Committee of Supply (Speech 2) by Mr Gan Kim Yong, Acting Minister , 13 February 2009, 3:50 PM, Parliament

Mr Gan Kim Yong, Acting Minister , Parliament

Addressing Long Term Challenges

Challenge 1 - Ageing Population

1. While many of us are preoccupied with the present economic crisis, we must not lose sight of the long-term challenges that need to be addressed. One such issue is the ageing population.

(I) Helping Singaporeans Work Longer

Updates on Re-employment

2. By 2020, one in six Singaporeans will be aged 65 or above. Re-employment will be an important cornerstone to build a resilient and sustainable workforce, and to help workers secure a more comfortable retirement. For this reason, we will introduce the re-employment legislation by 2012. The tripartite partners have been working closely over the last two years to prepare our companies and workers for re-employment.

3. We have made good progress in our efforts to improve the employability of our older workers. The employment rate of residents aged 55 to 64 has been increasing steadily over the last 5 years from 45.2% in the last economic downturn in 2003, to 57.2% in 2008. Preliminary findings from a survey which my Ministry carried out last year found that 85% of local private sector employees work in companies that offer opportunities to work beyond retirement age. This is encouraging.

4. Jenny Pow is a good example. Jenny joined CTC Holidays as an Admin Assistant in 2003. She is a hardworking and meticulous worker. Last year, when she turned 62, instead of retiring, CTC offered to let her continue working as she still has much to contribute. The company is also sponsoring her for a training course in online ticketing to help her adapt to technological advancements in the industry. In this downturn, it is all the more important to invest in training and upgrading, and to make better use of our older workers.

5. However, the current economic crisis can hamper our efforts in implementing re-employment. We must therefore press ahead to raise the employability of older workers and to prevent the gains of our earlier efforts from being eroded.

6. To help older workers stay employed and minimise structural unemployment, we will need to encourage and help them to re-skill and upgrade. This way, they can remain relevant and productive, and be re-employed when they reach their retirement age.

7. We will continue to work with tripartite partners to help employers hiring older workers through programmes such as the ADVANTAGE! Scheme. We will also continue our outreach efforts, such as through regular industry briefings and the re-employment web portal to help employers and workers learn more about re-employment and how they can benefit from it.

8. The Tripartite Implementation Workgroup on the Employability of Older Workers will continue to get feedback on re-employment experiences. The economic uncertainty provides an opportunity to understand the dynamics of re-employment in a different context, and will help the tripartite workgroup as they finalise the Guidelines.

Job-Recreation Programme

9. I will now give an update on the Job Recreation Programme or JRP, and its role in this downturn. The JRP aims to help local workers, including PRs, up-skill and take on better jobs. This is achieved through a combination of efforts to redesign jobs, train workers, and professionalise industry practices.

10. Since its inception in 2005, JRP has been successfully applied to several sectors, such as security and landscaping. Last year, over 20,000 workers benefited from JRP, up from the 15,000 in 2007. Cumulatively, since the programme started, more than 50,000 workers have benefited. Even in this downturn, JRP continues to be important and the enhanced support provided by SPUR will allow the programme to help even more workers. JRP is now led by NTUC's e2i, which aims to help 45,000 local workers through its programmes in 2009.

11. An example of a worker who has benefited from JRP is Mr Tham Kok Ying. Mr Tham worked in a boat building company for 36 years before being retrenched in October last year. Immediately, he enrolled in the Landscaping Job Preparation Exercise (JPE), and subsequently a Screen, Train, Place & Track programme. After a week-long work trial by Kiat Lee Landscape & Building Pte Ltd and a 26-day WSQ course, he was employed by the company and has been working there since.

(II) Helping Singaporeans to Have an Income For Life

12. Besides helping Singaporeans to work longer, the Government has also introduced important changes over the past few years to help Singaporeans improve their retirement adequacy. This is a long-term challenge and something we must not lose sight of, even in this downturn. Last year, we introduced CPF LIFE which will give CPF members an income for life. I must stress that CPF LIFE is not intended to solve financial difficulties, but it can only provide an income for those with CPF savings.

13. To recap, all CPF members born in 1958 or later will be automatically included in CPF LIFE if they have at least $40,000 cash in their Retirement Accounts when they turn 55. These members will enjoy a monthly income from age 65 for as long as they live. Because some members were concerned that they may have shorter than average lives, we have decided to offer CPF LIFE plans with a refundable feature. For such plans, depending on the member's age when he passes away, his beneficiaries would receive a bequest amount, which is the remainder of his CPF savings plus a refund of any LIFE premium that has not been paid out.

