LONG-TERM CENTRAL PROVIDENT FUND RATES OF CONTRIBUTION

Mr Lee Yock Suan: Mr Deputy Speaker, Sir, the Government has completed its study on the appropriate long-term rates and structure of Central Provident Fund contributions. The present contribution rate is 10% for employers and 25% for employees, making a total of 35%. After careful study, taking into consideration both social and economic factors, the Government has decided on the following rates. The target CPF total contribution rate is 40% for members below age 55, 25% for those aged 55 to 60, 15% for those aged 60 to 65 and 10% for those above 65 years old. The employer's and the employee's contribution rates will be equal.

I now ask the Clerk of Parliament to distribute an Annex (Cols. 1425 - 1426) which shows the target CPF rates. Annex - TARGET LONG-TERM CPF RATES (Cols. 1425 - 1426)

[Copies of Annex distributed to hon. Members.]

Projections of CPF Balances

Computations of CPF balances at ages 55 and 60 have been made for different income groups of new CPF members assuming various CPF contributions rates. These members are assumed to purchase housing commensurate with their income levels. After providing for Medisave, the end balances are computed and converted into equivalent monthly annuities to compare with the members' projected take-home pay. We can thus assess whether the end balances will be adequate for the members to live on over their average life span after retirement.

The target CPF contribution rates will be just sufficient to provide for the three basic objectives of retirement income, housing and Medisave, if the CPF member retires at age 60. He would have a CPF balance which would be sufficient for him to draw down at the rate of about 20% to 40% of his last take-home pay. Most workers should continue to be gainfully employed to age 60 or beyond, even though they will be able to withdraw their CPF savings at age 55.

CPF Rate for Older Employees

The Government encourages employers to extend the retirement age from 55 to 60. With longer life expectancy, workers should continue to be employed as long as they can be of value to their employers. 60 is already the retirement age in the Civil Service.

However, with long seniority-based time scales, the wages of older workers may be higher than the market values of their jobs. Simply raising the retirement age without correcting the wage structure will burden companies with higher wage costs and impair their competitiveness.

To lower the cost of employing older workers, the Government will progressively reduce the total CPF contribution rate beyond the age of 55 as shown in the Annex. But this by itself will not solve the problem. Wage reform must also be pursued vigorously, to shorten the wage scales and cap the salaries at the top of long scales. New, lower salary scales beyond age 55 may also need to be worked out.

Employers and unions should therefore begin to negotiate higher retirement ages and new wage scales for older workers in their collective agreements. The retirement age should be raised progressively to 60, except in those jobs which are unsuitable for older workers. One way to do so is to phase the adjustment over, say, five years. Thus employees who are now 50 years old and below will retire at the age of 60, those now aged 51 will retire at the age of 59, and so on.

The Government would like to see the retirement age raised on a voluntary basis, by agreement between employers and workers. It will review the situation in three to four years to decide whether any further measures should be taken.

As regards the CPF rates beyond 55, most CPF members aged above 55 would have met their housing commitments in full and do not require as high a CPF rate as younger members. For those still servicing housing loans, it is important that they continue to be employed so that they will have the means to service their loans. They also need to accumulate further savings in their Medisave accounts to better provide for their medical expenses which are likely to increase with age and with improvements in medical science.

Special Account

Contributions to the Special Account have been suspended since April last year when the CPF contribution rate was cut by 15 percentage points. With future increases in CPF contribution, up to 4 percentage points will be channelled into the Special Account.

This will help to ensure that members do not invest their entire CPF savings in property but will retain a cash reserve to provide them with at least a small income after retirement. However, some existing home-buyers have already committed to housing loans based on the previous 50% CPF rate. They will be permitted to draw on their Special Accounts to meet their committed loan instalments after they have exhausted their Ordinary Accounts.

The Special Account will also serve as a buffer which can be more readily adjusted in a recession as the funds are not committed for housing.

Implementation

We must restore the CPF rate without hurting our international competitiveness. The restoration will be phased in over several years, in step with economic growth and increased productivity. The adjustments for older workers will also be in gradual steps.

As the economy is still recovering from the recession, the CPF rate will remain unchanged this year. Next year if the economy continues to improve, the Government is likely to raise the CPF rate with effect from 1st July 1988. Employers and employees should already take this into account in their wage negotiations this year.

