CENTRAL PROVIDENT FUND AND RELATED CHANGES

Debate resumed.

The Minister for Manpower (Dr Lee Boon Yang): Mr Speaker, Sir, thank you for allowing me to join in the debate.

Yesterday, Deputy Prime Minister Lee announced the Government's acceptance of the Economic Review Committee Work Group's recommendations on Central Provident Fund and related issues. Since then, 38 hon. Members have spoken mostly in support and also, at the same time, to raise valid and important points to reflect public concern on these changes. Sir, I would like to take this opportunity to respond to Members' queries and concerns. But before I go into the specific issues raised by individual hon. Members I would like to say something about the employment market to provide a backdrop for the Government's acceptance of these wide-ranging recommendations.

First, I want to talk about the changes in the external environment and the employment market. From 1990 to 1997, Singapore's economy grew strongly. Employment creation rose by 413,200 jobs in total, and that did not include jobs that were created by the construction sector. Members will remember those were the boom years, and the construction sector was going great guns. So if we took those out, in effect, we are talking about creating about 52,000 jobs a year. That is more than the average cohort of young Singaporeans entering the workforce. The result is full employment for many years.

However, much has changed in the last five years. The 1997 Asian financial crisis caused a downturn in 1998. Then, after a brief recovery, we were hit by the global economic slowdown in 2001. These are some of the shifts. Some of these are cyclical trends which come and go. More importantly, over and above these cyclical changes, we also have to face structural challenges ahead of us.

The emergence of new players bigger and better endowed than Singapore is rapidly reshaping our business environment. Multi-nationals are on the prowl looking for locations which can offer more comparative advantages. That is why Singapore and many other ASEAN countries face strong competition from China for investments and job creation. In the manufacturing industry, China's vast resources of land, labour and the sheer enormity of its domestic market give it a comparative advantage way ahead of us. Furthermore, we are not only competing against countries like China. In the higher value-added industries, Singapore faces competition from the mature developed countries such as the Netherlands, Ireland, Denmark and Finland. These countries have highly trained, highly skilled, very creative and innovative workers much needed by the knowledge economy.

Because of intense economic competition, and the rapid pace of corporate restructuring, our employment patterns will change. Instead of secure jobs in stable companies, the future will see frequent job creation and job destruction at the same time. This is already happening in countries such as the US, when many jobs are being replaced or lost, while new jobs are being created in different industries. So, how will these changes affect us here in Singapore?

Sir, we cannot compete on low cost manufacturing in the years ahead of us. This is not where we have a comparative advantage. Instead, we must shift into higher value-added production and services over the years in the future. A decade ago, investments in Singapore amounted to S$3.3 billion (based on 1990 prices), creating 18,000 jobs. 33% of these jobs were jobs requiring people with at least NTC-2 qualifications. Last year, investment commitments were more than doubled at S$8.3 billion. But these investments will result in only 24,000 jobs. However, three-quarters of these jobs will be skilled jobs. So, for every investment dollar in future, fewer jobs are going to be created, but more of these jobs will be skilled ones requiring skilled workers.

Likewise, we are also experiencing more job turnovers in Singapore. Singaporeans of all ages and educational qualifications have been affected in the process of economic restructuring. Even when the economy was growing strongly in the years between 1991 and 1996, the number of workers retrenched rose at an annualised rate of 17%. Whilst we were enjoying good economic growth, some years 6-8% growth, we were still seeing increased number of workers being laid off purely as a result of the retrenchment from structural changes taking place in the company. Whilst new jobs are being created, the demand will be for more skilled and knowledge workers.

Under such circumstances, older workers will be hard hit by this changing environment. This is in part because a significant proportion of our older workers have only secondary and below qualifications. Hence, they do not have the skills necessary for the new jobs that are being created. But, even for some of the older workers with higher educational qualifications, on-going restructuring is creating difficulties for them, and they face greater job competition.

In March this year, the unemployment rate of residents aged 50 to 55 years was 4.6%. This is significantly higher than the 4.1% for workers aged 40 to 49 and the 3.9% for workers in the 30 to 39 age group. However, it is still lower than the unemployment rate for young workers below 30, which stood at 5.5%. Recently, the media and yesterday several Members in this House - as pointed out to me by my Minister of State, Dr Ng Eng Hen - had mentioned that the unemployment rate for the 50-55 stood at 11%. I think this was a mistake. Somehow, it has crept in. People have got this impression that it was 11%. Let me say that this was a mistake. It is wrong. It is not the right figure. We do not have double-digit unemployment rate in Singapore, not even for the older workers. But this is no cause for comfort. When an older worker is retrenched, he or she tends to remain jobless for a longer period. As Deputy Prime Minister Lee pointed out yesterday, last year, older job seekers aged 50 to 55 experienced a median duration of unemployment of 21 weeks, compared to 14 weeks and below for younger workers. The re-employment rate for workers above 50 was 37% compared to 56% for younger workers.

Sir, there are jobs available in Singapore, and most of these older workers are able to do these jobs. But it may be a different job, in a different sector, which requires the older workers to make an effort to learn a new skill. Otherwise, older workers will have to accept lower wage. And, in fact, older workers above 50 who found re-employment were already likely to earn less than before their retrenchment, as mentioned by DPM Lee yesterday. Clearly, what is happening is that we are experiencing growing structural unemployment and older workers are facing the greatest risk of prolonged unemployment.

Faced with growing global competition, changing corporate structures and the emergence of new employment trends, we have to examine our existing systems and structures to identify whether they will still serve us well in the new operating environment. It is the recognition of these new trends and growing threat of structural unemployment that has prompted Government to accept the ERC Work Group's recommendations to restructure the CPF system.

Where the CPF is concerned, this institution has stood the test of time. As both Senior Minister of State, Mr Tharman, and DPM Lee had said, the CPF has served us well and is in no danger of a collapse. Going forward, we are confident that it will continue to serve us well, provided we refine and retune the system for a more competitive environment.

Sir, I will not dwell on the core areas of retirement, housing and health care. These have been more than adequately addressed and explained by DPM Lee.

In refining the CPF system, we must take care not to add to or reinforce existing rigidities in the labour market, which could eventually make the Singapore worker less competitive than his counterparts in other countries. It must be made more flexible and more resilient so as to better serve workers.

The Government knows that these changes will cause some difficulties for some of our CPF members, for example, the 50-55 age group or those earning above $5,000. We are sympathetic that they have to make this adjustment. But the underlying driving forces causing job losses in many sectors, namely, global competition, corporate restructuring and the changes in the employment trends, will only get stronger with time. We did not cause these changes. But we cannot avoid them. So we must adjust to them. Sooner or later, we have to adjust. It is better to make these changes earlier, so that the younger members have more time to prepare and will be better placed to face the realities of competitive global environment.

Sir, I would now like to turn to the issues raised by hon. Members. I will group them into key areas where the changes have been recommended, starting with the Minimum Sum. The recommendation is to retain the Minimum Sum, the present framework, to reach $80,000 by July next year.

Mr Yeo Guat Kwang supported the concept of maintaining the Minimum Sum framework and he asked if Government were to revise the Minimum Sum, what will be the future Minimum Sum like. I believe Dr Amy Khor also supported the idea of raising the Minimum Sum and emphasised that it should be done gradually.

Sir, we started to revise the Minimum Sum back in 1995. By next year, ie, after 8 years, we will reach the target of $80,000. That Singaporeans need a higher Minimum Sum in future is beyond doubt. The Government will study what would be an appropriate Minimum Sum and the schedule of implementation after we have achieved our current target. The amount will be increased, taking into consideration inflation, higher standards of living and the rising expectation of basic retirement needs. In response to Dr Khor who pointed out that we should move gradually, let me assure Members that we will give CPF members plenty of time to adjust to any revision in the Minimum Sum in future. We will certainly not rush this issue. We took eight years in the last revision. We can take equally long, or maybe a little longer.