Reduction in number of CPF LIFE plans

14. To give members flexibility and choice, the National Longevity Insurance Committee (or NLIC) had recommended offering members 12 different plans, 6 refundable and 6 non-refundable. The original 12 plans gave members a choice, but at the same time, made it more difficult for members to decide on an appropriate plan. We have therefore reduced the number of plans from 12 to just 4 that are meaningful, simple and clear. For avoidance of doubt, let me clarify that payouts start at age 65 for all 4 plans.

15. I will elaborate. Two key factors that members need to consider are the level of monthly income and the bequest amount for his beneficiaries. These 4 plans will offer members a range of trade-offs between these two factors. The default plan is called the LIFE Balanced Plan. As the name suggests, it will provide members with a balance between a reasonable level of retirement income, and yet at the same time some bequest amount if they pass away early.

LIFE payout ranges

16. Let me give an example of 55 year-old Mr Tan, who chooses the LIFE Balanced Plan. Assuming he has $67,000 in his Retirement Account, Mr Tan can expect to receive between $570 and $620 every month from age 65 for as long as he lives. If Mr Tan passes away at the age of 70, his beneficiaries will receive a bequest amount of between $76,000 and $79,000. The monthly income and bequest amounts are given as ranges because the actual amounts will depend on actual interest rates and mortality experience.

17. If Mr Tan prefers a higher monthly income, he can choose the LIFE Plus Plan but the trade-off is a lower bequest amount. If Mr Tan wishes to leave more for his beneficiaries instead, he can choose the LIFE Basic Plan but he has to accept a lower monthly income. If Mr Tan does not wish to leave behind any money, because he has no siblings or for whatever reasons, he can opt for the LIFE Income Plan, which offers the highest monthly income but no bequest amount. The LIFE payout ranges under the 4 plans are shown on the slide.

18. I have been asked how a protracted economic downturn would impact CPF LIFE payouts. As I mentioned, apart from mortality, LIFE payouts will depend on actual interest rates. A lower interest rate would lead to lower payouts. Likewise, if interest rates rise, payouts will be higher. Therefore, we expect CPF LIFE payouts to be adjusted from time to time. This is in line with the principle that the scheme should be self-funded and sustainable. It is for this reason that I have given the monthly payouts and the bequest amounts as ranges. Nevertheless, the CPF interest paid by the Singapore Government will not fall below the guaranteed floor rate of 3.5% on the first $60,000 of CPF balances and 2.5% for amounts above that. This guaranteed interest rate is something that commercial providers are not able to offer.

Socio-economic status and CPF LIFE

19. When the NLIC deliberated on the pricing structure of CPF LIFE, it noted that many factors affected the lifespan of an individual. However, the committee felt that the structure of CPF LIFE should be kept simple and easy to administer, yet fair to all its participants. Therefore, it decided to recommend only age and gender for the purposes of pricing, and not to take into account other factors such as whether a person smokes and whether he is obese, and so on. The NLIC also noted the possible effects of different socio-economic status (or SES) on a person's lifespan but found that there was as yet no robust local data on SES. The NLIC therefore recommended that the Government study this further.

20. CPF Board has completed its preliminary study of the possible relationship between SES and mortality. The study showed that there is a correlation between mortality and the selected proxies representing a person's SES. However, it also showed that the age to which a person in any SES grouping will live to can fall in a wide range. This is because life expectancies are affected by many factors including those related to a person's health and lifestyle, for example, whether a person smokes, consumes alcohol, whether he exercises regularly, and not just SES. It is unclear what the actual effect of the SES proxies would be, unless we could segregate the effects of health and lifestyle factors from the SES proxies in the study. If we did so, the effect is likely to be smaller. More importantly, the approximations involved in assessing an individual's SES could in fact place some people in the wrong category. This would be unfair and run contrary to the objectives of the scheme.

21. The refundable option in CPF LIFE will mitigate to some extent the anxiety of some members that they may not live as long as others. With this option, members who die early will have a bequest amount as illustrated earlier. Members who prefer to rely on commercial annuities may also be exempted from CPF LIFE, provided the annuity gives them benefits not less than that offered by CPF LIFE.

22. We have therefore decided not to capture the effect of socio-economic differences on CPF LIFE, to keep the scheme simple. LIFE premiums will only be based on gender and age, which is the standard practice in many existing annuity schemes. Most insurance schemes around the world have also not adopted SES factors in pricing their premiums.

