What does CPF mean to each person?
Over the years, Government Minister's have consistently stated that the basic objectives of the Central Provident Fund (CPF) are savings for retirement, medical treatment, and housing. But what is at the top of each person's mind? Last week, NTUC conducted several discussions with union leaders. After attending the discussions, one of my colleagues in her early 30s, a graduate married with 2 children, sent me this observation:
"At different stages of our life, we have different expectations of CPF. For me - and my cohort - CPF is for housing. Which is why most of us do not really bother about the Minimum Sum, or Medisave retention sum, but more concerned on how much is left from my Ordinary Account (OA) for housing.
For those in their late 40s, they could have grown up kids. The working group may have slightly better savings and income, and therefore may aspire to upgrade. So CPF for housing again.
That is why in the dialogue sessions over the last few days, we do not hear people complaining that the 4% freeze will affect their retirement income, but that it will affect their mortgage loans. Which shows most are committing almost the maximum of their OA into housing.
Urgency to save for healthcare needs will come at a later stage. Children will want to use their Medisave for their parents, so that their parents can draw out the excess from their CPF when they retire. I do that for my parents, and I understand most of my friends do that too.
For those not married, they should have more savings relatively - as they have less to spend on.
In fact, though not many have achieved the Medisave minimum sum, with Medishield, it may not be that inadequate.
I think insurance would serve as a good source of income for many retirees in future, to complement CPF savings. The reach may not be that extensive in the past, but personally I think it is a good scheme of forced savings with protection.
To me, retirement income should be financed with individual savings, insurance, and subsidies from children if any."
However, my colleague knows a single mother who worked hard to raise 8 children, but they seem too caught up with their own families now, giving her little support, if any. I told my colleague that I have seen tears well up in the eyes of 70-year old residents seeking help at meet-the-people sessions when I ask them how many children they have. They know the next question I would be asking is: How much support do they give you each month? Voice breaking, the answer would be "Not much." Yet they would defend their children - saying they life is hard for them too.
Sir, if there is a dis-connect between Government and people, it is because people look at the immediate while Government takes a holistic view. Any unhappiness that people express is understandable because changes affect their immediate needs. The CPF is for their needs over a lifetime, especially their retirement needs. What we should take care to do is make sure the adjustments we make do not cause undue hardship. I believe the ERC's recommendations that the Government has accepted, has done that. It will squeeze some people, but not unduly.
Sir, the ERC has restated the principles of the CPF. This is important. We did not have such a clear set of principles before, so the CPF had become different things to different people.
Objectives of CPF restated
Now the ERC has clearly stated that the CPF is for the broad majority of Singaporeans - those above the lowest 10% and below the top 20% by income. The lowest 10% will need help through other means. The top 20% should be able to plan for themselves.
For the broad middle 70%, what does the CPF provide? Retirement expenditure, healthcare and home ownership - at the basic level. At the basic level. It is a point that has to be highlighted, so that we will not continue to have misconceptions of what the CPF will provide for us. Perhaps it would be better if we define more clearly what we mean by basics. It is our individual responsibility to plan and save for beyond the basics. Like my colleague, who has taken up insurance-linked investments.
But not everyone will be like my colleague. I regard her as belonging to the top 20%. For the broad majority of Singaporeans, their CPF savings provide them their basic needs in retirement. For more than the basics, they should save what they can, and their children should support them.
CPF supplements, not displaces family support
I think we should all remind ourselves that pensions have a history of about 150 years. Our CPF system has a history of barely 50 years. Before pensions and CPF, parents raise their children, and children support their parents when they grow old. This cycle has not changed. For the broad majority of people, CPF supplements the traditional compact between parents and children. Without it, demographic changes will put the traditional compact under severe strain.
Over-consumption in housing
Sir, for a long time now the CPF, working with the HDB, has been more of a housing society to most Singaporeans than a fund for retirement. With Singapore's rapid growth, it has allowed many Singaporeans to upgrade their homes.
Today, more than 90% own their homes. The quality of our housing is already high by world standards. We cannot expect the same fast pace of upgrading to continue. [The Swiss are blessed with more land, and great natural beauty. Many Swiss live on landed property. For those who live in the cities, surely we do not see the majority living in fenced-in condominiums complete with swimming pools!]
Basic needs in housing means first property
Sir, the total CPF contribution will be 40% up to the age of 50 years. It means the CPF will continue to help each one buy his first property. Those who wish to upgrade will have to plan and save separately. The Ordinary Account will be less, most likely not enough for upgrading without other savings. Beyond the age of 50 years, the CPF will concentrate on helping the individual save for retirement spending and healthcare. The prudent valuation limit on use of CPF funds for mortgage payments will prevent the erosion of hard earned savings. This will contribute to a more stable property market.
