Analysis: Singapore mulling new safety net

By SONIA KOLESNIKOV-JESSOP, UPI Business Correspondent  |  Aug. 13, 2003 at 11:20 AM
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SINGAPORE, Aug. 13 (UPI) -- In the face of rising unemployment and increased competition from countries like China and India, the Singapore government has been hammering to its citizens for a few weeks now that labor costs needs to come down. Along with this, all recent official comments are pointing that Singaporeans could soon get a new social safety-net.

"In order to upgrade our manufacturing sector, grow new services activities, and help more entrepreneurs to succeed, our economy must be as flexible as possible, and our costs as low as possible. One vital area needing restructuring is our wage system and labor costs," said Deputy Prime Minister Lee Hsien Loong.

The government is hoping to make the local labor market more flexible and nimble. "This will in turn make our economy resilient and competitive," Lee added.

Senior government officials have already said two areas require "special attention:" the Central Provident Fund, its state-run pension scheme, and the wage structure. The fact that Senior Minister Lee Kuan Yew himself talked to the union recently was highly significant.

"Domestically, we are restructuring our economy and bringing down business costs. We have lowered taxes and fees, and will continue to do so to meet the competition. Our land costs and rents have also come down. Now, we need to make our wage structure more flexible and competitive, and retune the CPF system," Prime Minister Goh Chok Tong told Singaporeans in its National Day address.

Introduced in 1955, the CPF 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.

Last year, the government tinkered with the CPF by lowering the monthly salary ceiling for employer and employee contribution from $3,400 to $2,850, reducing the amount that the employer has to contribute to the employee's CPF account and lowering wage costs slightly.

This time, the government is likely to tinker with the actual overall percentage being contributed to the CPF. That percentage was lower during the Asian financial crisis from 40 percent to 36 percent, but was supposed to be restored over the next 2 to 4 years. The government had also announced last year that the CPF contribution rate for workers aged 50 to 55 would be cut to 32 percent from 36 percent to help them find and keep jobs amid rising structural unemployment.

All economists are now ruling out the possibility of the CPF percentage being restored to its old level. Even National Trades Union Congress secretary general Lim Boon Heng has indicated the NTUC will not press for a restoration of the cuts in employer's CPF contribution as doing so would only put more jobs at risk.

Indeed, Lim even went further saying that even the current 16 percent contribution by employers rate was "too high" for companies in trouble, a clear sign of things to come. Lim is also Minister in the Prime Minister's Office

"All hints so far suggest that the announcement will not be insignificant. Besides endorsing some of the ERC recommendations, the most effective and swift approach to lower cost is to cut employers' contribution, maybe to 12 percent. However, it will not be immediate but phased in

over 2-3 years time," said UOB Head of Treasury Jimmy Koh.

"Singapore will never be able to match lower cost centers, but the government wants to send a clear signal to foreign investors that Singapore is very flexible, foreign companies will always be taken care of here and when times are tough necessary adjustments are made. This is a signal of increasing flexibility of the system and a signal of pro-activism," Koh added.

Joseph Tan, an analyst with Standard Chartered agreed: "I think the employer's contribution is likely to be cut to 10-12 percent, and it will happen soon. PM Goh is making a speech this weekend and will get a clear picture of the changes," said Tan.

Meanwhile, the Remaking Singapore Committee recently recommended a scheme modeled after the South Korean Employment Insurance Scheme (EIS), which could be introduced as a component of CPF. The scheme provides unemployment benefits, requires recipients to register for job placement and be available for work and imposes penalty if they reject job offers. It is finance through mandatory contributions.

Apart from the CPF, the government is also likely to encourage companies to restructure wages.

DPM Lee said there were two main problems: "Firstly, our wages are still seniority-based. And secondly, too large a share of our total pay is fixed and too little is tied to performance or profits."

The government has been doing some wage restructuring in the private sector, but more remains to be done.

"I think the government will also try to narrow the gap between entry-level and senior salaries on similar position. Currently the difference in salary is 2.5 times, and they will narrow it down to 1.5. How, I don't know. But government-owned companies will play a key role," Koh said.

"The fact that government has such a large ownership over the economy will allow them to implement such reform. If the private sector had a greater control on the economy, this would not be possible," he added.

The NTUC has already announced it is working with 50 companies to restructure wages.

"It will be easier to shift down top-end wages," pointed Tan.

"The seniority-based wage structure may no longer be sustainable and may well be hurting the re-employment prospects of older workers who suffered retrenchment. Even though we have introduced flexible wage system, our present flexibility is over-dependant on the end-of-the-year bonus adjustment," Lee Boon Yang, Minister for Information, Communications & the Arts recently said.

The labor market and state pension systems are key issues for many countries trying to restructure their economies. France and Germany have been trying to free up rigid labor laws, lightening the burden of taxes and social security contributions on wages, and reform their pension systems.

But while the French and German trade unions are resisting all the way, it is unlikely to be the case in Singapore, where union leaders have strong affiliation to the government and are usually supportive of wage and employment policies.

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