF is that system of enforced savings. It must be always sacrosanct – it must be left untouched or used only for the most important purposes.

In this case, you must take matters into your own hands when the Government wants you to do something which may not be in your best interests.

So when the EPF sends its forms out to your employers, make sure you fill it up and state clearly you want to keep your contribution at 11%. The difference will mean thousands of ringgit many years down the line, money that will help you live better in your old age.