Mr Chew Heng Ching asked whether we will allow members to opt out from the Minimum Sum Scheme, if they have a pension plan. Let me point out that, in fact, this is already the existing position. Members who, upon reaching the age of 55, can enjoy a pension that will pay them an annuity, or a monthly pension, more than what the Minimum Sum can pay, will be allowed to withdraw their Minimum Sum. Those who have enough in their CPF account can convert to an annuity at the age of 55. An annuity which will pay more than what the Minimum Sum would allow them to draw on a monthly basis would also be allowed and, in fact, we encourage them to withdraw all their CPF to purchase their annuity, or to place it in a bank which will then allow them to withdraw a monthly amount. So, in fact, we already have this mechanism.

Next, I turn to the Special Account where the recommendation is to increase the contribution rate from our present rate of 4-6-6 to 5-7-9 for the different age groups. Here, like Mr Seng Han Thong, I was also quite surprised that Mr Low Thia Khiang has taken a fairly strong position on this issue. He has agreed with the gradual adjustment, and he also pointed out that it will get people to be more self-reliant. I agree with him. I would like to say that his idea is not wrong, in principle. And I am also very glad that he supports the Government's principle of putting more into the Special Account and also cutting back on the contribution to the Ordinary Account for housing. However, his scheme of having four age groups contributing 7-9-9-6 to the Special Account is quite drastic. It is front loaded, very heavy for the younger workers, and will make it very difficult for young people to start buying their first house. So we have no reason to cause people to delay marrying, starting a family and buying a home. In fact, that is what our home ownership programme is all about.

Our concern is that they over commit either by buying too big a house, or by upgrading beyond their financial limits. So the way to address this concern is to have a Special Account which increases with age. So there has to be a balance. The ERC Work Group's recommendation of having 5-7-9 percentage point contribution to the Special Account strikes a better balance between old-age needs and housing needs of the younger CPF members. The proposed four-step rate by Mr Low Thia Khiang would have too adverse an impact on the existing younger members, ie, those in the 35-45 age group. The sharp increase in the Special Account contribution would seriously affect their ability to service their existing mortgages. For new members adopting the four-step proposal it will delay their ability to purchase a first property using their CPF savings. So, on balance, I would not be able to support Mr Low's proposal and I would prefer to go along with the ERC's recommendation of 5-7-9.

Mr Othman Haron Eusofe, Mdm Yu-Foo Yee Shoon, Mr Andy Gan, Dr Chong Weng Chiew and Mr Zainudin have all spoken on the proposal to facilitate pooling of CPF funds for investment in private pension plans. They support the idea, but they urge the Government to enhance public education in the use of pension plans because they have serious doubts whether the average Singaporean knows exactly how to participate in a pension plan.

Sir, public education on the use of CPF investment scheme or pool pension plans would be critical for its acceptance by Singaporeans. We agree that Singaporeans need to understand the concept and the mechanics of how a pension plan works in order to be able to take full advantage of the potential to enhance their savings through pension plans. So public investor education on pension plans should be driven along three tracks - the Government, the non-profit industry body as well as the financial institutions and fund management companies operating pension plans.

On the part of the Central Provident Fund Board, we will disseminate information to enhance consumer awareness of pension plans. We will promote public investor education on pension funds through publicity activities as well as in collaboration with agencies, such as the Ministry of Community Development and Sports and the Financial Planner Association of Singapore. Industry bodies, such as the Investment Manager Association of Singapore could also help consumers learn more about pension funds. The relevant Government bodies will work with these industry players to promote better understanding of pension plans.

Sir, CPF Board will also study existing restrictions, such as foreign currency denominated equity, and the difficulty faced by CPF members to have a flow through of CPF contributions to pension plans. We will facilitate members' access to these pension plans. Finally, the financial institutions and the fund management companies themselves should also promote their products professionally.

Sir, with each party playing their part in providing information and educational material, CPF members should have ample opportunities to better understand the use of pension plans for their financial planning. What we hope to achieve is to provide all the information to CPF members so that he or she can make an educated decision on whether to join any pension plan. The CPF Board cannot make this decision for the members.

Dr Ong Chit Chung suggested that we confine investments under the CPF Investment Scheme to investments in unit trusts and pension plans, and not to share purchases. We have been moving in that direction. We started out with a fairly liberal regime under the CPF Investment Scheme where members can invest about 80% of their investible funds in shares. Then we scaled it back to 50% and, I think, more recently, it was scaled back to 35%. On the other hand, we allow them to invest up to 100% of the investible funds in the professionally managed funds. We also allow them to use their Special Account savings for such investments. So we are moving in that direction, scaling back on the personal investments in shares, where there is a highly speculative element, and encouraging members to move towards professionally managed funds.

Next, on the salary cap recommended by the ERC Work Group, that is, to lower the salary cap for CPF contribution from $6,000 to $5,000. Dr Teo Ho Pin asked whether the reduction in salary ceiling will affect the members' ability to upgrade their housing type in future. Sir, let me point out that the changes will be implemented gradually in tandem with CPF restoration. We still have this outstanding 4% CPF that has got to be restored for most of the workers over the next three, maybe four, years, depending on how the economy performs. So any negative impact on mortgage payment would thus be moderated because we are not implementing this measure in one go. The labour market itself will adjust to the reduction in the employer's CPF contribution, and part of this will work its way back into the member's salary which he can, of course, use to service his mortgage.

Mdm Ho Geok Choo and Mr Andy Gan asked whether reducing the CPF salary ceiling may lead to higher take-home pay for those earning about $5,000 or above, but as a result of higher take-home pay, they would end up paying more taxes. Are they not worse off than before? Reducing the salary ceiling for CPF will enable them to have a higher take-home pay. We have to look at it this way. All along we have used CPF for the past 47 years as one-size-fits-all kind of plan. Everybody contributes the same amount. But increasingly, we notice that, for the higher income earners, there is less need for them to have the same level of mandatory saving as the lower income. I think we should start to free up some of this, allow those in the higher income to have more control and discretion over how much more they should save. Hence, the idea of trying to limit the CPF to serve the 10th to 80th percentile group.

Sir, the ERC Sub-Committee's recommendation to lower the salary cap from $6,000 to $5,000 should also be taken together with the previous recommendation to lower personal income tax. So CPF members in this income tax group facing a cut in the ceiling will also benefit, to some extent, from the new tax regime that was announced by DPM in the Budget Statement. Furthermore, for the higher income group, while income tax obligation may go up, we now have a mechanism called the Supplementary Retirement Scheme for them to make tax exempt investments to mitigate their tax burden. So there are offset mechanisms available for this group of people who will enjoy a higher take-home pay as a result of this change in the ceiling.

On the point about the income floor, the recommendation here is to raise the income floor for employee's CPF contribution for low wage earners. Many MPs have spoken on this. Mr Gan Kim Yong, Mr Heng Chee How, Mdm Yu-Foo Yee Shoon, Mr Ravindran, Mr Sin Boon Ann, Mr Ang Mong Seng, and Miss Penny Low all supported this move. They understand that it will allow the low income group to have a higher take-home pay, and this is welcome.

The idea behind this move to raise the CPF floor level is to encourage more part-timers to enter the job market. Because in the past, with a wage floor of $200 attracting CPF contribution, many would-be part-time workers, or odd job workers, say that by the time the CPF contribution is deducted, the take-home pay becomes so small and miserable that they just did not feel sufficiently incentivised to take on the job. So, with this raise of the CPF floor to $500-$750, we hope that more homemakers and housewives will join the workforce to supplement their household income. Others who will benefit from this change include the odd-job workers. We hope that the higher take-home pay from odd jobs will encourage more of such people to enter the job market in this manner.

I also like to point out that there is no reduction to the employer's CPF contribution for this group of workers. So although they are not making full contribution, as an employee, they still receive full employer's contribution and they are still saving some money for their old age. And with the higher take-home pay, they will be supplementing the family income and, I think, that is good for the family. Of course, there are those with very low income and they would have great difficulty saving for their future retirement needs, and this is the group that may eventually have to fall upon some social assistance measures. We also have schemes, such as Medifund, to look after the very poor to help them meet their medical expenses. We have rent and utilities assistance scheme and also many other community welfare schemes to help the very poor. When the economy does well and the Government is able to achieve a budget surplus, then we will try to give some CPF top-ups or New Singapore Shares. We can try to allocate more to those who are poor and those who are in greater need of such help.

The subject of older workers aged 50-55 has been the most controversial element of the recommendations of the ERC Work Group. Many Members have spoken on this.

