Published December 17, 2008

CPF-cuts muscle their way back to NWC agenda

Economists believe move is likely though some say it may add to pain

By ARTHUR SIM

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(SINGAPORE) The National Wages Council will reconvene in early January, about four months ahead of schedule, with cuts in employers' contribution to members' Central Provident Fund (CPF) likely to be on the agenda.

While CPF cuts are not a dead certainty, economists that BT spoke with believe this is likely.

Prime Minister Lee Hsien Loong had said as recently as November that any cuts to the CPF scheme in the immediate term 'would make things even gloomier.'

However, in a statement released yesterday, NWC said that an increasing number of companies are facing issues of 'low demand and overcapacity and are looking at cost cutting measures to cope with the severe business downturn'.

NWC chairman Lim Pin also said: 'Given the weakening economic situation, there is a need for the NWC to take stock of the new situation and review its May guidelines to help companies and workers manage the downturn.'

Among other things, NWC had in May recommended that companies consider giving a one-off special lump sum payment to rank-and-file workers, as well as improve productivity through innovation, job re-design and stepping up training.

On possible CPF cuts in January 2009, Citigroup economist Kit Wei Zheng said: 'The decisive shift in the balance of risks thus necessitates a different policy response now, compared to six months ago, when the labour market was tight and the NWC's recommendations were intended to deal with high inflation.'

With the spectre of deflation now expected for 2009, Mr Kit said that whether a CPF cut actually takes place will largely depend on incoming data in the job market, in particular the fourth quarter job numbers. 'These will give a first taste of the speed of deterioration in the labour market, which has held up relatively well so far,' he added.

National University of Singapore economist Tilak Abeysinghe also believes that a CPF cut is imminent. And in the arsenal of the cost-cutting measures that can be implemented, 'The CPF is the major instrument that the government can use,' added Professor Abeysinghe.

Currently, the employers' contribution stands at 14.5 per cent. And depending on the severity of the economic downturn, Professor Abeysinghe believes this could be cut to as low as 10 per cent. 'Cutting wage costs to companies would be better than retrenchments,' he added.

The last time CPF cut employers' contribution was in October 2003, in the wake of the Sars crisis. Then, the CPF rate had been cut from 36 per cent to 33 per cent with employees contributing 20 per cent and employers' contribution cut by three percentage points to 13 per cent.

The employers contribution was only restored in July 2007 to 14.5 per cent.

If the government does decide against any CPF cut, it could be, as Mr Kit suggests, because it could result in 'unintended consequences'. For example, earlier studies by Citigroup found that CPF cuts may have aggravated the 'woes' of the middle class, even if they did help preserve jobs.

Mr Kit also highlighted that many use their CPF to pay housing loans and pointed out that with an ageing population, CPF savings become even more crucial. 'Cuts may not be sustainable or desirable in the long run,' he added.

Knight Frank director (research and consultancy) Nicholas Mak also said that any CPF cut now would adversely affect the purchasing power of those looking to buy a home, 'especially the middle class'.

Already, he noted that changes in 2006 required that excess CPF contributions to the Medisave account could not be used for housing through the Ordinary Account but had to go into the Special or Retirement Account instead.

NWC could simply be recommending wage restraint or even wage cuts. However the government has already taken the lead with wage cuts for senior civil servants.

'If a CPF cut does take place, perhaps the government can consider some form of CPF top up in the Budget to compensate for the loss of income,' said Mr Kit.

'It may need to restore some form of a social safety net,' he added.