Allowing older members to opt-in to CPF LIFE

23. Let me move on to opt-in for older members. While those who are aged 51 and younger this year will be automatically included in CPF LIFE, older members can also opt in. I am pleased to announce that from September this year, CPF Board will start inviting older members aged 55 and above to opt into CPF LIFE. LIFE payouts for the older members will start as early as January next year. Younger members will be invited when they turn 55. When members opt-in, they can also receive up to $4,000 from the L-Bonus, and up to $1,800 from the V-Bonus. Participants of the Lease Buyback Scheme, which was announced earlier, will be automatically enrolled into CPF LIFE to provide them with a lifelong income.

24. Let me give you an example. 61 year-old Mr Veloo has $67,000 in his Retirement Account. Under the Minimum Sum Scheme, he would have received $390 for about 20 years. Let me show you why it makes sense for Mr Veloo to opt in to CPF LIFE. If Mr Veloo earns less than $1,200 per month and lives in a small flat, he will receive the maximum L-Bonus of $4,000. He will also receive a V-Bonus of $1,800. If Mr Veloo opts for the LIFE Balanced Plan, starting from January 2010, he can expect to receive between $380 and $400 every month, not just for 20 years, but for as long as he lives.

25. We are also helping CPF members, including contract workers, who do not have sufficient savings to participate in CPF LIFE. Firstly, let me clarify that there is no minimum balance required. Therefore, those with low balances can also opt into CPF LIFE.

Further Liberalisation of Minimum Sum Topping-Up Scheme

26. Secondly, we want to encourage families to help their older family members by topping up their CPF. Last year, we made it easier for CPF members to receive top-ups to their Retirement or Special accounts from family members and other individuals under the Minimum Sum Topping-Up Scheme. This year, we will liberalise the rules further. Previously, we only allowed those with at least 1.5 times the prevailing Minimum Sum in their CPF balances to make top-ups using their CPF savings. From 1 April 2009, they need only have CPF balances of at least the prevailing Minimum Sum, to be allowed to make CPF top-ups. From 1 August 2009, we will also remove the age restriction that CPF top-ups to parents and grandparents can only be made to those aged 55 or above.

27. Top-ups, whether by cash or CPF, can help older CPF members to participate in CPF LIFE, enjoy the L-Bonus, the CPF 1% extra interest and possibly higher D- and V-Bonuses as well. Naturally, if CPF members continue to work after 55, this would be the best way for them to continue building up their balances to participate in CPF LIFE. Contract workers who are older low wage workers will receive additional help in the form of Workfare.

Helping members service CPF housing loans

28. I will now briefly touch on other issues regarding CPF. First, on use of CPF for housing. There was concern that members who suffered reduction in wages during this recession could have difficulties servicing their housing loans. He suggested that these members be allowed to use their Special Account (or SA) to service their housing loan. I wish to reiterate that savings in the SA are meant for retirement. Allowing CPF members to dip into their SA to finance their homes could seriously affect their retirement adequacy. We had in the past allowed limited usage of the SA for housing when CPF rates were cut, but only to the extent the members were affected by these cuts. However, in the current economic downturn, CPF rates have not been reduced. Instead, the Government has introduced Jobs Credit.

29. MND had earlier also announced measures to help home owners who may encounter difficulties with paying their mortgages. It is therefore not necessary to dip into their SA.

30. There was also a suggestion to allow a one-off withdrawal of CPF for training under SPUR. It is not advisable for the same reasons I mentioned earlier. Furthermore, training programmes under SPUR are generally affordable. Let's monitor the situation and consider additional help and support in future when the need arises.

Tightening of CPFIS

31. I will also address some initiatives to refine the CPF Investment Scheme, or CPFIS. Under CPFIS, members can invest their OA and SA savings. But these members must take individual responsibility and accept the risk of their investment choices.

32. Since 2006, new funds have to fulfil more stringent admission criteria which take into account the fund's relative rating, track record and expense ratio, before they can be included under CPFIS. Beginning 1 Jan 2011, CPF Board will require all existing funds under CPFIS to also meet these criteria to be allowed to accept new investments. This is to lower the cost and improve the quality of the funds in CPFIS.