First, I would like to respond to Mr Leong Horn Kee, who suggested that the reduction in CPF contribution for the group of workers aged 50-55 should not be done now, but should be done for future cohorts of older workers. We are beginning to see the emergence of structural unemployment, as I explained earlier on. It would be unwise and irresponsible for this Government to pretend that there is no problem now and to leave the problem to be tackled for future cohorts of workers. The problem is emerging now. The sooner we tackle it, the better off we are. We should give notice that we are going to make this move. The change itself is going to be phased out gradually, so that it is not a sudden shock.

Mdm Ho Geok Choo observed that the non-restoration of CPF contribution for the older workers in this age group will result in an 8% reduction in the Ordinary Account, from 22% currently, to 14%, and this could affect their ability to meet their mortgage payment. Workers in this age group will see an 8-percentage point reduction in the Ordinary Account as a result of the non-restoration of CPF contribution, together with a 4-percentage point reduction in the employee's contribution, and also the migration of 1-percentage point to Medisave and 3-percentage point to Special Account under the earlier recommendation.

But the 4-percentage point cut in the employee's CPF contribution is not lost to the employee. It becomes higher take-home pay for him. So, he should be able to use that to supplement his mortgage payment through his CPF account. Effectively, the reduction for this age group is only 4-percentage point, because today they are already short of 4-percentage point which is not going to be restored. So, the effective reduction is the 4-percentage point which will be migrated to his Medisave and Special Account. We feel that the shortfall in mortgage repayment will not be as drastic as suggested by this presentation that the Ordinary Account has been reduced from 22% to 14%. The impact is less than that.

I would also like to remind Members that DPM Lee announced yesterday that CPF members who are affected and are in this age group will be allowed to draw on their Special Account to meet their mortgage payment. This will help those in the 50-55 age group during the transition period to ease their financial burden.

Mr Steve Chia yesterday supported the changes recommended by the ERC. But he asked that we should not micro-manage the CPF system, that we should let employers and employees to decide on their own contribution rate, based on company performance. Dr Jennifer Lee, Mr Sin Boon Ann and many other hon. Members asked whether a 4-percentage point reduction in employer's contribution will be effective. Will it only just hurt the worker by cutting his CPF, without actually enhancing his employability? We have to look at it in totality. Freezing the contribution rate at 16% is one of the many measures to help enhance the employability of older workers, and these are the older workers who are at greatest risk of retrenchment and who are most vulnerable.

Sir, we have, over the years, tried to narrow the salary minimum-to-maximum ratio for workers doing the same job. Because of our seniority-based wage scale, this minimum-to-maximum ratio is quite wide. In some industries, it may be as wide as two or even more than two. However, despite many years of effort, the seniority-based wage system is still deeply entrenched in Singapore. Not many employers are able to change the system on their own. Any change will also result in much unhappiness.

Many Members who expressed reservations over this recommendation had also at the same time considered that wage cost is not an insignificant factor. For example, Dr Jennifer Lee noted that wage cost is a factor, although she questioned whether this 4-percentage point reduction would make a big difference.

Mr Speaker, Sir, we agree that we should make greater effort to replace the seniority-based wage system, or to progressively change it to a system where wages are paid based on value of jobs and performance. But this will take time. We just cannot wait for the seniority-based wage system to be completely phased out over many, many years, in order to address the immediate problem of rising structural unemployment. We have to move on every front. We have to tackle the problem in many ways, because this is a problem that cannot be solved with one magic bullet. It is a problem that requires a plethora of solutions or efforts in order to address it.

Sir, neither can we leave it entirely to the workers to negotiate with their employers, as suggested by Mr Steve Chia. If, in fact, our CPF structure today reinforces or makes the seniority-based wage system even more inflexible and difficult in this competitive environment, then we should be prepared to restructure and change it to make it more relevant to the current employment market.

Sir, while many Members have questioned whether the 4-percentage point reduction will be sufficient on its own, I would like to point out that, yes, a 4-percentage point reduction is not a very big difference. It is not a solution or alternative for the seniority-based wage system. But it is a move in the right direction. It sends a strong signal. Here, I am cheered when Mr Ahmad Magad expressed the view that, in fact, it is a pragmatic way to address the rigidity in our labour market. Likewise, Dr Amy Khor and also Dr Warren Lee have expressed support for this move and said that it will help us to address the seniority-based wage system.

So, on balance, while this is an issue that many Members have reservations, we must also recognise that the seniority-based wage system is going to be here for quite some time, and we will have to begin to address it, and this is the first step that we are taking to address this issue.

Mr Chiam said that the freezing of the employer's CPF for the 50-55 age group is unfair to the older workers, and that the 4% saving is not a sufficient incentive to employ workers. As I said, in itself, it may not solve the problem completely, but if it is seen as part of the rest of the measures - some of which I will touch on later on - it is a step in the right direction.

Mr Chiam went on to say that it is unconstitutional. Surprise! Surprise! If it is unconstitutional, he himself has decided not to do anything, but he suggested to my colleague, the Secretary General of NTUC, that the unions should do something about it, because this is unconstitutional. If indeed this is unconstitutional, Mr Chiam knows what the remedy is. If he feels that this measure is unconstitutional, he knows how to take it up. So, I would ask Mr Chiam to follow up, rather than ask the trade unions to do it, because the representatives of the trade unions have in this House supported such a move. As Mr Nithiah Nandan has pointed out, he has to deal with his members' anxiety and difficulty in finding re-employment, and he sees this as one of the helpful measures. Even though it is not the single most important solution, it will help his members in addressing their structural unemployment concerns. So, I will leave it to Mr Chiam. If he sincerely believes that it is unconstitutional, he certainly knows what to do with it.

Dr Ong Seh Hong made an interesting point that by freezing the employer's CPF contribution for the 50-55 age group, we are creating a situation where there is no longer equal pay for equal work. I do not quite understand the logic behind that. I would like to point out that under today's seniority-based wage system, there is already an element of distortion. In some jobs, where two persons are doing the same work, an older person can get paid one-and-a-half or even twice as much as the younger person. So, there is already this element. What we are doing with this freezing of the employer's CPF contribution is to take one small step to try to level the playing field, to try to bring it back, and make it more equal. So, I hope that Dr Ong, who believes in equal pay for equal work, will support the NTUC in their effort to promote revision of the seniority-based wage system to promote paying workers by job rate. If he does so, then he will be helping us to overcome the rigidity in our employment market.

When we accept this recommendation to freeze the employer's CPF contribution, employers should also not just stay put and keep to the old mindset about older workers, and be too quick to want to release older workers in the event that they have to restructure or reorganise their companies. We hope employers will be more open-minded and more willing to employ older workers. Many of the older workers are equally productive and reliable in their jobs. In this regard, our employer organisations in Singapore have a very important role to play in changing the mindsets of employers. DPM Lee had already announced yesterday that the Government will set the example in the civil service by providing civil servants with a special payment, the Transitional CPF Non-restoration Top-up Component, to offset the non-restoration of the 4% CPF contribution. I certainly hope that this will send a strong signal to employers in the private sector to consider adopting the same approach to return all or part of this non-restored CPF portion to older workers who are making good contribution to the company. Employers can do so by way of giving mid-year and end-of-year bonus or some other variable payment.

Sir, many other Members have also spoken about the need not just to freeze the employer's CPF contribution to enhance employability of the 50-55 age group, but also to enhance their skills. Skill is a very important factor. I agree with Mr Othman Haron Eusofe, Mr Heng Chee How, Mdm Halimah Yacob, Mr Yeo Guat Kwang and Dr Maliki that skills are a very important factor. This is another area that the Government is tackling with full commitment. In fact, freezing the older workers' CPF is not the only way that we are going about tackling structural unemployment. We have, indeed, implemented programmes to help older workers enhance their employability through skills upgrading and training. We have put in place programmes to address the skills mismatch between older workers and the new jobs that are being created in the economy. We have introduced a wide range of programmes, including the People-for-Jobs Traineeship Programme, to help particularly the older workers to acquire the necessary skills to meet the requirements of the new jobs.

