(4) STRENGTHENING OUR SOCIAL SECURITY SYSTEM

We are building an inclusive society where every citizen shares in the country’s success. Since independence, three pillars – all linked to the CPF – have underpinned our social security system. The first – the CPF Special or Retirement Account – has enabled every working Singaporean to build a nest-egg for his retirement needs. The second – subsidised public housing through the HDB and the CPF Ordinary Account – has made home ownership a reality for the vast majority of Singaporeans. The third – the 3Ms of Medisave, MediShield and Medifund – has provided Singaporeans with affordable, high-quality healthcare.

The CPF helps us achieve our social stability. We should continue to strengthen the CPF system, and include as many Singaporeans as possible in it. The three existing pillars of our social security system continue to serve the majority of Singaporeans well. Through the CPF schemes, most Singaporeans are able to save enough to provide for their own social security. However, low-income Singaporeans are finding it more difficult to save enough in their CPF. Their wages have stagnated because of globalisation, and will continue to be under pressure. For this group, we now need a fourth pillar - Workfare.

Like the existing three pillars, Workfare will also be linked to the CPF, to encourage more low-wage workers to save for their longer term needs. In doing all this, we must continue to preserve the key principles which underlie our social security system - namely self-reliance and mutual support within the family, supplemented by the Government only to the extent necessary.

Raising the Employer CPF Contribution Rate

First, we will raise the CPF contribution rate. It is currently 33% - 20% from employees and 13% from employers. We have set a long-term variable range of 30% to 36%. This range seeks to strike the right balance between achieving our social security objectives and economic competitiveness, while giving us the flexibility to respond to changing economic conditions. With the economy doing well, I believe we can sustain a modest rise in the employer CPF contribution rate.

Therefore, the Government has decided to increase the employer contribution rate by 1.5 percentage points to 14.5%, starting from 1 July 2007. One percentage point will go into the Ordinary Account. It will add to the savings of CPF members, and help many of them pay for their mortgages. The remaining 0.5 percentage point will go into the Medisave Account to better provide for healthcare needs. The Ministry of Health has made it easier for Singaporeans to draw from their Medisave Accounts, and will continue to liberalise the use of Medisave.

The increase in CPF will apply to all Singaporean workers, except for the group of workers who earn $1,500 or less and are also above 35 years old. For this group of workers, we will need a different approach.

Restructuring the CPF and Introducing Workfare for Low-Wage Workers

Older low-wage workers are the ones most affected by the changes in our economy. They find it harder to learn new skills and upgrade themselves, they find it harder to get re-employed if they lose their jobs, and their families find it more difficult to make ends meet. We will therefore introduce Workfare to supplement the wages and savings of older low-wage workers, and modify the CPF system to complement the Workfare scheme.

Many other developed countries have addressed the problems of low incomes, often through extensive social welfare programmes. But Welfare has drained fiscal resources and, more damagingly, eroded the work ethic and encouraged an entitlement mentality. The more successful model of assistance has been Workfare - which seeks to supplement the incomes of low-wage workers on the principle that the best way to help people is to help them find work and stay in work.

Wage supplements are new to Singapore, but the concept has been tried with some success in other countries. The US has the Earned Income Tax Credit. This acts like a negative income tax for low-wage workers, supplementing their earned income instead of taking away from it. The UK has a Working Tax Credit which is similar. These schemes have helped to reduce poverty and encourage work. But they are not without problems - they are not cheap, and they potentially weaken the incentive for workers to upgrade themselves. That is why we have to consider the design of the scheme very carefully and move cautiously. We introduced the Workfare Bonus as part of the Progress Package last year, to test out the concept with Singaporeans. We are now ready to take a step further by making Workfare income supplements a long-term feature of our social security system.

We will move in parallel on both the CPF and Workfare for low-wage workers. We will reduce the CPF contributions for these workers, while introducing Workfare income supplements for them. This will achieve three objectives. First, workers will contribute less CPF, so as to increase their take-home pay. Second, employers will also contribute less CPF, to make the workers more employable. Third, the Government will give workers Workfare income supplements, mainly into their CPF accounts, and so help them to build up their savings. Workfare provides more incentives for individuals to work, and for employers to hire them. With Workfare, low-wage workers will end up with more in their CPF. With Workfare, the state will step in to share the burden of social support with the individual and his employer.

The principal target group of Workfare will be older full-time workers aged above 45 years who earn $1,000 or less. This group will receive the highest Workfare benefits. However, Workfare benefits will extend to a wider group - those above 35 years who earn $1,500 or less, but at a lower rate. This is so that we do not miss any deserving cases, and also so that workers whose earnings increase beyond $1,000 do not suddenly lose all their Workfare benefits. I will go through each of the measures in turn.