EPF percentage monthly reduction – Did you make it right?

Based on the growth trajectory of the EPF fund before COVID-19, The Edge predicted that its fund size would reach RM 1 trillion by the end of 2021. 

Amidst pandemic in 2020, EPF still managed to nail a stellar performance in 2nd and 3rd quarters, which is one of the best in at least 16 quarters. In 2019, EPF has ranked the 12th worlds largest pension fund and 7th respectively in Asia. It also paid more than 5% in dividends annually to its members except in 2008 during the global financial crisis which led to a payout of 4.5%. 

Well, for those who always plan to save more than they could spend, it is fair to say that it is hard to pass a judgement that those who opted for 11% of EPF contribution had made an irrational choice. EVERYONE knows they should save for a rainy day especially during this pandemic, not to mention more than 30% of Malaysian live from paycheck to paycheck and worse, most of us are currently stuck in the “middle-income trap” where the more we earn doesn’t proportional to the more we save. 

So the question remains, are some Malaysians making the right choice of opting-in the 9% of EPF contribution?

Perhaps if not in the financial standpoint, a psychological point of view upon Heuristics practice, quick decisions with minimum contemplations. Or in the marketing world, we like to call it social proof. 

Most of you would probably still make the right decision. Shockingly, as many as 5.4 million out of 7.49 million active members of Employees Provident Fund (EPF) members have decided to opt-in for 9% from January 2021 onwards, not to mention I who wrote this article too, opting for 9% contribution. 

With the vast amount of knowledge and expertise out there in the world, most of us in our lifetime relied a lot on Heuristics practice to navigate the complexity and to stay safe although it can be costly sometimes where it can lead individuals to miss critical information and unjust biases, like queueing up for a long queue for food that presumes to be good. Does it sound familiar to you?

Now, coming to the spectrum of socio-economic standpoint, which is the exact reason why our government decided to allow members to reduce the 11% statutory monthly contribution to 9% to assist Malaysian in boosting their disposable income during the COVID-19 pandemic when our Finance Minister Tengku Zafrul tabled the budget 2021 last November 2020. As you all can see, most of us require extra cash to standby for the potential and what already happening is the economical loss in individual level like for instance the reduced income or potential loss of side income. Some of us simply couldn’t wait till retirement age to utilize the savings as the situation in COVID-19 forces some of us to strive for survivability to put food on the table daily. It is no better to spend on saving than it is now if the situation demands it, isn’t that after all what savings are all about? 

This is not the first time that the EPF contribution rate has been adjusted due to the pandemic. In February 2020, the rate was reduced to 7% for the duration of April to December 2020 as part of the Economic Stimulus Package – although members were also allowed to opt-out from the lowered contribution rate too. Hence, I believe such precedent has given most Malaysian a basis or reference point on whether we have made a sound decision not only for ourselves but our families too.

Conclusively speaking, if you are not strained financially, maintaining at 11% would be the wisest thing to do since EPF has never really failed us when it comes to their annual performance and good payout. Besides, a soon to be trillion ringgit-dollar fund does have an impact on how the portfolio is going to be more rewarding in the future. However, let’s not forget the fundamental reason why we are asked to save since we are young. Because we always need to prepare an umbrella before it rains. And now, it seems to rain around the globe where many people are losing their livelihood. Isn’t that the situation we are facing now in Malaysia? So, it is fortunate not only that we are given a flexible choice to choose what rate of contribution we are going to opt for EPF, on top of that the government has allowed EPF Account 1 withdrawal to further facilitate Malaysian in navigating through the hardship during the pandemic or the rainy day.