EPF reduction to 8%, good or bad?
By now, you should know that our government has actually introduced a new policy where employee’s Employees Provident Fund (EPF) contribution will, by default, be reduced to 8% from the regular 11%.
Is this a good move or a bad move?
Personally, I don’t feel it’s a good move. Why?
The government tries to encourage consumer spending with more money at our disposal. But to be honest, 3% is not much of a difference. The average salary in Malaysia is around RM 4k per month. 3% is only around RM 120. What can you do with RM 120 per month? If you’re a financial-savvy guy, you can save it up and put it somewhere, which is a good thing. However, majority of Malaysians are not financial-savvy. They will just spend their money away on unnecessary things.
This brings us to another point, people are still getting poorer. They spend on the WANTS, and not the NEEDS. And some might even spend way beyond their limits. Do bear in mind that we’re talking about middle-income group. If the government wants to help the poorer families cope with the inflation, this is not going to help since the amount is too insignificant. So when people start spending way beyond their limits, another problem will occur – we might end up facing the credit crisis which US is dealing with now.
Also, Malaysians are famous for finishing their pension/retirement fund within the first few years of their retirement. With the amount lessen, it will certainly cause them to finish faster. This is another proof that most Malaysians do not know how to manage their finances.
Last but not least, having more disposable income is not really true. The amount deducted from the EPF will end up becoming your total taxable amount, which also means you’ll contribute more to the government. This is not applicable if you are highly paid since the maximum EPF contribution per person is only RM 500 (according to my company’s HR). Sorry for the RM500 mistake. I’ve checked with my tax agent and this is not true. You can contribute as much as possible to the EPF.
At the end of the day, the one which will earn most from this new policy is none other than our government. Even if this can be considered as “a little bit” useful, it is only for short-term. The long term effect is not showing any positive signs, in my humble opinion.
NOTE: To explain about the RM500 issue. It’s actually about taxable amount. The maximum you can deduct from the net taxable amount is RM500 from the EPF. If your montly salary is RM 8000, your EPF contribution is RM 640 (8%) and RM 880 (11%) but due to the RM 500 thing, your net taxable income will be RM 8000 – RM 500 (from EPF) – other fees. However, if your salary is RM 4000, your EPF contribution will be RM 320 (8%) and RM 440 (11%). Both are below RM 500, so the net taxable income actually differs (RM 4000 – RM 320 vs RM 4000 – RM 440). Hope my explanation is clear enough. 
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Comments
@ Angie
Yeap, our company’s HR will inform us about it. They can submit for us, we just need to sign.
by the token of your post, perhaps you should consider increasing your contribution to 14 or maybe even 17%. Afterall it is just a couple of hundred ringgits.
As I have posted on a few blogs before, this is a rather proven though not necessarily a good method to temporarily increase consumption. Mahathir has done it. Singapore did it and continued with it for a while and planning to do it again. Perhaps Singapore million dollar minister is planning something more sinister?
Cheers.
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@ Fat4s
If I have enough money to pay off my debts, why not? I think at the end of the day, it is the way they “FORCE” implement this policy. When Dr Mahathir did it, it was not a “FORCE”. You fill up the form if you want to reduce the contribution. Now, it is a MUST. It’s a totally different case altogether. If you’re not aware of it, you might realize you have few extra bucks and just spend it away.
Anyway, as I mentioned earlier, it’s not applicable to those with high salary. According to my HR department, the max contribution is only RM500 per month.
Yes, I agree the impact could be minimum – short term and in long term it may hurts more. As we’re all human (government too), who cares about long term? Maybe we can just deal with it later…
Maximum EPF contribution RM500? You mean RM500 the max is to be taxable?
@ ChampDog
Hmm, the max RM500 is questionable. I’m not sure if my source is giving me the right information. 
I’ll have to ask around again. I doubt there’s any limit on EPF contribution.
there a max limit of deductible amount from EPF in income tax form, probably is rm500 per month , any amount over that, u pay tax for the EPF.
remember that they combine kwsp with ur insurance in one column of ur income tax form? there’s a max amount set to it. the amount is so pathetic that the insurance won’t cover enough for ur life if anything happens to u.
damn our stupid government
they should just separate this out and give a higher limit!
@ Kidd
The simple calculation has been updated to this post. This time sure correct already, coz verified by my HR and tax agent. Haha.
Do you mean the SOCSO? It’s irrelevant actually. Not useful whatsoever.
@ kidd
My tax agent is blur case one. My sister. Hahahha. We are good citizen who pays taxes okay…don’t run from it (trying to figure out also but after so many years, I gave up).
It’s not calculated per month, RM500. It’s actually RM6,000 per year of tax relief. This RM6,000 tax relief also including your insurance premium payment.
You can check out on my posting as well, Debunking: EPF 8% Means Paying More Income Tax!!??? for some insights.
Arrivus last blog post..Debunking: EPF 8% Means Paying More Income Tax!!???
@ Arrivu
Thanks for the tips. I must admit I’m an idiot when it comes to taxes and EPF. I’ve read your 2 posts related to the EPF and they are very helpful. Thanks again.
Aha!! This is what I suspected. Lower EPF contribution, increase taxable amount to get more income tax from us so that the government earns more!
Anyway, the form to exempt from getting your EPF contribution reduced will be downloadable by 1st Dec 2008.
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