CPF Minimum Sum Requirement and Singaporean's Retirement Adequacy

Tan Chuan-Jin

#15

Mdm Speaker, much has been discussed about the CPF in recent months and I thank Members for the opportunity to clarify. Every country is concerned about how to help its people manage when they retire. Some argue that, as individuals, we should be left to sort our own lives out but, in reality, it often does not work out that way. Almost all developed countries have some form of pension or retirement system because most people generally do not save regularly nor do they effectively plan for their own retirement.

Most systems operate as such: you pay regularly, sort of like a tax, and you receive a stream of income when you retire that will cease when you pass away. Payouts are often regular, such as every month, to ensure that there is a regular flow of income to help sustain

Page: 11

living needs. There is a good reason why it is not provided as a lump sum.

For us in Singapore, assurance in old age revolves around a few key considerations: healthcare, housing and retirement needs. The CPF is our key pillar in the social security system. It is a mandatory savings account that helps us put aside money today to cover our needs in old age. As the CPF is a defined contribution system, the full amount in your CPF account would go to your family if you pass on prematurely. Both individuals and their employers contribute their share to the scheme. It is important to remember that as part of the CPF system, employers contribute to that scheme as well. And it is also a vehicle through which we help cater to healthcare and housing needs.

When CPF was first introduced almost 60 years ago, members could withdraw their money at age 55 in a lump sum. That was because at that time, someone could expect to live only another six to seven years after that. That was the life expectancy then. It made sense and it was logical to be able to withdraw your CPF in a lump sum at age 55. But the world has changed. The situation is very different today where one could expect to live a further 30 years or more. Allowing a full withdrawal from CPF at age 55 today will put us at real risk of outliving our savings in old age. To blindly keep to the earlier model of full withdrawal at age 55, which made sense then, would be wrong and irresponsible.

This is why we introduced the Minimum Sum scheme. The policy is not a new one and has been in place for about 30 years. The idea is this: how to stream out our CPF savings every month to meet living expenses instead of having them all withdrawn in a lump sum. Neither do we require Singaporeans to set aside all our CPF savings to be streamed out in this way. Only a basic amount necessary for retirement expenses is required and you can withdraw your CPF savings above that in a lump sum. This basic or minimum amount is known as the Minimum Sum.

Let me clarify several issues relating to this whole concept of the Minimum Sum.

As we know, some are unhappy when the Minimum Sum increases for every cohort that turns 55. Some see it as a "shifting goalpost" that locks up more and more of their CPF savings. Others do not understand how much savings they must set aside at 55.

Let me explain the Minimum Sum in some detail to dispel misconceptions and myths that have surfaced in the recent public discussion.

First, the Minimum Sum quantum is cohort specific. Once it is set for a particular cohort, it does not change. For example, someone who turns 55 between July 2014 and June 2015 will need to set aside $155,000 as a minimum, above which he can withdraw. This is slightly

Page: 12

higher than what a person who turned 55 last year needed to set aside, which was $148,000 and which would remain unchanged for that person who turned 55 last year. To further illustrate, for someone who turned 55 five years ago, the Minimum Sum was $117,000 and that has remained unchanged for him.

Second, the increases to the Minimum Sum for each successive cohort over the last decade are part of a major, planned, gradual adjustment starting in 2004, to catch up with what a lower middle-income household would need in retirement. This was announced a number of years back; it is part of a plan.

How did we arrive at $155,000 for this year's cohort? That is the amount you need to get a monthly payout of about $1,200 in 10 years' time when you reach age 65, when you begin the drawdown of your CPF savings. We estimate that is how much a lower middle-income household would spend on daily living when they enter retirement 10 years from now. One thousand two hundred dollars per month in 10 years' time is not an excessive amount – it is equivalent to only about what $1,000 would be able to fetch today.

Some might argue that both they and their spouses work, and so if both are required to set aside the full Minimum Sum individually, then they will have the combined payout of $2,400 which is more than what they need. Well, the answer is that if they have a property – and many do have a property – then they can pledge that property to set aside only half the full Minimum Sum in cash, so that each one only needs to set aside $77,500 for retirement – half of $155,000. The combined payout of their Minimum Sums will then be a total of $1,200 per month – or just adequate for basic living expenses. And what happens if they do not have a property to pledge? In the scenario where they do not have a property, they will need to pay for rent, and so a combined payout of $2,400 may not be too generous, after all.

