I refer to the report “New survey shows 60% of Singaporeans want to retire by 60” (Channel News Asia, 22 April).
In the light of this survey’s findings, it may be timely for us to evaluate how well the Central Provident Fund (CPF) system has served Singaporeans in their retirement planning?
Well, the last time we had some remarks in this regard in the media, the sentiments expressed were less than favourable, as revealed in headlines such as “Ranking of CPF flawed: Expert” (Straits Times, 25 November 2009), “Pensions : S’pore ranks low” (ST, 16 October 2009) and “Report rates CPF system a ‘C’, suggests refinements” (Business Times, 16 October 2009).
Singapore has done relatively poorly in a new global pension index by Mercer. Singapore is ranked eighth out of the 11 countries in the study.
The report also makes five recommendations for Singapore:
1) “That it should raise the minimum level of support for the poorest pensioners”
In my view, the problem with CPF is that about 25 per cent of account members, those who have less than $40,000 at age 55, will be excluded under the new compulsory CPF Life scheme. It is the poorest who really need more support in retirement, and I believe Singapore is the only country in the world which excludes the bottom 25 per cent of its retirees from a national pension scheme (of course those excluded can opt-in to the scheme, but this is unlikely as most may get even less monthly payouts under CPF Life).
2) “Raise the prescribed minimum that must be set aside for retirement”
The current CPF Minimum Sum (MS) is already $117,000. At its current rate of increase of $11,000 (for the last year), the MS is projected to be about $161,000 in 2013. The projected Medisave Minimum Sum (MMS) must also be added to the MS, making a total of about $197,000 in 2013 (MS $161,000 plus MMS $36,000).
Moreover, I understand that all the projections, like that which predicts only 60 per cent will have more than $67,000 in their CPF at age 55 in 2013, are based on “active” CPF account members. What is the definition of “active” CPF account members? How many “active” and “inactive” members are there in total?
3) “Raise the contribution rate”
At 34.5 per cent, we already have the highest contribution rate in the world. The problem is not the contribution rate, but the relatively low interest rate on the bulk of CPF monies in the Ordinary Account, which only pays 2.5 per cent (plus an extra 1 per cent on the first $60,000 of the Special, Medisave and Ordinary Accounts).
Even for the Special and Medisave accounts which pay a higher rate, the interest has been less than 4 per cent since it was pegged from 1 January 2008 to the 12-month average yield of 10-year government bonds plus 1 per cent. In the future, these rates could fall as low as the floor rate of 2.5 per cent plus an extra 1 per cent on the first $60,000.
So far the government has extended a guarantee of the 4 per cent interest rate on these accounts to the end of this year, as the pegged rate has fallen below that (from 1 March 2009 to 28 February 2010, the rate is only 3.44 per cent). Will the government extend the guarantee in the future?
To put this in perspective, if Temasek Holdings can get a return of 18 per cent per annum for the last 32 years, can’t the CPF interest rate be higher?
4) “Encourage additional savings from above average income earners”
With the CPF draw-down age being continuously delayed from 55 years to 60, then 62 and now 65, and ever increasing MS and MMS, even those who are capable may be reluctant to make additional savings.
Moreover, there is some concern that the 4 per cent minimum guaranteed rate on the Retirement Account, may become lower after the guarantee expires on 31 December 2010.
5) “Increase the labour force participation rate among older workers”
Over 100,000 self-employed are believed to be not making their full CPF contributions despite being required to do so by law under the CPF Act. Lower-income older workers have also generally seen their wages decline over the years. So unless older workers are earning enough to survive, it may be difficult to increase their participation rate.
Finally, under the Adequacy of Retirement Income sub-index in the Mercer study, Singapore’s net income replacement rate is ‘particularly low’ due to the nature of the CPF and members’ ability to access funds for a number of purposes.
The retirement income replacement rate is a measure of a pension system’s effectiveness in providing income during retirement to replace earnings which were the main source of pre-retirement income.
Why is it that Singaporeans have the highest contribution rate in the world, but their retirement income replacement rate is so low?
One of the main contributing factors is the ever increasing prices of HDB flats under the HDB’s “market subsidy pricing” policy, which means that many Singaporeans spend a large and growing proportion of their CPF and income on servicing housing loans.
Currently there are 30,770 HDB loans in arrears for over 3 months. How many of these people may end up losing their homes and CPF?
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Note: The author delivered a 3-hour lecture on Singapore’s pension system (CPF) under the Global Pension Experts Programme, last year in Seoul, South Korea. He has written over 50 articles on CPF.
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Picture: Courtesy of “First Ever Ektron Training in Asia”
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a couple aged 30 ties the knot & buys an overpriced cramped HDB flat, taking up 30yrs loan. they think they can live happily ever after. they conceive & have kids in the following yr, and they went about doing what normal families do, and raised their kids well.
16-18yrs later, they send their kids to the local polytechnics, and the exorbitant tuition fees tap on the couple’s CPF.
3yrs later, the boy serves NS, the daughter goes to the local university, taps on the couple’s CPF for tuition fees. 2yrs later, the boy completes NS, goes to a local university, taps more on the couple’s CPF for tuition fees.
4-5yrs later both the kids graduated & start their 1st jobs, their insignificant CPF contribution goes back into the parent’s CPF accounts.
by the time the couple hit 60yrs old, the loan for the flat is probably still incomplete. which they probably might choose to finish the whole debt using cash.
at 60yrs old, debts just cleared using cash savings, the SA in their CPF is probably so little that they cant even have a decent retirement, while the kids can’t afford to finance the parents.
in conclusion, the concept of using CPF to purchase flats & tertiary fees was a major flaw, and nobody’s interested to do anything about it.
retirement in singapore is a myth, hoax, legend, folklore……… the day u truly retire is when u sleep & never wake up again.
I think the CPF board should just set aside $50K just for our funeral expenses for those who are 55 years of age. And to release all our money after 55 years.
We dont need the government to look after us and manage our funds. If I am full of sickness and have no money, I will think of ways to end my life. we are just like an expired goods waiting to be dispose off.
The living needs the money and not the dead. All I know from the begining the CPF board promise us that at the age of 55 years we will be able to get our monies back. Look at now, MS cap $131K. how many of us have more than $131K in our CPF? what blantant excuse to hold our CPF.
CPF is an extra temporary tax that allows the Government to “boost” our country GDP to make things looks nice on their report card so that they can show that they did well over the years.
But the actual fact they are leeching our income tax, ERP, public housing interest, GST, Public transport, Utilities Bills & the list goes on and on.
Things a lot of citizens don’t know is with the ongoing inflation rates your CPF is always decaying & the interest rates given to counter the inflation does not match, in other words you keep losing value in CPF.
So what is the best solution to counter this problem. Invest your CPF on natural resources stocks because the demand will always be there thus reducing your CPF decay rate.
Remember, paper money is worthless only gold,silver & copper has real value.
Start waking up your fellow citizen & educate them on what our politicians are destroying our lives.
I’m just a voice from the people cheers =)