Singapore to Cut Pension Rates To Lower Costs for Businesses
By HASAN JAFRI and IZHAM AHMAD DOW JONES NEWSWIRES
SINGAPORE -- Singapore will make deep cuts in the state-run pension system -- effectively reducing workers' pay -- to lower the cost of business, spur foreign investment, combat unemployment and lift the economy.
Prime Minister Goh Chok Tong Thursday outlined a comprehensive overhaul of the state-run mandatory Central Provident Fund, which has some 100 billion Singapore dollars (US$57.06 billion) in savings contributed by companies and employees, and is the cornerstone of Singapore's social welfare system.
While the widely expected changes are painful and could hurt consumer spending and the housing sector, it is also the strongest signal yet from Mr. Goh to reform the economy and help companies better compete against rivals in China and India.
"The changes I have announced are the most drastic we have ever made to the CPF system," Mr. Goh said of the scheme established in 1955. "They are necessary because we are seeing the most drastic changes yet in our external environment. ... We have to lower our costs to remain attractive to investors."
The most immediate change is a reduction in total CPF contribution to 33% from 36%, effective Oct. 1 with the employers' contribution reduced to 13% from 16%, Mr. Goh said in Parliament.
In addition, the government will introduce a host of changes to make older workers more employable, limit the overall contribution workers and companies make and gradually limit the amount of CPF money that workers can withdraw at one go as they reach retirement age.
Over the longer term, instead of a fixed rate, the total CPF contribution will vary between 30% and 36% with the employers' share somewhere in the range of 10% to 16%.
Some in the corporate sector were pleased with the changes.
"We think that the cuts that have been announced today will give companies greater agility in adjusting their business costs," said Joanne Tan, spokeswoman for Hewlett-Packard Co. The computer and printer giant is one of Singapore's biggest employers with 6,000 employees.
Singapore Telecommunications Ltd., which has some 10,000 employees, said the 3 percentage point cut will trim its staff cost by S$10-S$13 million. Local staff costs amounted to S$151 million in the first quarter ended June, comprising 29% of operating expenses here.
But some economists warned the cuts are not deep enough and the flexibility that Mr. Goh wants to introduce in the system will, in fact, add uncertainty to government policies.
Most participants had expected the employers' contribution to be cut to 10% from 16%, leading to annual cost savings of as much as S$3 billion, or 2% of Singapore's GDP. But the cuts announced only yield savings of S$1.3 billion, which is "insufficient," says Nizam Idris, regional economist at IDEAGlobal.
"They want to manage the CPF [as a policy tool], but they have proven many times in the past that they make the CPF changes behind the curve. They hiked at the wrong time and, in 1999 they cut at the wrong time," he said. "If I were an investor, I'd be worried because the risk is that the policy move will always be late."
The financial markets' immediate reaction was muted. While the Straits Times index closed nearly unchanged at 1593.58 points, key property stocks fell.
The Singapore dollar remained largely unchanged at S$1.7538 against the U.S. dollar while the 10-year government bond yield closed at 3.75% from 3.64%, primarily as a result of overnight losses in U.S. government paper.
The immediate cuts are not as deep as the six percentage point cut earlier expected and suggests the government tried to balance cutting the pension scheme and the damage it may cause on domestic spending, the property sector and the ability of Singaporeans to service their mortgages.
To offset the hardship measures, the government will also announce a relief package, including relief for mortgage repayments, Mr. Goh said, adding details will be released later.
Ahead of the government measures, DBS Group Holdings Ltd. said it will "cushion" the burden on property owners via several measures including deferring payments on principal for the next three years. DBS is Southeast Asia's largest lender and one of the largest lenders in the mortgage market.
The latest restructuring is also the result of Singapore's poor economic performance in recent years. Gross domestic product in the second quarter shrank an annualized 11.4% on quarter, the worst on-record, and will at best grow by 1% this year over 2002. The economy shrank 2% in 2001.
The CPF savings help Singaporeans cover retirement expenses, pay for housing, healthcare and education, but the high savings rate is also pricing out Singaporeans from the global labor market by raising the cost of business, the government says.
The rising cost, in turn has led to a 17-year high unemployment rate of 4.6%, which is expected to rise further 5.5% later this year.
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