FROM Oct 1, the Central Provident Fund rate will be cut from the current 36 per cent to 33 per cent. Employees will continue to pay 20 per cent, but employers will contribute 13 per cent, three percentage points less than now.
PM Goh announced the painful changes in CPF cuts in Parliament on Thursday.
This was announced by Prime Minister Goh Chok Tong in Parliament on Thursday, in a statement that included other changes to Singapore's system of enforced savings, in order to stem the outflow of jobs and to ensure that Singapore stays globally competitive.
The rate of contribution for workers aged 50 to 55 will also be brought down to 33 per cent on Oct 1, but will be further cut in stages on Jan 1 in 2005 and once again 2006, by one percentage point for employees and two percentage points for employers each time, till it hits 27 per cent -- 18 per cent for employees and 9 per cent for employers.
These cuts will shave $1.3 billion off employers' wage costs.
'The CPF is Singapore's most important social safety net,' Mr Goh said, warning that jobs, including white-collar ones, were now moving to places where business costs, particularly wages, are lower, because of globalisation.
A summary of some of the key changes:
Special Account contributions
The new target Special Account contribution rates will be 5 per cent for members aged 35 and below, 6 per cent for those aged 35 to 45 years, and 7 per cent for those aged 45 to 55 years.
Medisave Account contributions
The Medisave Account contribution rates will remain at 6 per cent for CPF members aged 35 and below, 7 per cent for those aged 35 to 45, and 8 per cent for those above 45 years old.
The Economic Review Committee had earlier this year proposed that both Special Account rates and Medisave Account contribution rates be increased, but these will now be deferred.
CPF salary ceiling
Following the ERC review last year, the Government had already decided to reduce the CPF salary ceiling in two steps: First, from a monthly salary of $6,000 to $5,500 on Jan 1, 2004 and then from $5,500 to $5,000 on the following January.
But $5,000 is still higher than the 80th percentile monthly salary, which is currently $3,700. So the salary ceiling will be further lowered from $5,000 to $4,500 on Jan 1, 2006.
Assuming a reasonable rate of wage increase and inflation, by then, $4,500 will be just a little above the 80th percentile income. The ERC had earlier this year set the principle that CPF should focus on workers earning between the 10th and 80th percentile incomes.
CPF Minimum Sum
The CPF Minimum Sum gives CPF members a monthly payment after their retirement at age 62. It is the nest egg that will see them through their old age. The current Minimum Sum is $80,000, but half of this can be in a property pledge, so most CPF members have only $40,000 in cash in the Minimum Sum.
The yield in monthly payments from this is only $252 from age 62 to 80 -- too small a sum to pay for a workers' basic needs, so the Minimum Sum will be increased from the current $80,000 to $120,000 in today's dollars. Half of this can still be in a property pledge, but the monthly yield from the remaining cash will go up to $378. It still is not much, but it will be better than before.
The CPF Minimum Sum will be raised by $4,000 a year, and adjusted for inflation, starting July 1, 2004.
Withdrawal rule at age 55
The CPF withdrawal age will stay at 55, but members will now have to first meet the CPF and Minimum Sum requirements because the newly lowered contribution rates will result in insufficient CPF savings to see workers through their retirement years.
Mr Goh said he was aware that changes to the CPF worried Singaporeans, and that they have been re-looking their finances since he first announced at his National Day Rally speech in mid-August that changes were coming.
'Most Singaporeans will be able to cope. But many may have to do some belt tightening.
'The Government will help ease their adjustment pain. We have put together an assistance package. It will include measures to help homeowners cope with their loan repayment, which may be affected by the cut in CPF,' he said.
For full reports, see Friday's edition of The Straits Times.
Summary of CPF changes