9 June 2006
“Why did we retune the CPF?”
1 When the growth and employment figures came out for 2005 and the first quarter of this year, we rejoiced that the economy has finally turned up for the better. This has led some people to ask whether the cut in employer’s contribution to CPF will be restored.
2 This shows a fundamental lack of understanding of why we decided to retune the CPF in 2003.
3 There were three reasons: to make our wage costs more competitive; to create and save jobs for workers; and to make older workers more employable.
4 In his speech in Parliament on 28 August 2003, then Prime Minister Mr Goh Chok Tong explained that Singapore’s business cost was previously lower than those in developed countries, and we faced limited competition because many economies were highly regulated and protectionist. Now the situation has changed. Today the cost of doing business here has reached First World levels, and we face fierce competition as countries such as China and India have opened up to foreign investments.
5 The retuning of the CPF in 2003 was to establish a sustainable rate of contribution to meet the three objectives. It was not a short-term measure to get us out of a recession.
6 Long term target contribution rates were set at between 30% to 36% for those below 50 years of age, and between 24% to 30% for those between 50 and 55 years.
7 The salary ceiling for CPF contribution was lowered from $6,000 to $4,500.
8 The changes would be implemented over a 3-year period. So, the lower contribution rates for workers between 50 and 55 years, and the salary ceiling were progressively adjusted. The final adjustments were made only on 1 January 2006.
9 The NTUC actively supported the retuning of the CPF in 2003. The resident unemployment rate was at a record high of 5.2%. It was necessary to slow down the pace of relocation of business out of Singapore, to save jobs. It was necessary to make wage cost more competitive to attract new investments to create jobs for Singaporeans. It was necessary to keep the cost of employing older workers manageable, so that employers will continue to employ older workers.
10 Today the same principles apply. While resident unemployment has fallen to 3.4% in March 2006, what concerns me more is the low employment rate of older Singaporeans compared to many developed countries. (See chart below) The unemployment rate is not a good measure of the well-being of Singaporeans as it measures only the proportion of persons who want to work and cannot find work.
11 We should be looking at the employment rate. The employment rate indicates the proportion of Singaporeans of each cohort that are at work earning money to support themselves.
12 In the past few years, I have been concerned about the relatively low employment rate of older Singaporeans. It partly explains why the household income of the lowest 20% has stagnated or declined in recent years. The point struck home even more vividly in my house-to-house visits on working days during the recent general elections. I asked a man who did not look so old why he was at home. He said he was retired. I asked his age, and he said “57”. I commented that it was too early to retire at 57. He then admitted that he had been retrenched, and could not find a new job. A person like him does not come under our unemployment statistics because he would have declared himself retired. We should therefore be looking at the employment rate so that we can also pay greater attention to helping people like him.
13 So we have to watch carefully our wage costs. Wages can go up only if there is productivity increase. That is the principle we are working on under the Job Re-creation Programme – re-design jobs to raise productivity and pay workers more.
14 Recently, with the release of the NWC recommendations, some people have asked whether the cut in employer’s contribution to CPF will be restored. We have only just completed the retuning of the CPF on 1 January 2006. Now is not the time to consider any restoration.
15 As it is, the pace of restructuring and relocation is relatively high. Retrenchment figures are high. We should not push more employers to relocate faster than we can create new jobs for those who will be displaced.
16 Yes, most workers this year can get slightly better wage increases and higher bonuses because their companies are doing better. There is a choice: pay all in cash, or part of it in CPF contributions. However, most low-income workers will appreciate better an increase in take-home pay to cope with the rise in cost of living. For higher income workers in strong sectors, they can themselves decide to put aside part of their higher wages and bonuses in personal savings. They can even opt to contribute voluntarily to their own CPF accounts.
17 Higher CPF contribution rates will hit many people in sectors where our comparative advantage has been eroded. It would mean less take-home pay for lower income workers. If we care for them, then we should not push for higher CPF contribution rates.
18 For the foreseeable future, I do not see any prospects for higher CPF contribution rates.
19 We need certainty in CPF contribution rates. Then workers can plan on the basis of these contributions, e.g. for their housing. The new rates are more sustainable. As they are lower than before, the scope for CPF cuts to get us out of future recessions is limited. That is why we have to build up the flexible wage system, especially the monthly variable component (MVC). This is well underway in unionised companies because unionists have done their job. Employers in non-unionised companies should get their act together now. They should not expect to be bailed out again by a CPF cut.
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