For example, if employer's contributions are raised by 3 percentage points, and employee's contributions are reduced by 1 percentage point, the total rate will be increased by 2 percentage points for workers below age 55. Simultaneous adjustments will also be made for older workers.

This adjustment would increase employer's wage costs by 3% and employee's take-home pay by 1%, even if basic wages remain unchanged. Both employer's and employee's contributions are part of total wage costs. The CPF rate increase must therefore be part of an agreed overall wage increase for the year, and not be added on to it. The Government will decide on the 1988 adjustments to the CPF contribution rates after the economic results for the first quarter of 1988 are known.

Similar adjustments in the years when the economy is performing well will gradually restore the total CPF rate for workers below age 55 to 40%, consisting of equal contributions by employers and employees.

Mr Lim Boon Heng (Kebun Baru): Mr Deputy Speaker, Sir, the Minister's Statement is welcomed and I think it will be generally supported by both employers and employees. It is good to know what the long-term rate of CPF contribution by both employers and employees is going to be.

I have a few questions to ask the Minister. First, I would like to ask him to clarify how he intends to implement the CPF contribution rate beyond the age of 55. It is not quite clear to me in the Statement. Second, since the Minister has suggested that lower wage scales beyond the age of 55 may be necessary and that this should be taken into account in wage reform, is he not concerned that inclusion of this item in current wage reform negotiations may slow down the process? Third, is the Minister suggesting that, in general, wage scales should be lower for those above 55? Will there not be cases where the wage scales may, in fact, be higher beyond the age of 55? Finally, will the Government set a stronger example in employing older workers? Whilst the Minister has stated that the retirement age for workers in the public sector is 60, in fact those who were employed before 1st July 1956 have their retirement age still at 55. Would the Government consider raising the retirement age for these workers also to 60 years old?

Dr Ang Kok Peng (Bunoa Vista): May I refer to the Annex provided just now? At column 1, under Age of Member, line 2, you have 55-60, and line 3, 60-65. Is there not an error?

Encik Abbas Abu Amin (Pasir Panjang): Sir, I wish to commend the Hon. Minister for the efforts made in introducing the long-term CPF rates of contribution. The proposed scheme is a step towards consolidating our efforts at safeguarding the interests of our people, especially the older workers. When successfully implemented, the new CPF scheme ---

Mr Deputy Speaker: Encik Abbas, are you making a speech?

Encik Abbas Abu Amin: I am asking a question later on, Sir.

Mr Deputy Speaker: No. Could you ask your question now?

Encik Abbas Abu Amin: I would like the Minister to clarify some of the points that I have here. (1) Based on the current collective agreement, what is the percentage of contributors in the age groups of 55-60, 60-65, and above 65 years old? These are the age groups that are directly affected by the new scheme. (2) Will the public sector take the lead in raising the retirement age from 60 to 65 years? (3) How will these proposed CPF rates affect the public sector employees who are on the pension scheme?

Mrs Yu-Foo Yee Shoon (Yuhua): ( In Mandarin): I would like to ask some questions.

First, I would like to express my support for the Minister's suggestions about these new CPF measures. Just now the Minister announced the long-term CPF rates for workers below 55 to above 65 years old. Would the Minister let us know in greater detail the time-frame for these measures, whether it is over a period of three years or five years or ten years for the gradual implementation of the varying contribution rates. Another point is about the decreasing rate of CPF contributions for workers under 55. Will the Minister take into consideration their ability and needs for saving for old age, Medicare and public housing?

Dr Wong Kwei Cheong (Cairnhill): Sir, firstly, how many collective agreements in Singapore are there, for workers with retirement ages beyond 55? Are there any such collective agreements with reducing wage scales for those above 55? If not, how will the Ministry go about encouraging in future, as the retirement ages are increased, reducing wage scales for those who are beyond 55?

The second question I would like to ask is about the target total CPF rates announced. Are they going to be the maximum rates on a permanent basis? Or, would these target rates be changed as our economic performance improves in the years to come?