With immediate effect, workers above age 50 can qualify for an additional three months, after the initial six months of wage support under the People-for-Job Traineeship Programme. This means we are extending the People-for-Job Traineeship Programme to a full nine months, provided they were recruited after retrenchment or switched jobs with some retraining required for the new jobs.

One Member asked whether we would extend it for two years. Let me say that we should proceed with this extension, try it out and then, based on the experience that we get from managing this more generous programme for another year, we can decide whether it needs to be extended for a longer period. We are open to the suggestion.

Sir, in addition to programmes like the People-for-Job Traineeship Programme, we have also set up a job task force chaired by the Minister of State, Dr Ng Eng Hen, to look more holistically into ways of helping the older workers who are retrenched or who are unable to secure alternative jobs. This would, in a way, address the point raised by Ms Irene Ng that we need some central or national body to look at the plight of the older workers. This Committee would continue to examine ways of helping older workers to enhance their employability, to facilitate skills upgrading and retraining for them. We will certainly continue to work with the employers and the trade unions to invest in worker training because we believe that ultimately, it is the skills and competency of our workers that would ensure their employability in the future. It is more so for the older workers because there is an increasing challenge for them. Each younger cohort of workers that goes into the job market is more skilled, better educated, more capable than the older workers. It must be so because of our education system. The older workers are going to be increasingly challenged. We will have to invest efforts in continuing education and training so that they can also keep up-to-date and also face the increasing challenge from the younger workers.

Mdm Halimah and Mr Heng Chee How spoke on the need to introduce greater flexibility in our wage structure. This is exactly what the ERC's recommendation about restructuring the CPF scheme is all about. We do want to introduce greater flexibility in our wage structure. So freezing the employer's CPF contribution for this group of workers, aged 50-55, should be seen as part of the overall package to enhance employability and also flexibility of our wage structure for this group of workers. In terms of flexibility of wage structure, we will continue to promote and push the idea of building up the monthly variable component so that companies can make quick adjustments to their wage costs when they face severe business downturn, instead of having to rely on the across-the-board CPF cut, as we had done twice already in recent history.

Finally, let me respond to Mr Othman Haron Eusofe. The point he made was that older workers need to upgrade their skills. I agree with that. As I have said earlier on, we will continue to invest in efforts to upgrade the skills of the older workers to help them cope with the new skills demand in the job market.

Mrs Yu-Foo Yee Shoon has suggested setting aside 1% for personal training from the CPF account. Sir, our problem today is that allocating the limited CPF contribution to the three accounts for home, retirement and healthcare is already a difficult balancing act, as we have all debated over the last two days. We should not further complicate the matter by creating another sub-account within the overall CPF framework, even though it is for an admirable objective of encouraging the member to be more responsible for his continuing education and training. Let me say that this does not mean that people will have no opportunity to go for training. On the contrary, the Government already provides ample opportunities and financial support for training and skills upgrading for all workers. These programmes will continue to be reviewed, updated and when necessary and beneficial, it would be enhanced. Let us make use of these resources, instead of trying to draw on the already limited CPF savings.

Dr Warren Lee mentioned a not quite related point but allow me to respond. That is the difficulty faced by self-employed who want to renew their trade licence but did not contribute to their Medisave. This is actually an unrelated issue but let me assure him that the CPF Board is very sympathetic. If a self-employed cannot renew his licence because he is not up-to-date with his Medisave payment, all we require is that he makes us a promise that he would make some payment. We will work out a very reasonable instalment payment plan for him to pay the contribution. But bear in mind that it is not really a payment - he is contributing for his own future medical and healthcare needs. Self-employed are well-advised to keep their Medisave updated so that they do not run into this difficulty. But if they do have the difficulty, let me assure Dr Warren Lee that the Board is very sympathetic and we will help the self-employed to work out an appropriate payment plan.

Mr Speaker, Sir, in summary, the ERC Work Group's recommendation is wide-ranging. It touches on many people. It sets in train a series of changes and adjustments for the CPF system. But these are not sudden changes. These are changes that would be introduced gradually and progressively over time as we restore the CPF to the target contribution rate of 20% plus another 20% from the employee. If we do not make these changes, if we remain status quo, we will be allowing rigidities, employment problems and inadequacy of retirement savings to become more deep-rooted and intractable. If we tackle these problems head-on and early, we will have a reasonable chance of overcoming them. By acting early, quickly and decisively, we will be better placed to enhance our long-term competitiveness and economic progress.

Mr Low Thia Khiang rose ---

Mr Speaker: Mr Low, only clarification, no speeches, no debates.

Mr Low Thia Khiang (Hougang): Sir, the Minister said in his speech that my proposal is not feasible because it would affect the ability of Singaporeans to own flats. Is he referring to younger Singaporeans to own HDB flats or private properties?

Dr Lee Boon Yang: Mr Speaker, Sir, I think the vast majority of younger Singaporeans' first home is a HDB flat.

Mr Low Thia Khiang: Sir, further clarification. If that is the case, then does the Minister agree that ---

Mr Speaker: Mr Low, that is a question. No question is allowed.

Mr Low Thia Khiang: Sir, I am clarifying with the Minister. Since he is saying that this is related to the ability of Singaporeans to afford HDB flats, I would like to clarify with him whether he is aware that the Government is committed to provide affordable housing to Singaporeans. Currently, the commitment is that 90% of Singaporeans should be able to afford a 4-room flat. If the change that I propose results in the younger generation of Singaporeans not being able to afford HDB flats, is it not the Government's responsibility to adjust the selling price of HDB flats? I would also like to clarify with him ---

Mr Speaker: No, Mr Low, I must insist that you either seek your clarification or you resume your seat.

Mr Low Thia Khiang: No, I am clarifying with him because he is saying ---

Mr Speaker: Then, do so. You are making a speech.

Mr Low Thia Khiang: No, I am asking a question and asking for clarification and his views, Sir.

Mr Speaker: Do it now.

Mr Low Thia Khiang: Would he clarify that the Government is basing affordability of HDB flats based on the calculations of the balance in the Ordinary Account of the CPF that people have? I believe that the more CPF Singaporeans have in the Ordinary Account, the higher would be the selling price of a HDB flat. The other clarification is he refers to ---

Mr Speaker: Mr Low, I must insist that you resume your seat and let the Minister reply.

Mr Low Thia Khiang: I have another clarification on front rolling.

Mr Speaker: No, just let the Minister reply.

Dr Lee Boon Yang: Mr Speaker, Sir, the Government's policy is indeed to help Singaporeans to own a home, at least to own a home over their lifetime of work and saving, not to just have a home given to them. You have to work, you have to save and you have to pay for the mortgage. So Mr Low's example of having 7-9-9-6, having a very high contribution to the Special Account, simply makes it more difficult for the younger CPF members to put aside sufficient CPF savings by the time they reach the typical marriage age of around 28-30 to meet the downpayment to buy a home that they want. What we are saying is that we should not handicap, further disadvantage or make it more difficult for this younger group of Singaporeans. We should allow them to put sufficient savings into their Ordinary Account at a young age to be able to afford their first home. Thereafter, they will have to plan carefully if they want to upgrade to a bigger home, or to even upgrade to a private property. The prices of HDB flats are not based on how much money that is left in the Ordinary Account.

Mr Speaker: Dr Ong, do you want to seek a clarification too?

Dr Ong Seh Hong (Aljunied): Mr Speaker, Sir, I would like to clarify my point because the Minister said that he could not understand what I meant yesterday. I was saying that the main problem of the older workers being unable to find a job is, we all know, because of the seniority-based wage system. But if we freeze and lower the CPF contribution rate for this group of workers, it may result in a certain reluctance when we really want to push for a job-based wage system. Because from the employers' point of view, they say that since the Government will take care of it from the CPF front, they do not have to do anything. Therefore, there is a reluctance there. From the workers' point of view, they say that if they are going to accept a CPF cut when they grow older, why should they accept a job-based wage system? That is what I meant that by introducing this CPF freeze, it may create some problems later when we want to push for a job-based wage system.

