EPF 3% reduction - what should you do?

Firstly, on a macroeconomic level, I think this is a good move. Increasing disposable income will increase consumption, hence increase overall economic output - thus the economy will continue to grow.

Taking a more nuanced view - even if a lot of the increased income flows to debt reduction, this means less pressure on capital requirements on bank balance sheets. However, revenues will suffer slightly in the short term but in the medium term, this frees up capital to lend - this will stimulate growth.

So the debate is raging on social media on what should one do and there are of course all sorts of accusations and pictures of calculations showing how much you will pay on GST, taxes etc .. there are so many angry people out there... sigh

My suggestion is very simple - You Do What is Best for YOU.

Don't Listen To People Telling You What They Want You to Do Just Because That Is What THEY Want To Do Themselves!

So what is best for you? I've broken it down to 3 main categories:

A) You should take the 3% reduction IF YOU ARE:

• Carrying a balance on your credit card - at 16% or 17% pa, there is no way that EPF returns can off-set that. So you're better off taking the extra income and paying down your debt faster.
• Living from pay cheque to pay cheque and have no savings - please please please use this opportunity to build up some liquid savings for emergencies.

B) You must not take the 3% reduction IF YOU ARE:

• In your 20's, just started work - even if you have credit card debt but if it is not a lot, you must learn to work within your existing budget and pay that off. Leave your 11% alone to grow in future - by leaving it to compound, your retirement savings will grow much faster!
• Going to spend that money on luxuries that are above your current budget - however, that is what the majority of people will do. Well, I guess if some spending can buy some happy experiences like taking the kids on a holiday that you couldn't have been able to afford, then why not? 

C) Indifferent - minimal impact IF YOU ARE:

• Quite well off, have high income and large EPF balance already - the 22 month 3% program amounts to 66% of a month's income to you - you could leave it in and it will boost your savings a bit; BUT if you wanted to have a bit more liquidity on hand, there's no harm in taking the 3% reduction also.

For C - one possible avenue is thus: you could take some of your existing savings of equivalent value to the 66%, use that amount in a lump sum to either invest or reduce long term debt like a housing loan because you are assured that you can build your savings back up to the original level with the extra 3% per month. 

The premise of this is that you have a savings level that you are reluctant to reduce but with the temporary increase in disposable income, you can similarly temporarily reduce your current liquidity level to retire some debt or can now flow that into less-liquid investments.

So depending on the situation you're in, choose the option that works best for you.

Generally though, delayed gratification is better - let the money grow in EPF. But if you have high interest debt, then it's better to take that extra money to pay it down.