My third question is, since I believe the objective of this whole exercise in restructuring the CPF long-term rates is to encourage more older workers to join the work- force so as to reduce our tight labour situation, there is also another pool of workers, part-time workers in particular, who should be considered. If you look at the Female Labour Force Participation Rate, it drops very quickly after the age of 25. This shows that many of our female workers, after marriage, do not join the workforce. May I ask the Minister whether he is willing to consider reducing the CPF contribution rates for part-time workers? If they are reduced, then factories for example, can start 4-hour shifts and engage many of these females who are not able to work on a normal 8-hour shift.

Mr Chng Hee Kok: Mr Deputy Speaker, Sir, I welcome the Minister's Statement. I also commend him for the work he has done in arriving at the conclusions.

I have four questions here. The first refers to the 4% that is to be locked up in the Special Account. This Account is soaking up funds. How will this affect the economy in the years to come? The second question is that the rate targetted for the age group of 55-60 is going to be increased from 10% to 12.5%. Is this not contrary to our aim of encouraging employment of people above the age of 55? Should this not remain at 10%?

The third question is, this increased CPF contribution will come mainly from future wage increases. How will this affect companies which are not in a position to give the recommended wage increases? For example, companies which are not doing well and are not, in fact, in a position to give any increase at all. The last question is this. Setting the target rate of 40% to take into account old age, housing and medical needs, does this mean that there will be no room for other uses of CPF, like education?

Dr Augustine Tan: Mr Deputy Speaker, Sir, these target long-term CPF rates appear to have been set to satisfy housing needs, retirement and health needs. My first question is, would the Minister supply the basis of his calculations to this House? In other words, what exactly are considered to be housing needs? Does he consider a 3-room flat, a 4-room flat, or is allowance being made in his calculations for upgrading of flats? And how many upgradings has he allowed in his calculations?

Secondly, Sir, has he taken into account the macro- economic considerations from the overall savings investment needs of the economy? Because there has been a concern expressed in the last couple of years that we are over- saving in relation to the investment requirements or what we can invest in our own economy. So were the macro-economic considerations taken into account? If so, could he supply the details to this House?

Dr Ow Chin Hock (Leng Kee): A few questions for the Minister. First, a simple one. How long is long-term? Five years, 10 years, 30 years? The second question is a related question. What is the assumed or expected inflation rate over this period? Thirdly, has the Minister considered varying the contribution rates according to income levels rather than age groups or in addition to age groups? If not, is he implying that differential rates based on income level is less equitable than the differential rate based on age? Finally, how will the new rates affect (a) aggregate consumption, and (b) national savings ratio.

Mr Philip Tan Tee Yong (Paya Lebar): Mr Deputy Speaker, if I am not mistaken the Minister mentioned in this House that, to release funds for education, CPF rates would have to be increased. Now with the long-term increases in mind, will CPF for education be considered?

Mr Lee Yock Suan: Mr Deputy Speaker, Sir, as usual, Members have shown very keen interest in this issue and I thank them for their questions and comments. It will give me the opportunity to clarify various aspects.

I will deal with the questions in the order they were raised.

First, the questions from the Member for Kebun Baru. How will the new CPF rates for those above age 55 be implemented? The answer is that as we adjust the rates for the younger workers, we will also adjust the rates for the older workers. So both the rates for the younger workers and the older workers will be in phases. The time scales may not be identical but the basic concept is that it is better to phase in the rates to allow the people affected time to adjust, both the employers as well as the employees.

Second question: whether this call to employers to negotiate, if necessary, lower wage scales beyond age 55 will cause delays in the wage reform process? Yes, it is true that wage reform is very important and I hope the employers will not delay unduly. With economic recovery on the way, it is important that they reform the wages as soon as possible. That obviously is top priority. But at the same time the Government is keen to raise the retirement age to 60, progressively. So it may be a good idea if we can start work straightaway and if the employers and the unions can get together to discuss this issue. It does not mean that wage scales will have to be lowered for all workers beyond age 55. There could be certain categories of workers, for example, brain services, where, in fact, the performance improves with experience and age. But there are certain other jobs, say, the manual ones, where clearly some workers may be overpaid when they are at the top of their wage scales. In those situations, I think it will not be feasible to simply insist that the employers raise the retirement age. What we have done is to lower their CPF rates to make it possible to lower the cost of employing the workers without affecting, if possible, their take-home pay. But it may not be sufficient in some cases, for example, where the wage scale is very long. There are some situations where the older employees at the top of the scale may be paid as much as three times the starting salary. So if we assume that the correct market wage may be somewhere in the middle, those at the top may, in fact, be paid 50% over their market value. The adjustments in the CPF rates may not be sufficient to correct for this factor. So it is important that both union leaders and the workers realize that it is in their self-interest to make the necessary adjustments, not only through the CPF rates but also, if necessary, through wage scales. Otherwise there will be no employment opportunities beyond 55.

