Pros and cons of temporarily reducing CPF contribution rates until the economy recovers

With the many headline-grabbing announcements of the successive Budgets Statements in 2020, the postponement of the planned increase in Central Provident Fund (CPF) contribution rates for older workers by one year - from January 1, 2021 to January 1, 2022 - in the Fortitude Budget might have slipped by without your notice.

Deputy Prime Minister (DPM) and Finance Minister Heng Swee Keat explained that this was meant to help companies manage costs amid the Covid-19 crisis.

Furthermore, in Parliament earlier this month (June 2020), MP for Marine Parade GRC and NTUC FairPrice CEO Seah Kian Peng asked the government to consider reducing Central Provident Fund (CPF) contribution rates as a high priority and enacted sooner rather than later, in order to help put more on the table for employees during this difficult economic climate.

In response, Minister for Manpower Josephine Teo said that the government is mindful of this concern of Singaporeans, but said that there are no plans to reduce CPF contribution rates.

She explained that this is to ensure Singaporeans' ability to save for retirement is not eroded, while ensuring those who depend on CPF contributions to meet housing and healthcare needs can continue to do so.

Minister Teo added that when savings rates are cut, there is very little chance Singaporeans can make up for the loss of growth in retirement savings. However, Minister Teo did not rule out potentially revisiting this decision, and introducing other measures, if the need to arises in the future.

Undoubtedly, adjustment of the CPF contribution rates is a powerful lever that the government can use if needed, though it comes with far-ranging implications on Singaporeans today and tomorrow.

We'll examine the pros and cons of reducing mandatory CPF contribution rates (for employees and employers), to better understand what would happen if this was indeed to be activated in the future.

Historical occasions when CPF contribution rates were cut

Ever since CPF was introduced in 1955 with a total contribution rate of 10 per cent, contribution rates have been periodically (and steadily) increased, until a peak of 50 per cent in 1985.

Since then, the rates have only been cut as a response to economic difficulties twice: in 1986 during Singapore's first post-independence recession and in 1999 during the Asian Financial Crisis.

We can see that even during the SARS crisis and 2007 Global Financial Crisis, CPF contribution rates held steady, with the government opting to use other relief measures to help Singapore workers remain competitive and employed.

How much (more) will workers take home if CPF contribution rates are cut?

According to MP Seah Kian Peng, the overriding intent behind calling for CPF contribution cuts is to allow workers to keep a larger portion of their wages.

To get an idea of how much it would help if CPF contribution rates were cut, let's look at a worker age 55 who earns the median salary in Singapore, which in 2019 was $4,563:

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Employer Contribution: $775.71

Employee Contribution: $912.60

Take-Home: $2,874.69z

If the employee contribution portion was cut by half (10 per cent), the increase in take-home salary would be $456.30, or an increase of 15.87 per cent.

For lower-wage workers, the proportion would remain the same, though the quantum in dollar-terms would be much lower.

Can employers' CPF contribution rates be cut instead?

So, if cutting employee CPF contributions wouldn't yield substantial cashflow benefits, some might wonder if the increase in take-home pay could come from the employer's contribution.

It is worth noting that if economic conditions are dire enough to warrant an adjustment to the CPF contribution rates, it is very possible that the employer's CPF contributions might be cut in order to save jobs by further lowering the cost of keeping Singapore workers employed, and boost Singapore's competitiveness as a destination for starting or expanding businesses.

While boosting one's take-home salary is an important priority (in Seah Kian Peng's view, at least), this goal would undoubtedly pale in comparison to keeping labour costs sustainable. After all, if a job is lost, there will be take-home pay to speak of.

So, it wouldn't make a lot of sense to cut employers' CPF contribution rates, only to have them pay more to their employees in cash.

Long-term implications for workers if CPF contribution rates are cut

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As we've seen in the case of increasing CPF contribution rates for older workers, it takes long-term planning, early announcement so businesses can prepare, and even introducing an offset package to help companies make the transition.

It is easy, and quick to slash CPF contribution rates, but increasing it after the Covid-19 crisis and resulting recession has lifted (which can take years) can be a slow, painful and even costly endeavour.

And all these while, cohorts of Singapore workers would have lost out on years of additional compounded savings, including fresh graduates, who might find it difficult to make down payments for their first home purchase.

The better alternative to cutting CPF contribution rates

By introducing measures like the Jobs Support Scheme and keeping CPF contribution rates steady, we're actually giving workers the best of both worlds - savings jobs by subsidising wage costs, while continuing to grow their retirement nest egg and compounding it without interruption thanks to CPF's guaranteed interest.

As Manpower Minister Teo explained, the government is aware of this 'CPF contribution rates card' they hold, and isn't ruling out using it in the future. But such a decision would only be taken after careful study and when the situation absolutely calls for it.

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This article was first published in Dollars and Sense.