CPF issue: 15% use properties to meet up to half of Minimum Sum

SINGAPORE - In a speech addressing eight MPs' questions on CPF, Mr Tan set out to "dispel misconceptions and myths that have surfaced in the recent public discussion" on the topic.

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Excerpt from Manpower Minister Tan Chuan-Jin's speech:

Clarifying Several Issues Relating to the Minimum Sum

"Let me clarify this concept of the Minimum Sum. 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.

"Now, 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 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. This is slightly higher than what a person who turned 55 last year needed to set aside, which was $148,000 and that remains unchanged for someone 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.

"How did we arrive at $155,000? 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 your draw-down 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. $1,200 per month in 10 years' time is not an excessive amount - it is equivalent to only about what $1,000 would buy 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 properties, 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. Then the combined payout of their Minimum Sums will be a total of $1,200 per month - or just adequate for basic living expenses. And what happens if they don't have a property to pledge? In the scenario where they don't have a property, they will need to pay for rent, and so a combined payout of $2,400 is not too generous at 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 your smaller amount, your monthly payout will be correspondingly lesser, and 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 only needs to set aside $77,500 in cash and the rest can be withdrawn through a property pledge. $77,500 will translate to a CPF LIFE payout of about $600 per month in retirement, which is not excessive.

"On that last point, to answer Mr Gan Thiam Poh's question, 50 per cent of active CPF members met the Minimum Sum in 2013, including 15 per cent 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 (i) members who had less savings in their CPF and had their housing withdrawals pledged to meet the Minimum Sum, as well as (ii) 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 necessary) 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 note that as at Dec 2013, about 20 per cent 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 means 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 have already passed age 55. This was necessary so as not to disrupt the plans of older members mid-way through their retirement.

"But 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 dramatically. Singaporeans are living longer - that is a reality. The things that retired households spend on have also risen in quality - this is also a testimony to the rising standard of living for many Singaporeans - that is also a fact. The more we postpone the needed changes, the more disruptive the changes will be when it is forced on us in future. Many governments do not embark on these changes and reforms, because these may be unpopular. But we believe that it is our responsibility to make these changes when we can, so that when the changes are upon us, we are well prepared for it.

"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 assistance to navigate these rules. One request I would make, following many dialogues with members of the public, is that they read the materials that are put forward. In many dialogues and conversations, many people get agitated and emotional and argue on points which are already clarified in the materials that we have put out, but they have not read. CPF is an important part of our lives, and it behoves us to read those materials to understand what it is and what it is not."