It will not prevent bubble-like price rises in future, but the swings may not be as wide as the past. Future leaders will do well to remember that in dealing with such situations they should not cause demand to rise further as that would merely pump up prices. The property price index chart, on page 4 of Business Times today, is instructive. Any measure that has increased demand has merely pushed prices up.
Perhaps it is clearer now what the CPF will do for people at different stages of their life. Seen in this light, the change in the long-term contribution rate for those in the 50-55 years age group cannot be described as discrimination against them.
Addressing the seniority-based wage system
Our wage system is seniority-based. As my colleague Matthias Yao (MacPherson) said yesterday, our system is uncommon. I studied wage systems in different countries in the 1980s. So I know our seniority-based wage system is inherently flawed. My younger colleagues in the unions did not take my word for it, they checked themselves, as Matthias Yao said yesterday, and confirmed what I found out almost 20 years ago, that the prevalent system is job rate.
Only the Japanese have a seniority-based system similar to ours. From the late 1980s, Japanese companies have had to change it. Progress was slow. But they have persisted. Let me quote from the article "The death of lifetime employment" in Look Japan, August 2002:
"The second mainstay of the customary employment system in Japan, seniority-based pay, has also changed. An aging society with fewer children is one of the underlying factors. A salary curve that rises sharply along with employees' age was acceptable in times when there were a greater number of young people. The total personnel costs could be suppressed during times like that, because a greater number of people are paid lower wages. But in an aging society it ahs become necessary to revise the seniority-based salary, to keep down total personnel costs. An increasing number of enterprises are raising the proportion of performance-based wages as an incentive for higher performance."
As Matthias Yao said, the right way is job rate. We have pushed that since 1986. Although years of modification has narrowed the gap between commencing and maximum salaries, on average an office clerk in the age group 50-55 is now paid 60% more than one in the early 20s doing the same work; an electrician 40% more; and managers 200% more. With these gaps, 4% points less in employer's contribution means they will still be paid more than those with shorter service.
Helping older employees avoid structural unemployment
There has been another good reason for this reduction in employer's contribution to CPF - to help employees in this age group. They may not see it as such. But retrenchment figures show that a higher proportion of them are laid off when companies restructure. Matthias Yao gave some figures yesterday. We expect restructuring to continue. So why should we place them at higher risk, especially when they also find it hardest to find re-employment? Ministry of Manpower data shows that workers above 40 years take longer to find re-employment. Mrs Yu-Foo Yee Shoon inform members of the experience of South West CDC, where the workers looking for jobs, and having a hard time, are those age 40 and above. MPs can get a good idea of the problem, if they spend time with their CDCs.
Age, not education level, is the key factor. Is it age discrimination? Or is it the seniority-based wage system?
A separate 4-year DOS study of 14,000 workers retrenched from Oct 97 to Sep 98 - the Asian financial crisis - shows that a significant number are now not working (almost 30%). It is a sign that we have structural unemployment. Unfortunately, we must expect more to come.
The DOS findings for those who found re-employment were sobering. More than half had wage cuts: 1 in 7 had their earnings halved; another 1 in 5 suffered cuts between 25% and 50%.
Those who suffered wage cuts were the older ones, aged 40 and above. Again, age is the common factor, not education.
So, to help them avoid the trap of structural unemployment,we have to do several things.
Bring their wage levels closer to their productivity, so they stay in their jobs. Altering our seniority-based wage system to pay by performance is the way forward, but not restoring the employer's contribution helps. Gan Kim Yong disagreed yesterday, saying cutting CPF for older employees will only entrench the seniority-based wage system. But employers' contribution to CPF is also part of total wages. Lowering it will narrow the gap between top-end wages and commencing salaries.
Certainly, adjusting wage costs is not enough. In addition we should retrain them and redesign jobs to raise productivity. The unions have pushed for it. They say employers are not retraining enough. I hope MPs who are in management positions in their companies will give retraining of their employees a greater push.
The ERC's recommendations therefore address several long-term issues, and they help workers over their lifetime. Certainly to some workers, the small changes may hurt. The effects can be mitigated - and employers would do well to make transitional payments to those immediately affected when CPF is restored for those below 50 years. For those working in unionised companies, I am sure they will get transitional payments. Others have said it is unfair to some older workers who are value for money for their CPF not to be restored. Here I fully agree with my colleagues - employers are free to pay them in cash.
It will not be easy to cut CPF in future
Finally, let me highlight another recommendation - that the CPF should be used as a counter-cyclical tool, only as a last resort. Twice the CPF has been used to help us out of recession. Each time we have devised new, flexible elements into our wage system. This means that in future recessions, employers should not expect employer's contribution to CPF to be cut. They will have to work with the wage structure they have. The CPF will focus on providing the broad majority of Singaporeans with their basic needs.
