The right time to give back?

Bouncing back from the recession, the Singapore economy is set to soar. The city-state registered remarkable economic growth of 13.1 % for the first quarter and the government boosted its projected growth forecast for the year to 7% to 9% from the previous 4.5% to 6.5%

In view of this healthy outlook, together with low unemployment rates, Lim Swee Say, General Secretary of the National Trades Union Congress, urged the Government to restore the employer’s portion Central Provident Fund (CPF) contributions. The government has since agreed and announced an increase in the compulsory contributions.

The first part of the "restororation" will take place in September this year, when employers will pay an extra 0.5% of salaries into the Medisave section of workers' accounts. In March next year, a further 0.5% will be added to the Special section of CPF accounts, dedicated to retirement savings.

The maximum increase in employer liability will be S$45 a month - for local and permanent resident employees earning the capped salary of $4500 a month or more.

The CPF is sometimes considered a “blunt” instrument for national savings, as the contribution rate is often reduced in times of economic downturn. The initial long-term target was 40%, but this was reduced to a “flexible” target of between 30% and 36 % in 2003. The current CPF rate stands at 34.5% where employers contribute 14.5% of an employee’s gross wage.

Lim says moving the contribution rate closer towards the higher end of this window would enable Singaporeans to set aside money for their future healthcare needs. “As we continue to grow our economy and upgrade our productivity, wage pressure will (rise),” he notes. “It is important that we don’t just put all these wage increases into our pockets and spend them all today.”

Increasing the contribution will obviously hit employers wage costs hard, with many already struggling against rising expectations. Reactions from the ground have been mixed, with some organisations questioning the timing of the proposed changes as well as its impact on competitiveness.

The Singapore National Employers Federation (SNEF) has called for a more cautious approach. It points out that while growth for the first quarter has been strong, productivity growth has not been on par. It declined for eight successive quarters before turning positive in the last quarter of 2009.  SNEF President Stephen Lee applauds the gradual increase in the contribution rate as it ensures that business competitiveness is not derailed.

Bryan Teh, Executive Director, Association of Small and Medium Enterprises however, felt businesses should have been allowed another year before increasing CPF rates, given other business costs are projected to escalate this year, and employers will also have to forgo the popular Jobs Credit payments from July. “It will also enable the businesses to ascertain if the current economic recovery is sustainable,” he tells HRM.

Union leaders however, feel that the timing is right. Cyrille Tan, General Secretary, United Workers of Electronic and Electrical Industries, says workers deserve the increased contributions. “Over the past two years, there were wage freezes and no bonuses,” he tells HRM. “Workers tightened their belts. With everything going well now, we should give back.”

DBS economist Irvin Seah told HRM agrees, saying the increase in business costs should not be a factor. “It is a known fact that Singapore is not a cheap place to do business,” he tells HRM. Costs will continue to increase over time. We can never compete on a cost-basis.”

Instead, Seah suggests companies counter the gradual decrease in cost competitiveness by raising productivity. “This will enable them produce more output at the same cost.”

While the general public felt the increase was justified, with 8 in 10 polled by REACH saying it was timely and appropriate in view of Singapore's strong economic growth, some have indicated their preference for the increase in employers’ CPF contribution to be paid into the Ordinary account instead of the Medisave and Retirement Accounts so that they can use the monies to service their housing loans.