Third, if you do not meet your Minimum Sum at 55, you do not need to top up the shortfall in cash nor do you need to sell your property to make up the shortfall. Let me repeat this, you do not need to top up the shortfall in cash, nor do you need to sell your property to make up the shortfall. What it means is that with a smaller amount, your monthly payout would be correspondingly less. That is all.

Fourth, only half of the Minimum Sum needs to be set aside in cash. The savings above that amount can be used to finance housing purchases, or be withdrawn through a property pledge. This means a member turning 55 this year, for example, only needs to set aside $77,500 in cash and the rest can be withdrawn through a property pledge. Seventy seven five hundred thousand dollars will translate to a CPF LIFE payout of about $600 or so per month in retirement, which is not excessive. It is important for us to remember that. As you begin to draw down or reduce the cash component, what it means is that your monthly

Page: 13

payout will be correspondingly less.

On that last point, to answer Mr Gan Thiam Poh's question, 50% of active CPF members met the Minimum Sum in 2013, including 15% who used their properties to support up to half of the CPF Minimum Sum. Members who had used their properties to support their Minimum Sum included (a) members who had less savings in their CPF and had their housing withdrawals pledged to meet the Minimum Sum, as well as (b) members who had met the Minimum Sum but pledged their property to withdraw their CPF savings above half the Minimum Sum. In general, we look at the percentage of active CPF members who meet their Minimum Sum in cash plus property because home ownership, and monetisation if that is required, contribute towards how adequately we are prepared for retirement.

While some members are unhappy that their CPF savings are being locked up under the Minimum Sum rules, other members have voluntarily left their CPF savings in their accounts even though they have CPF funds in excess of the Minimum Sum and can withdraw these amounts. One reason why they do so is to continue to earn the risk-free returns on their CPF savings. Mr Gan Thiam Poh would be glad to know that as at December 2013, about 20% of the entire cohort who turned 55 in 2013 had balances above the Minimum Sum that were not withdrawn.

I am aware that some members may find the CPF system difficult to understand because policy changes over the years mean that different rules may apply for different cohorts. This practice of grandfathering old rules for older members is precisely to minimise adjustments to those members who already passed age 55. This was necessary so as not to disrupt the plans of older members mid-way through their retirement.

I would like to add this – it would not be responsible of this Government to leave unchanged the CPF rules for those who are younger when the situation around us has changed and quite dramatically so. Singaporeans are living longer – that is a reality. The things that retired households spend on have also risen in quality. If you look at our consumption pattern over the years, it has improved in quality. That is also a testimony to the standard of living that has risen significantly for many Singaporeans. And that is a fact. The more we postpone the needed changes, the more disruptive the changes will be when they are forced upon us in future. Many governments do not embark on these changes and reforms because they may be unpopular, but it is not the right thing to do. We believe it is our responsibility to make these changes when we can, so that when the changes are upon us in full, we are well prepared.

What I can assure everyone is that whenever there is a policy change, the CPF Board makes an effort to try to reach out to every affected member. At the same time, we encourage members who are unsure of the rules to also step forward to request for

Page: 14

assistance to navigate these rules. One request I would make following many dialogues with members of the public is, to read the materials that are put forward. I realised through many dialogues and conversations, many people get agitated and very emotional, and argue on points which are actually already clarified in the materials that are put out. But many have not read them.

CPF is an important part of our lives. It behooves us to at least read those materials, to understand what it is and what it is not. Many are concerned about whether they will meet their Minimum Sum.

Ms Tin Pei Ling and Mr Png Eng Huat asked about the balances that CPF members have for retirement. As I had mentioned earlier, about 50% of active members who turned 55 in 2013 achieved their Minimum Sum in cash plus property. For those who do not meet their Minimum Sum, the majority have a property that they have used their CPF savings to pay for. The reason why some of them do not meet the Minimum Sum is because we cap the amount that can be used for property at half the Minimum Sum. This means that while they may not have, in terms of cash, more than half the Minimum Sum, their property may be worth far more than half. And clearly in most cases, property would be worth more than half. But we cap it, which is why even though they may have a property worth $500,000 or $1 million, and if they have less than half the Minimum Sum in cash, they are actually considered as not meeting the Minimum Sum in technical terms.