The third question: I think I have already answered it. It is not necessary that this will apply in every case. We are proposing these new rates for the different age groups. The rates will apply across the board to all the workers in the same age group. The expectation is that with negotiations, adjustments and so on, we will eventually reach a new equilibrium where the rates are at those levels and hopefully the workers will also be employed up to age 60 or beyond, and the economics will sustain that kind of a situation.

Question No. 4: Will the Government set the example by also extending the retirement age of public sector employees who were employed before 1st July 1956? It is true that those employees who joined the Government before 1st July 1956 have a retirement age of 55. Those employed after that date form the vast majority of employees and with few exceptions, for example the uniformed services, the retirement age is now 60 for the public sector. Whether the Government will consider raising it for the other groups, I think the numbers affected are small because most of them would have retired by now. This is a question that I will pass over to the Minister for Finance because it is really in his field and it has to be looked into further.

The Member for Buona Vista pointed out a technical error in the Annex. I thank him for it. Of course, at age 55, there is this question of the birthday - whether you are just below or above 55. The first line "below 55" means up to but not including age 55, and the other column "Above 55" means 55 and above, and so on. So this is the borderline situation.

Coming now to the Member for Pasir Panjang. He was asking for numbers affected in the different age groups. I do not have the detailed numbers on CPF contributors with me. It should be in the CPF Report but I have some figures on the number of people employed beyond age 55. I think the figures should be quite similar. I will supply the data to him later on.

His question No. 2: Will the public sector take the lead? The public sector has, in fact, taken the lead for many years already. The retirement age is in fact 60 for almost all employees in the public sector who joined on or after 1st July 1956. That was 31 years ago. By now the majority of those who joined before that date would have retired. But it is important that Government should set the lead. I would also appeal to all the union leaders and the public in general to understand the issue and make the necessary adjustments. The retirement age is already 60 or 65 years in most developed countries. Our life expectancy has gone up. At the present moment it is about 75 or 76 years for males and 78 years for females. We are somewhat similar to the Japanese situation 15 years ago. Right now the Japanese life expectancy is about three years more. By the turn of the century, our life expectancy may well be in the 80's. So it is important that the employees should continue to work as long as they can. That is why the Government is so keen to raise the retirement age.

The question was raised: What would happen to the CPF rate of pensionable officers? This is a detail which we are working out and there are various other details which will be announced in due course.

Coming now to the questions from the Member for Yuhua. She asked for clarification of the time-frame for implementing the transition to the new rates. I have mentioned that if things go well, we will make our first move next year. Then we will have to observe the economic performance every year and, if conditions permit, we will make the adjustments. It is difficult to put an actual time-frame on it. It will depend on economic performance. But the intention is not to delay this unduly. I do not know, it may take five years. It depends on our economic performance.

She asked whether we have considered the problems of those above age 55 in implementing the new rates. I think she has in mind mainly this question of housing loans. We have some data on this. There are about 7,200 CPF members who are above age 55 and who are still servicing their housing loans with CPF contributions. The important thing for this group of workers is that they should continue to be employed beyond age 55 because without employment there will be no pay, no CPF. So what we are trying to do is to make it feasible for them to go on working beyond 55.

We have done a study of numbers affected by the new CPF rates. Of those above age 55, we reckon that not more than 500 persons will be in some difficulty, in the sense of having to dip into their pockets beyond their CPF balances. As for the other members, there are about 280,000 CPF members who are still servicing housing loans, both private and public. We estimate that perhaps 10,000 may have to supplement their loan instalments with cash. The number is actually very small as a percentage of the total number who are still servicing their housing loans and there are various schmes to assist them, for example, the HDB scheme of extended repayment, ballooning, and so on. As for private property owners, we have a bridging loan scheme. But as of now, only 17 persons have made use of the scheme. So there does not seem to be a very big problem for this group of people.