Dr Lee Boon Yang: Mr Speaker, he was actually making a speech rather than seeking a clarification. As I explained in my response, we should work from all fronts. We do not just try to find one solution for the problem. We all know that the seniority-based wage scale is a rigidity in our employment market. That is something we have to address, in the light of all the changes that are happening. Freezing the employees' CPF contribution for the older workers is one of the parcels of measures that we have to do, along with skills upgrading, retraining for the workers, redeploying older workers to new jobs in different sectors. All these would have to be done. And also, the continuing effort to scale back this seniority-based wage system. The trade unions have done much work on this. In fact, in some sectors, if I am not mistaken, from the starting pay to the end point, it used to be a factor of 2.5. Today, it is probably back to maybe 1.5 or 1.8. Even then, there is still a valid element of seniority pay which, earlier on, we heard from Mr Lim Boon Heng how this has done damage to Japan in its competitiveness. We should learn from those lessons. We should try as many measures as we can in order to address this problem.

Mr Speaker: Yes, Mr Low, what is your clarification?

Mr Low Thia Khiang: The Minister mentioned that my proposal is front rolling. I would like to clarify that in my speech yesterday, I mentioned that the ERC's proposal is actually back rolling, especially for the age group between 50-55. This group of people actually suffers a double blow. On the one hand, the total CPF contribution rate was cut to 32%, and then we increase the contribution to the Special Account to 9%, another 3%, and only 14% of the balance of the contribution is left in the Ordinary Account.

Sir, I say this would put the age group in a difficult position because of the life cycle of the person's age, where a person has probably committed to a second property or already upgraded to another property. They would probably need more money to service their mortgage loan. Secondly, in such a life cycle, probably their children are in tertiary education, like in the polytechnics, they may need CPF money to finance their children's education. I find that this is totally unbalanced. I am of the view that it is perhaps better to have a balanced front loading that will enable CPF members to save while they are young and still working, and not be in a position where they could lose their jobs suddenly.

Dr Lee Boon Yang: Mr Speaker, Sir, when I responded to Mr Low earlier, I said that I agreed with his idea. In fact, I was happy that he was supporting the Government's effort to try to put more money into the Special Account. But the question is one of balance. We have to balance home ownership with retirement savings. His proposition will make home ownership very much more difficult for the younger group of Singaporeans. Yes, there will be more savings for them in their old age. We want to have a situation where there is a little bit more balance in the sense that the younger workers will not face an uphill task in putting aside enough money in their Ordinary Account to finance their first home purchase. And if they want to upgrade, that is a different matter. They have to carefully work out their financial position, whether or not they will be able to afford it with the new CPF contribution rate in the future.

For those who are already affected by the CPF cut and non-restoration, we are going to allow them to use the Special Account, as announced by DPM Lee, to bridge this transition period. But for many other CPF members, the sooner we send the signal that they have to think carefully for their future upgrading, the better off are we. Otherwise, more and more people will get into this cycle and they become over committed to property. They buy properties right up to the limits of their capability. I do not think we are going to be in a better position.

Mr Low Thia Khiang rose ---

Mr Speaker: I think it is enough, Mr Low. Mr Mah Bow Tan.

The Minister for National Development (Mr Mah Bow Tan): Mr Speaker, Sir, DPM Lee announced yesterday that HDB will be implementing bank origination of HDB market rate loans from 1st January 2003. Let me elaborate on this and related issues, as well as respond to Members' comments.

First of all, let me explain the difference between HDB's concessionary loans and market rate loans because, I believe, some Members may not have fully appreciated the distinction between the two, and the fact that we are actually making changes only to one and not to the other. HDB provides mortgage loans at a concessionary interest rate in order to ensure that HDB flats are affordable to those who need them. And this includes first-time subsidised flat buyers as well as second-time buyers who are upgrading from the smaller flats. We peg the interest to the CPF Ordinary Account interest rate plus 0.1%. Last year, 63% of the loans granted by the HDB were concessionary rate loans.

As DPM Lee mentioned yesterday, the changes related to the use of CPF for the purchase of HDB flats - in other words, the valuation limits and the cash downpayment requirements - will not apply to these loans. In other words, the majority of HDB flat buyers will not be affected by these changes. I believe this is the group of buyers that most Members are concerned about.

Apart from concessionary rate loans, HDB currently also provides loans at market rates. Market rate loans are for HDB flat buyers who have either previously consumed HDB housing loan subsidies or who do not qualify for HDB loans in the first place. There are five categories of such buyers. Let me go through them one by one.

(1) Singapore permanent residents. Obviously, non-citizens are not eligible for HDB subsidy.

(2) Private property owners. Again, it is quite self-evident that private property owners should not be eligible for HDB subsidised concessionary rate loans.

(3) The high income households. In other words, those who earn $8,000 or more a month. Again, I think Members would agree that this is self-evident.

(4) Those who have already enjoyed two concessionary loans. In other words, they have bought at least two HDB subsidised flats, and are now going for another flat and therefore we do not wish to offer them any more concessionary loans.

(5) Those who have previously enjoyed one concessionary loan and are buying a similar sized or smaller HDB flat - those who are moving sideways or those who are downgrading. The rationale here is that for both these categories of buyers, they would have some cash left over from the sale of their previous flats and therefore they can make use of this cash.

The HDB market rate is pegged to the interest rate that DBS Bank imposes on its ex-Credit POSB customers, and this currently stands at 3.75%.

Members may recall that I had informed this House during the Budget debate earlier this year that my Ministry was reviewing the roles and functions of the HDB to see in what way HDB could better fulfill its core responsibility; in other words, to provide basic affordable housing to the majority of Singaporeans. That is HDB's core responsibility.

As a general rule, HDB should consider allowing the private sector to take over those functions which extend beyond this core responsibility. One such activity is the provision of market rate loans. As these loans are not subsidised and are pegged to commercial rates, there is really no special reason for HDB to continue to provide them. Furthermore, the private sector is well positioned to provide such loans. Currently, there are more than 100 financial institutions licensed by MAS who are allowed to provide housing loans, and this includes the three local banks as well as the six qualifying full banks (QFBs).

The Government has therefore decided that HDB will no longer provide market rate loans with effect from 1st January 2003. Flat buyers who are not eligible for HDB's concessionary rate loans can take market rate loans from the many banks which are licensed to offer housing loans. Existing HDB market rate mortgagors can transfer their remaining mortgages to the banks if they so wish.

[Mdm Deputy Speaker (Mrs Lim Hwee Hua) in the Chair]

4.50 pm

The Minister for National Development (Mr Mah Bow Tan): HDB flat buyers can enjoy immediate benefits from bank origination. HDB market rate loans which are pegged to the interest rate that DBS Bank imposes on its ex-Credit POSB customers currently stands at 3.75%. Several Members, including Mr Ravindran, Dr Lily Neo and Dr Ong Chit Chung, commented that while the banks may be giving promotional rates now, in the first few years of the mortgage, HDB's market rates may actually be more attractive than the rates offered by the banks over the longer term. I wish to just alert them to the fact that this market rate loan of 3.75% that is currently offered by HDB, one cannot assume that this rate will remain forever. If Members will recall, DBS Bank had actually stated its intention, at some point in time, to harmonise the mortgage rate imposed on ex-Credit POSB customers with its board rate, and the board rate stands at 5.75% at this moment. If and when that happens, then HDB market rate loans would also go up to that 5.75% figure, and it may become more expensive. In fact, some members of the public have been asking us why they must take loans from HDB instead of the banks which are offering more competitive mortgage rates, especially at this point in time.

With the move in bank origination, HDB flat buyers will now have more choices and the opportunity to take up the most competitive interest rates. They may enjoy longer repayment periods because I understand that some banks do offer loans up to 35 years, as compared to the maximum of 30 years which HDB currently offers. Others may decide to offer customised special loan packages for HDB customers. And banks also do not require mortgagors to fully draw down their CPF balances before giving them the mortgage loans, unlike HDB, and this may appeal to some HDB flat buyers.

Madam, the implementation of bank origination will allow HDB to exercise greater flexibility in the future for those who take market rate loans to buy HDB flats. It will reduce HDB's role as a lender. It will allow HDB to focus on the provision of subsidised housing and subsidised loans. It is another step towards further relaxation of HDB's rules and regulations in the purchase and resale of HDB flats. This is something that MND has been studying as part of the review of HDB's roles and functions. And this is also in line with the recommendation of the ERC to help home-owners to monetise their assets, something which the Government accepts in principle.