In addition to that, it is important to understand that even though some may not meet the Minimum Sum, they also would have spouses with higher CPF balances who can provide for them.

Over the years, more members in each cohort reaching the age of 55 have been able to meet their cohort Minimum Sum. This is despite the Minimum Sum having increased over the years for each cohort. For younger workers, we are even more optimistic about their ability to attain the Minimum Sum. In a 2012 study, two local academics, Assoc Profs Chia Ngee Choon and Albert Tsui, estimated that about 70% to 80% of new entrants to the workforce would be able to meet the Minimum Sum for their cohort fully in cash. There are several reasons why this is so: wages have been growing and labour force participation rates have been increasing.

Significantly, it is also because we have been making enhancements to the CPF system to help members grow their savings to meet the Minimum Sum. Mr Christopher de Souza asked what those are.

Page: 15

First, since 2008, the CPF pays an additional 1% interest on the first $60,000 of the combined balances. As a result, about two-thirds of members earn 5% interest; I repeat, 5% interest on all their balances in their Special, Medisave and Retirement Accounts. Over half of all members earn 3.5% on all their Ordinary Account savings. This – for those of you who are familiar with what you may be getting in your respective deposits – is far superior to what is earned on our bank deposits today and very comparable and far higher than many comparable financial instruments.

Second, Singaporeans earning lower incomes also enjoy boosts to their CPF savings through Workfare.

Third, we have also been raising CPF contribution rates for older workers to help them save more and have been working with our tripartite partners to improve employment opportunities for older workers.

The key group that we should really be concerned about and who may have insufficient CPF balances, are our seniors; many of whom are currently in retirement. Many have low CPF balances because they grew up working in an era where lower wages in the past was a norm; before we began to be more developed and wages became rising. And also because we have more liberal withdrawal rules for CPF earlier which were calibrated then for shorter life spans. In a sense, it depleted their CPF savings.

However, we also know that the majority of current seniors do own their own homes and have fully paid up their housing loans. Mr Png Eng Huat asked about the average proportion of the Ordinary Account Savings used for public housing by older members. Among members who turned 55 years old over the past five years and had used CPF monies to purchase HDB flats, an average of 55% of their OA savings had been withdrawn to finance their flats at the age of 55.

These housing assets by and large have appreciated and in many cases, quite significant and, if needed, can be tapped on to supplement their retirement incomes. Various schemes have been introduced and we will strengthen these. For example, we have the Lease Buyback Scheme and we also have the Silver Housing Bonus. Those who take advantage of these schemes typically get enough in proceeds from the sale to top up their CPF accounts up to the Minimum Sum, with cash to spare. Our current seniors also receive additional support from the Government through measures such as the Pioneer Generation Package (PGP).

The CPF is founded on the principle of self-reliance and work. Those who do not work and do not contribute regularly to the CPF, are naturally less likely to attain the Minimum

Page: 16

Sum. To give you a sense of the numbers, which Mrs Lina Chiam has asked for, we know that 23% of Singaporeans who turned 55 in 2013 were inactive CPF members, while the remaining 77% were active members or self-employed. For the group of inactive members, many of whom have not worked regularly, family support will have to come in and other social safety nets are in place to provide assistance – for example, through the various ComCare schemes. We have been strengthening the social safety nets over this in recent years.

Ms Tin Pei Ling asked whether a more flexible use of CPF savings for housing can be allowed. Mr Seng Han Thong specifically asked whether more flexibility could be exercised for members with less than half the Minimum Sum. Ms Irene Ng asked whether it can be made automatic for these members to continue using their CPF for their housing loans without interruption.

I understand that there are concerns about CPF members' ability to continue servicing their housing loans with CPF savings after age 55. Let me first state that in the 10 cohorts aged 55 and above, only one in 10 are still using their CPF for monthly instalments, and only one in 20 may have to meet their monthly instalments with some cash.

