Careful Mulling Needed Before Raising EPF employer’s contribution to 20%

By Dr Paul Anthony Mariadas

A possible leap from 13% to 20% in employer contributions to the Employees Provident Fund (EPF) is a significant increase of almost 54%. The increase in the employer’s contribution rate will help to address the issue of low retirement savings among Malaysian workers. According to a survey conducted by the EPF in 2019, almost two-thirds of active EPF members aged 54 and below had less than RM50,000 in their retirement savings. This is far below the minimum amount required for a comfortable retirement, which is estimated to be around RM240,000.

On the one hand, increasing employer contributions to the EPF could help to address concerns over inadequate retirement savings and promote greater financial security for employees. This could have broader social benefits, such as reducing the burden on government-funded retirement schemes and improving the overall well-being of the population.

On the other hand, the increase in the employer’s contribution rate may pose challenges for employers. The higher contribution rate will increase their labour costs, which could potentially impact their profitability. In addition, some employers may need to adjust their salary structures to accommodate the higher contribution rate, which could lead to dissatisfaction among employees who may see a reduction in their take-home pay.

Moreover, the increase in the employer’s contribution rate may also discourage employers from hiring new workers. Employers may be hesitant to hire additional staff due to the higher labour costs associated with the increased contribution rate. This could potentially lead to a slowdown in job creation and economic growth in Malaysia.

Whether this increase is too extreme or not depends on various factors, including the state of the economy, the competitiveness of businesses, and the social welfare needs of the population. The proposal to increase employer contributions to the EPF to 20% is a significant policy move that might have far-reaching implications for both employees and businesses in the country. If the proposal is brought to the cabinet for discussions, there are several key points that are likely to be considered.

One of the main considerations is the impact of the increased employer contributions on businesses, particularly small and medium-sized enterprises (SMEs). SMEs form a significant portion of the Malaysian economy, and an increase in EPF contributions could have a significant impact on their financial viability. The government will need to assess how businesses will be able to afford the increased contributions and how it might affect their competitiveness.

Increasing employer contributions to the EPF could potentially impact current discussions and negotiations with regards to minimum wage in Malaysia as both issues are related to the overall compensation package of employees and can have an impact on the cost of doing business for employers. If employers are required to bear the additional cost of increased EPF contributions, they may have less room to increase salaries or implement minimum wage increases. This could create challenges in negotiations between employers and employees, as well as between the government and industry representatives.

However, it is important to note that increasing EPF contributions and implementing minimum wage increases are both important in ensuring that employees are fairly compensated and able to meet their basic needs. Both issues are also related to improving the overall economic welfare of the country, as higher wages and retirement savings can lead to increased consumer spending and economic growth.

The long-term financial sustainability of the EPF is also an important consideration. The EPF has a significant obligation to its contributors, and the government will need to assess whether the increased contributions are sufficient to support the fund’s future obligations while exploring other measures that can be taken to ensure its financial sustainability.

Public perception of the proposal is also a key consideration. The government will need to assess how the proposal is likely to be received by different stakeholders, including EPF contributors, businesses, and the broader public.

If the proposal to increase employer contributions is implemented, the government will need to find a balance between the needs of employees, who would benefit from increased EPF contributions, and employers, who may struggle to bear the additional cost.

One option that can be explored is by implementing the increase in a phased manner, rather than all at once. This would give employers time to adjust to the increased contribution rates and mitigate the financial impact on their businesses. The government could also consider providing incentives or tax breaks for employers who comply with the increased contribution rates, to help ease the burden of the additional cost.

Another approach the government could take is to engage with employers and business associations to better understand their concerns and needs. This could involve consultations and dialogues with representatives from these groups to come up with solutions that work for both sides. By actively engaging with employers, the government could help to build support for the proposal and increase the chances of successful implementation.

The government could also explore alternative funding sources to support the increased EPF contributions. For example, they could consider redirecting some of the revenue from the implementation of a new tax or the collection of unpaid taxes to support the EPF. This could help to alleviate the financial burden on employers while still achieving the objective of increased EPF contributions.

In conclusion, the proposal to increase employer contributions to the EPF to 20% is a complex policy issue that will require careful evaluation and consideration of multiple factors. While the proposal could potentially improve the financial security of EPF contributors in retirement, the government will need to carefully weigh the potential benefits and costs before deciding. Ultimately, any decision will need to be guided by the goal of promoting sustainable economic growth and social welfare in Malaysia.

Dr Paul Anthony Mariadas is a Lecturer for the School of Accounting and Finance at Taylor’s Business School, Faculty of Business and Law, Taylor’s University. Taylor’s Business School is the leading private business school in Southeast Asia for Business and Management Studies based on the 2023 QS World University Rankings by Subject.