Madam, allow me at this point to briefly explain why we have these rules and regulations in the first place. Our public housing programme started in the early 60s when many people lived in overcrowded and unhygienic conditions. The Government needed to provide basic housing fast. At the same time, we wanted to promote home ownership to give people a stake in Singapore. To achieve this, subsidies were given to ensure affordability. Safeguards to protect HDB home-owners were also put in place. For example, the Housing and Development Act prevents third party creditors from recovering their loans from the sale of the HDB flat upon the bankruptcy of the flat lessee. At the same time, restrictions on the use of HDB flats were imposed to ensure home ownership and to justify the subsidies enjoyed by HDB flat lessees.

These rules have been relaxed over time. In the 60s, lessees who wanted to dispose of their flats had to return them to HDB. In the early 70s, HDB allowed flat lessees to sell their flats at market prices in the open market after satisfying the minimum occupation period. In the 80s, the eligibility criteria for resale flats were broadened to include permanent residents as well as private property owners. In the 90s, the rules were relaxed further to allow single citizens to buy 3-room and smaller resale flats, and also to permit the subletting of whole flats under certain circumstances.

By moving towards market practice, bank origination can gradually pave the way, at the appropriate time, for HDB to further relax its rules. Mr Ong Kian Min suggested yesterday that with loans being given by banks, we should at the same time relax rules such as the minimum occupation period policy and the existing subletting restrictions. Ms Irene Ng, Miss Penny Low, Dr Warren Lee, Dr Amy Khor and many others made similar suggestions along these lines. Sir, I believe their suggestions are reasonable and logical, and I would like to inform Members that MND is actively studying these issues to see whether and how we can make such changes, so that we can treat HDB flats bought with bank loans more like private properties.

Madam, while allowing banks to grant loans to give flat buyers greater flexibility, I want to stress that this greater flexibility also comes with greater responsibility. Flat buyers should exercise financial prudence and buy a flat within their means. They must go into the purchases with their eyes wide open. They must expect to be subject to the mortgage financing rules that are imposed by the commercial banks, including credit assessment rules and foreclosure policy.

Some Members have expressed concern that the implementation of bank origination is, in fact, a partial withdrawal by Government of its social safety net. In particular, several Members, like Mr Ravindran, Mr Andy Gan, Dr Lily Neo and Dr Maliki, have pointed out that the HDB is generally very sympathetic towards flat lessees who are in arrears, and only repossesses flats due to loan default as a last resort. They are worried that banks would be less forbearing compared to HDB.

Let me address these concerns, which are valid concerns, by making the following points.

Firstly, I wish to assure Members that there is no change in the Government's commitment to the provision of basic housing in the form of subsidised HDB flats. We are not touching our basic housing safety net. Our housing subsidies have enabled the vast majority of Singaporeans to own their own homes. When we started in 1960, 9% of Singaporeans lived in public housing. Today, it is 85%. Almost all of them, or 96% of them, own their flats. Concessionary loans are a key instrument to promote home ownership. Hence, the Government will continue to provide HDB loans at concessionary rates to eligible buyers.

However, with this move, the Government is indeed pulling back the safety net a little bit at the edges for those who should not need the safety net in the first place. They are the financially better off, they are the ones who already have a flat. And who are we talking about? Specifically, we are talking about non-citizens. We are talking about the private property owners. We are talking about the high-income owners. We are talking about the second or even third-timers who are either moving sideways or downgrading. They are not those who are buying a flat for the first time. I believe this is the group of people whom Mr Ahmad Khalis was most concerned about in his speech. And they are not the people who are upgrading to a second flat when they are ready to do so.

It is not tenable for Government to continue to maintain such a wide safety net such that people become over-dependent on Government and are unable to exercise individual responsibility. This move will give them more flexibility. But, as I said, at the same time, they must be prepared to exercise more responsibility, as Dr Chong Weng Chiew mentioned just now, and as Dr Amy Khor agreed with. It is in line with what we have been talking about in remaking Singapore - how to encourage more entrepreneurship and more risk-taking, how to let people take more responsibility in their lives, how to be more dependent on themselves rather than on Government. However, let me assure Members that we are not yanking away the safety net from those who need it. We will continue to maintain our home ownership policy by providing subsidised loans for subsidised flats, so that eligible Singaporeans can afford good quality public housing. To ensure that this remains so, the changes announced yesterday will not apply to such buyers. I wish to assure Dr Ong Chit Chung that the social compact between Government and people that he talked about will not be diminished by these changes.

Secondly, like banks, the HDB today already conducts credit evaluation for most buyers before granting mortgage loans. As a result of this, the arrears rate for HDB market rate loan is not excessive. Government will continue to encourage prudence and responsibility in housing purchases, regardless of whether the loan is provided by HDB or by banks. While it is probably true that the HDB is more forbearing than banks in the collection of arrears, I must inform Members that HDB does exercise its right to take back the flats when the lessees are in arrears and are unlikely to be able to repay their loans, although such cases are not that many. It is important for buyers to continue to exercise prudence. We have cases of HDB mortgagors running into arrears within a few months of their flat purchases. In one case, the lessee was only able to service two instalments before he went into trouble, and that was for his third HDB flat. Obviously, HDB must constantly review its own mortgage policies for flat buyers who clearly do not have the means to service their mortgage loans.

Madam, with bank origination, HDB flat buyers should exercise greater financial prudence before taking up bank loans. We cannot expect the banks to behave like HDB. It is not their social responsibility to do so. We cannot, for example, tell the banks not to foreclose for hardship cases, as suggested by Dr Amy Khor. Nonetheless, the Government recognises that bank origination is a very significant move for some HDB flat buyers and, therefore, intends to keep certain safeguards intact, in their place.

I wish to assure Mr Ravindran that the current protection clause in the Housing and Development Act against third party creditors will be retained. We have no intention of changing this. This ensures that flat buyers and their families do not lose the roof over their heads as a result of claims by third parties, other than the banks, in the event that the owners become bankrupt. In addition, we will continue to disallow a HDB flat to be used as collateral for purposes other than to finance its purchase. In other words, one cannot, for instance, mortgage the flat to raise capital for business ventures. The refinancing of existing loans will also be capped at the outstanding loan amount. So, these measures will be adopted for prudential reasons and they will minimise the risk of default in mortgage payments.

Madam, some Members have suggested that Government should provide a safety net for those who lose their HDB flats due to foreclosure by the banks. I do not think it makes sense for us to pull back the safety net in one form and then replace it in another form, in the form of subsidised rental housing. I would like to stress again that the individual must exercise care and prudence in deciding what type of flat he wants to buy and how much he wants to borrow from the bank, particularly if it is for the purchase of his second, third or even fourth flat.

Having said that, I think Members here will know that HDB looks at all appeal cases carefully and where there are deserving cases, HDB will bend over backwards, forward, sideways, as Mr Ahmad Khalis put it, to render appropriate assistance. So, I do not think that Dr Lily Neo has anything to worry about that she no longer has a role to play. She will have a lot of things to do.

Madam, Members were also concerned that CPF Board would rank second to the mortgagee for bank loans, despite the need to safeguard CPF savings for retirement needs. As DPM Lee explained yesterday, allowing banks to stand first is very necessary for prudential reasons. In addition, I would like to point out that in the case of HDB flats, there is really no change to the status quo, because HDB currently already has first charge on the mortgage loans that it lends out, followed by CPF Board standing second. So, the banks will merely step into the shoes of HDB and take first charge on the mortgage when they grant loans to HDB flat buyers, come 1st January 2003.

Madam, the changes related to the imposition of valuation limits and cash downpayment requirements are necessary and major changes. So, it is prudent that they be phased in slowly to allow HDB flat buyers to adjust to them. Capping CPF withdrawals for housing purchases is necessary to encourage prudent housing purchase and safeguard CPF savings for retirement. The limit has been set at 150% of the property value initially, gradually going down to 120% over five years. These limits will apply to HDB flat buyers who take loans from banks. But they will not apply to the new market rate loans granted by HDB between 1st September 2002 and 31st December 2002; in other words, this year. As the valuation limits will be gradually phased in, they should not have a significant impact on the HDB resale market.