For CPF members who do face difficulties with their housing loan repayments, we have exercised flexibility where a case merits it and allowed them to use part of their Retirement Account savings for housing, even if they do not have half the Minimum Sum.

I have shared with Members of the House that we receive an average of about 500 appeals annually from members 55 years and older who request to use more Retirement Account savings for housing. We have approved about two-thirds of these appeals. The number of such appeals – 500 a year – is not large, considering that there are more than 60,000 CPF members turning 55 every year. For cases that are not approved, we also work closely with HDB to explore alternative financing or housing options for the CPF members. And there are various steps that can be executed to assist them.

I would like to assure Mr Seng that we are ready to exercise flexibility in the use of CPF for housing after 55 years old because we recognise that helping a member maintain a roof over his head is an important part of our overall retirement adequacy goals. To address Ms Irene Ng's point, I do not think we want to make it automatic for members. Some of these members would be able to service their housing loans using cash, instead of drawing upon their Retirement Account savings and hence compromising the monthly payout in retirement. We also do not want – and I think is important to note this – we do not want to encourage rash and imprudent housing purchases by members who think that they can automatically draw down fully on their Retirement Account funds to service their loans. You could end up with over consumption on housing as a result of that. Any member can get

Page: 17

overstretched.

Mr Ang Wei Neng raised a separate point on whether we can remind CPF members at age 54 about the impending transfer of members' monies from their Ordinary Account to their Retirement Account when they turn 55. Currently, CPF Board informs members two months before they turn 55 years old. Since January this year, HDB has been sending letters to households with outstanding HDB loans and with at least one HDB lessee age 50 to 54, to remind them to plan ahead for their housing payment before 55 years old. Nonetheless, I think more can be done in this area and Mr Ang's suggestion is a good one. We will look into how CPF members can be reminded to make sufficient arrangements for their housing payment in advance.

Mr Ang also asked whether the CPF Drawdown Age will be increased when the re-employment age is increased. This is an issue that we are studying carefully. The drawdown age today is 63 and will be raised to 65 years old by 2018. Whether it needs to be raised further, will depend on life expectancy and the need to maintain retirement payouts at a reasonable level. We have not reached any conclusions yet.

One way that we protect Singaporeans from the risk of outliving their payouts due to increasing life expectancies is through our CPF LIFE annuity scheme. Mr Png Eng Huat asked about members who opt for the CPF LIFE Standard Plan. Among the members who joined CPF LIFE upon turning 55 years old in 2013, about 70% are on the Standard Plan.

To sum up, the CPF remains a key pillar to help Singaporeans cater for their needs in old age. There are areas that certainly can be improved, and I welcome different views and perspectives on this. While it is not possible to meet every single member's specific needs, I can assure Members that we will look into all feedback and make changes where warranted.

As Prime Minister Lee Hsien Loong mentioned during the recent debate on the President's Address, our focus over the next few years will be on two key challenges: first, helping members cope with the rising cost of living during their retirement years which could erode the value of their CPF LIFE payouts; secondly, helping low-wage workers who may have accumulated lower CPF balances over their working lives. We will also put in more resources to help Singaporeans better understand the CPF system.

Mdm Speaker: Questions will be taken later, Mr Ang. Deputy Prime Minister will take the Parliamentary Questions on the Order Paper first.

Page: 18

CPF Minimum Sum Requirement and Singaporean's Retirement Adequacy

Summary

Questions Identified

Full Transcript

Gan Thiam Poh

Summary

Questions Identified

CPF Minimum Sum Requirement and Singaporean's Retirement Adequacy

Summary

Questions Identified

Full Transcript

Gan Thiam Poh

Summary

Questions Identified

Seng Han Thong

Irene Ng Phek Hoong

Ang Wei Neng

Tin Pei Ling

Tin Pei Ling

Christopher de Souza

Mrs Lina Chiam

Png Eng Huat

Png Eng Huat

The Minister for Manpower (Mr Tan Chuan-Jin)

Mdm Speaker

Tan Chuan-Jin

Mdm Speaker

Tan Chuan-Jin