On this question of housing, I should elaborate a little bit. Before the CPF cut, out of the 50% CPF rate, 40 percentage points went into the Ordinary Account which could be used for housing. After the cut, out of the 35%, 29 percentage points went into the Ordinary Account. So it was reduced from 40% to 29%. With the restoration to the final 40% rate for workers below 55, 30 percentage points will go into Ordinary Account, 4 percentage points into Special Account and 6 percentage points into Medisave. For those members who have housing loan commitments, they will be able to make use of the 30% in the Ordinary Account plus the 4% in the Special Account, if they have exhausted their Ordinary Account. In addition, they will have the 5 percentage points which will be the reduction in the employee's CPF rate. This will go into their pocket as increased pay and they can make use of that to service their housing loan instalments. So all in, they will have 30% plus 4% plus 5%, a total of 39% points to service their housing loans. This is almost the same level as before, 40%. In addition, the CPF contribution will increase as salaries increase over the years. So the quantum will increase. We do not think the housing problem will be a serious one.

The Member for Cairnhill has asked for data on the number of collective agreements which provide for retirement age above 55. I have some data here. If we exclude the marine officers who are on short-term contracts, there are about 933 collective agreements at present. Out of this number, 136 or 15% specify retirement age of 60 years. Some even provide for employment beyond 60, subject to mutual agreement and health permitting. 11 collective agreements provide for retirement at age 57 or 58 years. 67 collective agreements do not specify the retirement age. I think they will follow the norm of 55 at the moment. The remaining 719 collective agreements specify retirement at 55 years, the majority of them with the option to be re-engaged subject to medical fitness and mutual consent. This is the baseline from which we hope in three to four years' time to go generally to 60 years.

The Member also asked whether there are any collective agreements where the wage scale is reduced after age 55. I am not sure of this point. But again I want to emphasize that this is not something that will have to apply to everybody. In fact, for those workers who are very valuable to the employers, there is a possibility that the salary will be maintained and therefore with the lower CPF rates they will have more take-home pay. Or to go one step further, if they are really that valuable, through private negotiations, there could be enhancement of salary since the CPF has been reduced. So there will be all kinds of situations. But I think in general where productivity has gone down with age then it is fair that there should be some adjustments.

The Member asked the question: What are target rates? Do they represent a cap on the CPF rates? I think the Member for Leng Kee also asked a similar question. How long is long-term? The answer is this. We have done a careful study of all the factors and the conclusion is that 40% is enough for the three basic objectives of housing, retirement income and Medisave. Therefore, we will restore the CPF rate progressively to this final 40% and the intention is to hold this 40% for as long as we can to give stability both for employers and employees. But there could be economic situations where we have no choice. For example, there could be a severe bout of recession before we have built up the variable wage component. The preference will be to vary the wage component first and not touch the CPF. We will not touch it unless we cannot avoid it. It will be a kind of last resort. There could be another situation where we have hyper-inflation when it may be wise to soak off some of the money into CPF. Both these situations will be temporary situations, the intention being to restore back to the 40% as soon as possible. This is the meaning of target rates.

The Member also asked the question about part-time workers, whether we could lower the rates to encourage their employment. This is something that requires further study. But in relation to this question, I would like to clarify that at present those workers earning below $363 per month, in fact pay less than the full CPF rate. The employers pay the full rate but the employees pay less than the current 25%. Those who are earning less than $200 per month pay nothing. The employee's CPF contribution is zero. At $200, the rate is 10% and then it goes up progressively to 25% at $363 per month. With the cut in the CPF rate on the employee's side, the lower paid workers will similarly get the benefit of lower CPF contributions on their part. In other words, those earning $200 per month will pay eventually 5% instead of 10% and so on. So they will benefit by the full 5 percentage point cut. Most part-time workers, I think, will be in the ---

Mr Deputy Speaker: Order. It is 1.00 pm. I suspend the Sitting and will take the Chair again at 2.30 pm.

Sitting accordingly suspended at 1.00 pm until 2.30 pm. Sitting resumed at 2.30 pm