SINGAPORE, July 23 (UPI) -- The Singapore government has accepted recommendations by a high-level committee to reform its state-run pension scheme, the Central Provident Fund, or CPF.
But analysts said that the measures are not as significant as those already announced in other areas, such as taxation. Although the reforms are more of a tweaking than a full scale overhaul of what is considered a sacred cow, they underline the government's effort to lower business costs.
"Certainly, the changes announced are less significant for the economy that the taxation ones. But this is understandable, given the very nature of pension scheme," says Sanjeev Sanyal, economist at Deutsche Bank.
"With the CPF, you can only make incremental changes, as it cannot be the leading structural change motor. At most you can adjust it over time," Sanyal adds.
The CPF -- introduced in 1955 -- is a form of compulsory superannuation, which over the years has grown to provide for healthcare, education and public housing.
Working Singaporeans under the age of 55 put up to 36 percent of their salaries into the fund, with 16 percent coming from employers and the rest from the employees.
However, over the years, the proportion of funds within the CPF allocated to property financing have grown significantly, prompting concern that a significant number of CPF members could retire without sufficient funds for their old age.
According to private estimates, some 40 percent of CPF monies are currently invested in property, creating a situation for many Singaporeans of "asset-rich, but cash poor."
Meanwhile, changes in the global economic environment, including the emergence of China, have underlined the high cost structure of Singapore's economy. A long-standing criticism of the CPF is that it was often used as a counter-cyclical cost cutting measure -- with employers' contributions being reduced during a downturn, says Joseph Tan, an economist with Standard Chartered.
For example, during the onset of the Asian financial crisis in 1999, employer's contribution were lowered from 20 percent to 10 percent, and were then restored to the current 16 percent on January 1, 2001.
The Economic Review Committee (ERC), which was set up late last year to overhaul economic policies with a view on the long-term, recommended changes to the CPF to increase economic flexibility and retirement security.
The measures are aimed at reducing the proportion of funds being diverted to buy real estate and increasing investment in privately managed pension plans.
On Monday, the government announced it would gradually phase changes in CPF regulations including a cap on home loan withdrawals from pension funds. Instead, banks will be allowed to fund purchases of public housing flats, a potentially lucrative business.
Deputy Prime Minister Lee Hsien Loong told parliament that the changes to the CPF system should be gradual, and underlined that home ownership for Singaporeans would continue to be a fundamental policy objective of the government.
Some of the measures should inject more flexibility into the labor market. Sanyal noted that the changes were aimed at dampening the impact of the structural changes ahead, as the economy shift slowly toward being a more service-oriented.
"The shift will create some skill mismatch and result in some structural unemployment," he said.
Currently, the employer and employee contribution are based on a monthly salary ceiling up to $3448 per month, or 6000 Singapore dollars, but the government has decided to lower this ceiling to $2873. This will reduce the amount that the employer has to contribute to the employee's CPF account and help to lower wage costs.
The timing of the cut will coincide with the gradual restoration of the employers' contribution from 16 percent to 20 percent over the next 2 to 4 years, the level at which it was prior to the Asian financial crisis.
However, the CPF contribution rate for workers aged 50 to 55 will be cut to 32 percent from 36 percent to help them find and keep jobs amid rising structural unemployment.
Again, this should help lower wage costs, and although analysts do not believe it will encourage companies to hire older workers, it may encourage them to keep older employees on.
Some of the key measures announced by the government should encourage Singaporeans to invest in privately managed pension plans and limit the CPF amount invested in housing.
The government announced that the limit on home loan withdrawals will be set at 150 percent of the value of the property, taking effect from September 1, and then lowered to 120 percent over five years.
This is seen as an attempt to limit rising housing costs by reducing the ability to fund purchases out of savings, Tan said.
It will also allow private home-buyers to use CPF money to pay half of their 20 percent down payment. The rest would still be in cash.
DBS analyst Kaan Quan Hon believes these proposals will lift a major overhang in the property and equity markets. The relaxation of the cash down-payment rule will be welcome by developers, while banks could see more business opportunities.
"The soundness of the banking system will increase further with the move to give banks the first charge on the mortgaged property," Kaan says.
In May, the government announced bold tax cutting measures designed to help the small island-state retain its competitive edge. Corporate and top personal taxes, last at 24.5 percent and 26 percent respectively, will be reduced to 22 percent for this fiscal year, and will be further reduced to 20 percent by 2004.
To counterbalance the loss in revenues, estimated at $718 million, the Goods and Services Tax will be raised to 5 percent from 3 percent effective next January.