33. Next, with the implementation of the extra 1% CPF interest rate since 1 April 2008, only monies in excess of $20,000 in the OA and $20,000 in the SA can be invested under CPFIS. Given the higher interest rate on the SA and the uncertainty of CPFIS returns, it is better to be more conservative. Hence, we will raise the threshold of SA from $20,000 to $30,000 effective 1 May 2009. This means that members can only invest amounts in the SA in excess of $30,000. Existing investments will be unaffected and the restriction on the first $20,000 in the OA remains unchanged.

Payouts under the Minimum Sum scheme

34. Third, whether the floor Minimum Sum payout could be reviewed so that it is comparable to that of the Public Assistance scheme. As has been reiterated before in this House, the CPF system is premised on self-provision and self-reliance. Members can only withdraw what they put into the CPF. This is what makes the CPF system sustainable.

35. The Minimum Sum Scheme is designed to allow members to receive monthly payouts that will last for 20 years. Increasing the withdrawal amount must mean less for the member in future. Already, many members currently receiving the floor payout of $297 a month would not have enough savings to last the intended 20 years. In fact, with longer life expectancy, we should stretch the payout period further. Raising the floor payout would be irresponsible as it would mean that their savings would run out even faster. By then, these members may be less able to work to support themselves even if they want to.

36. The Minimum Sum is also not the only asset that CPF members have. In fact some members have withdrawn a substantial amount of their CPF at age 55. Many would have substantial housing equity in their HDB flats, and may be eligible for the Lease Buyback Scheme. They can also seek help from their family members, such as through the Minimum Sum Topping-Up Scheme which we have just liberalised further. Those who still face difficulties can approach the CDCs, which will assess their situation and see if they are eligible for financial and other assistance.

37. The CPF system has undergone a set of major reforms in the last two years and will better prepare Singaporeans for the challenges that we face in the future from an aging population.

Challenge 2 - Vulnerable Workers

(III) Helping Vulnerable Workers

38. The second long-term challenge that our society faces is the impact of globalisation on the lower-skilled workers. While we must press on with our economic strategy to stay globally competitive, we must do our best to ensure that all Singaporeans can enjoy the fruits of our economic progress.

39. In 2007, the Workfare Income Supplement or WIS was introduced as a long term scheme to supplement the incomes of low wage workers and build up their CPF savings for long term needs. Over 300,000 workers benefited from the WIS payment for work performed in 2007, receiving on average $1000 each. This is a substantial amount.

40. For 2008, close to 270,000 workers have already received the provisional WIS payment for work done in the first half of last year. More are expected to benefit when the final payments are paid in March and May for employees as well as self-employed persons respectively.

Suggestions to WIS Scheme

41. There was a suggestion that WIS should pay informal workers in cash, and to give greater flexibility to those with less regular employment. We have done that for the WIS Special Payment which I talked about earlier. But for the regular WIS, we should be more cautious about making changes that could affect the work ethic and self-reliance, because unlike the Special Payment, Workfare is a permanent scheme. Nevertheless, we will review the WIS scheme in 2010, and will take into account feedback from MPs and others.

42. During the Budget debate, it was suggested to do away with the requirement to make Medisave contributions to qualify for WIS. We must remember that the responsibility of looking after one's retirement and healthcare needs lies first and foremost with the individual worker, even during an economic downturn. Waiving the requirement to make CPF contributions would be sending the wrong .

Outreach to low wage workers

43. Ever since Workfare was introduced, our tripartite partners and grassroots leaders have been hard at work reaching out to the self-employed and informal workers to explain the importance of CPF and encouraging them to contribute to Medisave.

44. We also introduced the Medisave Contribution Draw as an additional incentive. In fact, the grand draw for workers who had worked in 2007 was held only two days ago. The grand prize winner, a 50 year-old taxi driver, won $5,000 cash. Over 500 others also won cash prizes ranging from $200 to $3000. I strongly encourage self-employed and informal workers to make regular Medisave contributions to save up for their healthcare needs. What's more, they can of course qualify for the Medisave Contribution Draw and benefit from Workfare as well, especially since this time the Special Payment will be made in cash.

Conclusion

45. Sir, we have to continue to help employers and employees prepare for re-employment. We have to continue to help Singaporeans understand CPF LIFE, and to help more members participate in the scheme so that they can benefit from lifelong income. And, we will help and encourage low wage workers to continue working through Workfare. We cannot wait for better times to deal with these important issues. I am confident that with the strong support from our tripartite partners – NTUC, SNEF, SBF and others – we will make good progress on these fronts, even during the downturn.

Factsheet on CPF LIFE

Factsheet on CPF Minimum Sum Topping-Up Scheme

Factsheet on CPF Investment Scheme