HDB flat buyers taking loans from banks will pay a minimum 10% cash downpayment, so that there is a buffer to protect their CPF savings against losses in case of a down market. Again, there will be ample time given for HDB flat buyers to get used to this cash downpayment, because we will be phasing it in over five years. There will be no change, come 1st January 2003; in other words, zero cash payment will continue from 1st January 2003. The cash payment will then be imposed, two percentage points from 1st January 2004, increasing by two percentage points a year until we reach 10% in 2008. So long as borrowers do not over-stretch themselves, I believe there should be no problems with this cash downpayment requirement.

HDB will work with CPF, MAS, the banks and other relevant agencies on the administrative and operational issues to ensure that the transition from HDB to bank originated loans will be a smooth one. Flat buyers will be fully informed and they will be advised on the changes so that they can benefit from this move to bank origination.

Mdm Deputy Speaker, bank origination of HDB market rate loans is a major step towards injecting greater flexibility into the public housing market. At the same time, it allows the private sector to take over an activity which is not part of HDB's core responsibility of providing basic affordable public housing. So it gives flat buyers more choice and it allows HDB to focus on what it does best.

Madam, I believe it is in the right direction. Together with the changes that we will make in the CPF, this will ensure that our home ownership programme remains relevant in the years ahead and our public housing market can cope with the challenges going forward.

Mr Low Thia Khiang: Mdm Deputy Speaker, may I be allowed to seek a clarification? The Minister said that MND is reviewing regulations to relax restrictions on HDB flats purchased with bank loans. Does the review cover also HUDC flats that have not been privatised but they are also purchased with bank loans?

Mr Mah Bow Tan: HUDC flats that are not privatised, if they are covered by the Housing and Development Act, yes, they will be part of the review.

Mr Steve Chia Kiah Hong (Non-Constituency Member): Madam, may I clarify with the Minister? For the purchase of HDB flats where the owners can actually get the loans from the bank, would they also be allowed to buy the CPF housing protection insurance, in this case? Would it be affected?

Mr Mah Bow Tan: Yes, I believe that those who take the housing loans from the banks will be required to buy housing protection insurance (HPS).

Mr Steve Chia Kiah Hong: From the CPF Board?

Mr Mah Bow Tan: Housing protection scheme under the CPF. I believe that is so. 5.14 pm

The Deputy Prime Minister and Minister for Finance (Mr Lee Hsien Loong): Mdm Deputy Speaker, it has been a long debate and I shall be brief. I would like to take up just three or four points which have not been addressed by the two Ministers and then wind up with some general remarks on the whole thrust of this approach.

First, the 50-55 age group. This is the key and most controversial recommendation in the ERC report - to cap the employer's CPF contribution for this age group at 16%. What is not challenged, and what all the Members agree, is that older workers in this age group are vulnerable. They are vulnerable to competition from labour forces elsewhere, better educated or less paid. They are vulnerable because their education and skills levels are lower than younger workers, and also because the seniority-based wage system ends up paying them more than productivity can, strictly speaking, justify. The question is how to solve this problem. Training and skills upgrading, that is a given. We need to do it, but it is not easy. And if you heard Mr Nithiah Nandan, you will know that it is a slog.

We also need to bring wage costs in line with, or at least, more in line with, productivity. We will tackle the seniority-based wage system. But doing that is a prolonged and arduous process. Because the labour market is inflexible downwards, not just in Singapore but, in fact, everywhere. Because if we are talking about bringing down people's wage levels, the national psychological resistance is very, very strong. Even if someone has lost a job, and has agreed to accept a lower pay for a new job, he has to overcome a psychological hurdle.

To undo the seniority-based system, either the older workers must get paid less than now, or have their pay go up not as fast as the younger workers and as fast as productivity. Hopefully, over a period of time, this will narrow the gap and reduce the problem. But neither is easy to accept. To bring down wages immediately generates a strong psychological reaction. To go up less slowly than other people will generate the same psychological reaction, as we can see when we are talking about the non-restoration of CPF in this case. We are not talking about bringing down the CPF rate. We are just saying, hold it while the CPF rates go up for others, and your wages will go up in time. But this is not easy to accept.

The CPF adds to wage costs, because it is a compulsory scheme. I did not use to believe this. I used to argue that the CPF is the worker's money. Putting $1 into his account, it is the same as paying him $1, and he does not mind. And the employer should not mind too. So it is not a tax. But, actually, the worker does mind. The worker prefers $1 taken home, instead of $1 locked up on his behalf. Because what he took home, he could save if he wishes. What is locked up on his behalf, he cannot spend even if he wants to. So when you impose the CPF on top of wages, particularly the employer's CPF contribution rate, in fact, you are adding to wage costs and adding to the inflexibility of the wage system.

And for older workers who are most vulnerable, the less you do this, the less problem you are going to cause their employment prospects. In fact, because wages are seniority-based and the CPF is a percentage of the wages, when everybody has a 20% rate of CPF contribution from the employers, the older workers have a higher burden than the younger workers. So this is a good reason why if you want to lower the burden on employment of older workers, we have to lower the CPF contribution rate for older workers.

Mr Chiam said it is unconstitutional and that it is an enormity which has just been perpetrated upon Singaporeans. But there is nothing new in this principle. Already, there is a step-down at 55 and there is another step-down at 60. What we are saying is to start stepping down at 55, in terms of the CPF contribution rate, is a little bit late. Let us start stepping down at the age of 50. So from 40%, below 50; you go to 32%, when you cross 50; and then to 20%, when you reach 55. So there are even steps downwards in order to help workers adjust, and in order to help keep them employed.

Four percent on the employer's CPF is not going to make a big, or immediate, difference to retrenchment and hiring decisions. It is not a quick fix. But it is a step in the right direction. The employers who have been interviewed, none of them want to take the flak and say, "Well, this is going to help me." So they say, "Well, 4% is neither here nor there. I don't need this."

As Mr Seng Han Thong said just now, "If you do not need it, why don't you contribute it to the workers' welfare fund?" I would put an opposite argument, just to think through this exercise. Supposing we had taken literally the argument, which Dr Jennifer Lee made yesterday, to say, reducing the pressure is bad because then you will not address the seniority-based wage system. We should increase the pressure. Supposing we had then said that, in order to increase the pressure, we will raise the CPF contribution rate for this group from 20% to 24%. Can you imagine the row, the uproar, the outrage, the anxiety and the extra burden which is put on older workers, and how that is going to impact the employers and, therefore, the employees? It is still the same 4%. But I think the psychological effect would have been different. Now, we are talking about reducing it by 4%, from 20% to 16%. It is a small adjustment, but it is an adjustment in the right direction, and one which will help.

We are also reducing the employee's contribution by 4%, from 20% to 16%. Members have not discussed this a great deal, but it is a significant move too. In most cases, when we reduce the employee's contribution rate, it will flow straight through to higher take-home pay for the worker. It will not affect the employer. But, in some cases, if the employer is facing a tough situation and if he has to retrench, I think a lower CPF contribution will make it easier for the employer to persuade the worker to accept a wage cut, keep his take-home pay constant, reduce total wage cost and keep his job. Without that, wage cut means less take-home pay. With that, there is some scope for adjustments.

So by reducing the combined CPF contribution rate to 32% for this age group, we are actually making the CPF system less inflexible. And we are not intervening more into the labour market. We are intervening less into the labour market by offsetting part of the negative effects of the seniority-based system. And we are making it easier for older workers to hold on to their jobs.

This non-restoration is part of the move to a more competitive wage structure in Singapore. We have to reduce the statutory component, not as a substitute for greater wage flexibility, but as part and parcel of a broader shift.

And we have to start doing this now. We can address the problems of the present cohort of the 50-55s. The civil service has got the TCTC. It is a catchy acronym. I hope the idea also catches on. It is not a problem which is upon us today, but it is a problem which is coming upon us which we can see and we can either start addressing it now, or we can talk about it, and then postpone the problem for 4-5 years. I discussed this with several of the union MPs before we decided on this. And I said, the alternative for us is to say, "Let's postpone this problem. Restore to 40%. After that, gradually bring it back down again because I would have given due warning, 4-5 years would have passed and I would take another five years to bring it down. Would you prefer that?" And they said, "No. You know there is a problem. You are at the point when people accept that things have to be changed. Better change now." Over 10 years, any number of mishaps can come along. We may have another crisis come our way, better to get this done with, and past. And that is why we are proposing to act now.

