LONG-TERM CENTRAL PROVIDENT FUND RATES OF CONTRIBUTION

[Mr Deputy Speaker in the Chair]

Resumption of Questions.

Mr Lee Yock Suan: Mr Deputy Speaker, Sir, I was answering a question from the Member for Cairnhill regarding the part-time employees, before we broke off for lunch.

As I explained, the workers in the lower salary group will also benefit from the reduction in the employees' CPF rate. There is, in fact, already a lower rate for workers who earn less than $363 per month. Most of the part-time workers will probably be in this group and therefore their CPF contribution rate will, in fact, be less than for other workers.

There are a number of problems in reducing the CPF rate for part-time workers. One is that there could a tendency for some workers to take on two part-time jobs instead of one full-time job. The other consideration is that part-time workers also need to have CPF to meet the three basic objectives of housing, Medisave and retirement income. Therefore, there are advantages in having a uniform rate for all categories of workers. But we can look further into this question.

I was searching for some data on the number of employees above age 55 years old, in response to the Member for Pasir Panjang's question. Details of CPF members, of course, will be found in the CPF Report. The data here are for employed persons as of now. In the age group 55-59, there are about 37,000 of them; age 60-64, 19,000; age 65- 69, 9,800; age 70-74, 5,300; age 75-79, 1,900; and age above 80, 828. So there are obviously quite a few employees well above 60 years old who are still working.

The Member for Radin Mas asked a number of questions. One of them concerns the cash flow problem, the overall liquidity situation. This was also asked, in a different way, by the Member for Whampoa. At the current rate of 35% CPF contribution, the inflow to the CPF Board roughly balances the outflow. We have estimated that if we increase the CPF rate from 35% to 40%, this will result in a net contribution to the CPF of about $600 million per year. This is something that can be tolerated if the restoration is done over a period of years with economic expansion and also as we liberalize the CPF scheme to open up more investment avenues. So the CPF rate of 40% will be tolerable in terms of the impact on our cash flow, exchange rate, and so on.

The Member also asked whether it is contrary to our objective of encouraging the employment of older workers to have an increase in the employer's CPF rate from 10% to 12.5% for members in the age group 55 to 60. This may appear to be an apparent contradiction. But the important thing to note is that the total CPF contribution rate for employees in this age group will be 25% after the full restoration, which is lower than the previous 50% and lower than the 40% for younger workers. Both the employers and employees' CPF are part of wage cost. There could be adjustments to lower the wage cost for those employees in situations where this should be done. But there could be some workers who are age above 55 who deserve what they are being paid and, therefore, in that situation there will be a slight increase in the employer's rate and the employees' own take-home pay will also go up.

The Member asked what happens to companies losing money. Well, as I have said, we will implement the adjustments in those years when the economy can afford it. Next year, for example, if the economy continues to do well, then we will make the adjustments. In that kind of situation, hopefully most companies will be making money and able to afford a certain wage increase, from which we will take a certain portion for the CPF to make the restoration. Whether companies are making money or losing money, unfortunately they will still have to pay close to the market rates to keep their workers and to make sure they are not too unhappy. So to a certain extent, you can regard this CPF rate as part of market rates. I think these companies should, pursue wage reform vigorously and in that situation a flexible wage will be helpful for them.

The fourth question he posed is that since we are limiting the CPF rate to 40%, which is sufficient for the three basic objectives of the CPF scheme, whether this means that there will be more room for individual savings, for example, for use for education. That is, in fact, the philosophy of the Government - that we should not have too high a CPF rate. We should have a rate that is sufficient for the members to cover the three basic objectives of housing, retirement income and Medisave. Beyond that, it would be better for the members to have a higher take-home pay from which they can save on their own for education of their children, for example, or for other uses.

The Member for Whampoa asked about the macro-economic impact. I think I have answered that question. He also asked how we calculate the CPF rate and whether projections could be made available. The calculations are very complicated. We had to go through computers and there is a whole pile of computer printouts. If the Member is interested, I can show them to him. Basically, we have taken a conservative approach. We have assumed certain moderate pay increases. We have calculated in real terms, that means after inflation. We have also assumed the HDB prices prevailing now, with slight adjustments, and so on. On that basis we projected over a long period of about 30 years from the time a new worker starts work at about 21, 22 years and so on, all the way until age 60. So the CPF rate of 40% maintained over that period until age 60 will be sufficient to cover the three objectives I have mentioned.

The Member for Leng Kee asked a few questions. One was: how long is long-term? I have answered the question. The second one is about assumed inflation rate. We have not assumed the inflation rate as such but we have netted off and calculated in real terms what will be the real increase in prices and so forth.

He posed this question: why do we not vary the CPF rate with income instead of with age? The thinking is that it is better to vary with age because of three reasons. One is that it is more equitable. Everybody pays the same rate more or less. So whether you are at this income level or that income level, the savings are a certain percentage of your income. There is a good reason for this, and that is, a person's expenditure, needs and saving requirements are related to his income. By so doing, we project on a uniform basis for all the employees and the changes are only done with age, beyond 55, to encourage the employment of these older workers. To a certain extent, it also conforms with the cash flow requirements of the workers as they age. In fact, by so doing we are having a different ceiling of CPF contributions for each individual. It depends on this uniform rate and how long he works and how much his income is. It is a better way than, say, having a quantum limit which would in effect benefit the richer workers who are above the cut-off point and there will be a problem of setting the quantum where, at whatever level, it may be too high for the lower income groups and too low for the high income groups. So the idea is to have a kind of a ceiling that is dependent on your income level.

He asked for data on aggregate consumption and savings. I do not have these details here. I will supply him later.

The Member for Paya Lebar, as usual, persists with his question on education. As I have explained, the CPF rate is calculated based on just the three basic needs. That is why we are able to keep it at 40% instead of going all the way up to 50%. If we go all the way up to 50%, it means there will be less take-home pay for the workers. There will be more cash flow soaked up from the economy. Since the CPF rate is only sufficient for the three objectives, it means that if you make any kind of withdrawal from the account for other uses, whatever it is, education for example, it must mean that the savings will be less than adequate for the member concerned. So education has not been taken in as one of the basic objectives of the scheme, the way it is designed.

I have a feeling that the people who are clamouring for the use of CPF for education are the very few privileged ones who can afford to and who want to send their children overseas. It is difficult for the Government to design a scheme to cater for this group of people. Our scheme is meant for the vast majority of CPF members who have very low accounts at the moment. I have mentioned the figure of 85% of CPF members having less than $40,000 in their accounts, excluding housing. If you open this avenue for education, the result will be that there would be more pressure on parents to send their children overseas. As for local education, there is already a loan scheme. I was told by the Minister for Education that, in fact, for this year for the new recruits to NUS and NTI, only about 16% have applied for the soft loan. So, in fact, most parents can afford to send their children to the local universities. But the important point is that we should have a system where the young graduates have a loan and pay off after they graduate, instead of depending on their parents' CPF which are rather low and required for their parents' own old age needs.

I realize that this is an emotional issue and everybody thinks education is very important. I think so too. And that is why the Government is spending so much money on education and is subsidizing it so heavily. But the basic question we have to ask is whether a CPF scheme which is meant for old-age financial security of individual members should be led astray into areas quite unrelated to old age savings.

I think I have covered most of the points.