The second issue, which I would like to address briefly, is bank loans - the question of charge reversal. Several MPs have asked why we need to do this. Mr Ravindran said the present system of CPF having first lien is fundamentally sound. Dr Lily Neo asked why fix it if it ain't broke. I can understand this because this is an arrangement which we have made for 21 years and now we have decided to change the arrangement. But, unfortunately, there is a need to change the arrangement.

The basic reason is this. As things now stand, when you have a mortgage loan, it is not really a secured loan. A secured loan means that when you borrow, there is a house, the house is a surety. If you do not service the loan, the house is available and it can be sold and the bank can recover its money. Therefore, the bank has confidence. But as it stands today, the CPF ranks first. And it is not just 10% or 20% of the value of the house which is the CPF's claim, but all of your CPF money you put into the house month by month, year by year, stands first, and stands more and more at the front and grows every year.

So as you service the loan, as the loan matures, far from the bank feeling relieved that the journey is nearly over, in fact, the bank is getting into a more and more serious position when its loan is less and less collateralised. This is fine if your property value is increasing because then, although you put money in, the value increases even more and there is always a buffer. And before you get into trouble, you sell the property and move on to another project.

But if the property value falls, which is not inconceivable, then beyond a point, the mortgage may not be collateralised at all because the CPF you have put in may be worth more than the current value of the property after five or seven years. And then the bank actually has an unsecured personal loan in everything, but name.

We start off with the 20% cash buffer when you buy a house. It is a requirement which MAS imposed in 1996 and which we have stringently adhered to despite any entreaties, pleadings, demands, requests, we just said, "no". Because we knew we were in a vulnerable position and we needed this 20% cash buffer at the bottom. It is a buffer for the bank and, then beyond that, buffer for the CPF. But because the CPF claim builds up quite quickly within five or six years, the cash buffer actually is reduced to zero, unless the property value has gone up. So the cash buffer is necessary, but it is not sufficient. We have not had a serious problem up to now. Firstly, because property values have appreciated steadily over the last couple of decades, and typically, people have resold properties frequently. On average, from bank mortgages, the duration is only five years, which means on average, every five years, people sell their property, they pay off their mortgage, they go on to buy a new property. But going forward, this is not going to be the situation.

The second reason we have not had a problem so far is because, even though some of the mortgages are under water, people have continued to service their mortgages. It is partly a cultural thing. You feel that it is your duty to pay back the loan, and not just to default on it. And partly it is our good luck that our unemployment rates are not that high and most people are working and, as long as he is working, the customer will service the loan. But that is not the experience in other countries. In America, if your loan is under water, you ask, "Why should I bust my guts out? I return the keys to the bank, and good luck to the bank." Now, if ever that happens to Singaporeans, we are in very serious trouble. Therefore, we have to reverse the lien. The CPF is your own money. You are borrowing from the bank. The bank has to come first before you and therefore CPF. Just as you borrow from HDB, HDB has to come first. So you must pay back the bank before you get back your own money. It is a basic principle.

Thirdly, refinancing. Mr Leong Horn Kee suggested allowing refinancing of existing loan not to be subject to the Valuation Limit. We have examined this in detail. The arguments go both ways. It is not a very tidy situation because the old loans were on one set of rules and the new loans are put on to a different set of rules, reversal of lien plus the Valuation Limit. But after much deliberation, we have decided in MAS that if you are refinancing with another bank, then the new mortgage must be subject to the Valuation Limit, because there will be a new agreement. The new agreement has to have a charge reversal and you must have the bank standing first, which is different from the status quo where the bank stands second. We cannot allow the CPF to have second charge and, on top of that, to have the CPF not capped by a Valuation Limit.

So, if you are going to a second bank to refinance your loan, then new rules will apply. We also do not want the second bank to make a new mortgage on old terms and have the CPF rank ahead, in which case, the problem which was with the first bank is now taken and has moved to a second bank, and we will be in a situation where you do not know where the bad loans are and the bad loans are being shuffled around. So, if we have a refinancing with a second bank, then the new mortgage will be subject to the Valuation Limit.

But, of course, if your current bank is willing to vary and improve the terms of the mortgage, without reversing the lien position, and without having to conclude a new agreement, it is between you and your bank and the CPF is not involved, then we will allow that. It is not entirely what Mr Leong Horn Kee hoped for, but it is what is practical to do in this situation and, I hope, will be of some help.

Finally, Mdm Deputy Speaker, may I make a few remarks on the overall philosophy of this exercise. The CPF is a critical part of our social safety net. It is a good system. It is based on individual responsibility and on self-funding. It is comprehensive. It covers retirement as well as housing and medical expenses. It allows members a very wide range of investment choices and, if we allow pension funds, an even wider range. It enables Singaporeans to own homes, gives them a stake in Singapore and substantial savings, whose value they will want to protect. So, they will not take a chance with a government which will devalue our currency or let the country go down the drain.

The CPF is a unique system. It evolved in special circumstances during the period of our economic take-off. It was built up over many years, starting at 10% contribution rate in 1955, long before independence. After independence, we built up the contribution rates steadily year by year. At the time of our economic take-up when the economy was growing at 8%, 9%, 10%, 12% per year, wages went up correspondingly, and we put aside 2%, 3%, sometimes 4%, a year into the CPF as wages went up, in order to enable Singaporeans to own their homes. By 1984 - which was nearly 20 years after independence - we had built up the rate from 10% to 50%. But we could not keep it there. The following year, we had a sharp recession, we had to bring the rate back down all the way to 35% to get out of the recession. Then we built it back up again painfully. This time, we did not aim for 50%; we aimed for 40%. It took us six years. We got there in 1991. But when the Asian crisis struck, we had to reduce the rate in 1998, and we had to bring it down to 30% again. Now we are back to 36%, hoping to get back to 40% over the next 2-4 years.

If we lose this unique institution, we will never get it back again. Therefore, we have to build on and preserve this system. Every country needs to provide for the retirement needs of its people. Our system is based on savings. In other countries which do not have high savings rates and a CPF-type system, their solution is tax - social security based on tax or on social security contributions - pay as you go. In other words, this generation of young people pays tax to contribute to the pension for the current generation of old people. And when they themselves grow old, they had better hope that there are enough young people who are willing to pay enough taxes to meet their needs. It creates serious problems of solvency and sustainability. It has done so in Europe. The Americans have had their share of the problems. Our CPF avoids that.

The Economic Review Committee recommendations will adjust the balance in the CPF between the retirement and housing needs. It will focus the scheme on the needs of the central group of Singaporeans, ie, those between the 10th and the 80th income percentiles, and it will reduce the negative impact of too high a CPF rate on the older workers. These are very important improvements to the CPF system.

The HDB changes are also a significant policy shift. It is not just a matter of banks offering lower mortgage rates than the HDB can. The issue is how extensive our housing safety net should be, and how we can progressively allow and encourage Singaporeans to be more self-reliant, rather than depending on the Government for many of their needs. The core of our home ownership policy remains unchanged. But at the margins we need to adjust, not only to free up the housing market, but to have Singaporeans make their own decisions, and take responsibility for them. If we are talking about being entrepreneurial, taking risks, or about people being self-reliant, answering for themselves, then we have to be self-propelled and, we have to be, to a much greater extent than before, on our own.

By shifting to bank origination, and allowing banks to take first charge when granting housing loans, we are taking just one important step in this direction. We are taking it carefully, we know there are risks, we know there will be consequences, and there will be some people who will still think there is a safety net. And when they realise there is not one, they will try and create one, and may look for Dr Lily Neo and the other Members to ask for one. But these are problems which we will have to manage in the context of our moving forward to a more self-reliant system. And today's move is a significant step, as far as a housing safety net is concerned.

Sir, I thank all Members for participating in this debate and I beg leave, Mdm Deputy Speaker, to withdraw the Motion.

Motion, by leave, withdrawn.