CPF issues can be resolved

SINGAPORE - Recent public attention has focused on the Central Provident Fund (CPF), with some expressing unhappiness at the increase in the Minimum Sum.

Others call for greater transparency in the deployment of CPF funds.

Prime Minister Lee Hsien Loong also told Parliament last week that the Government is studying how to improve the CPF and CPF Life annuity scheme so that payouts keep pace with the cost of living.

There is an urgent need to address some fundamental issues concerning the CPF, a compulsory savings scheme for workers to which employers must contribute.

A great deal of the current unhappiness revolves around the Minimum Sum scheme.

At age 55, CPF members are allowed to withdraw their CPF funds, but must keep a "minimum sum" in their retirement account.

This sum can be withdrawn in monthly amounts when they turn 60 to 65, depending on their year of birth.

The Minimum Sum has been rising each year as the Government tries to make sure CPF members set aside a large enough lump sum for their basic retirement needs.

CPF funds above that amount can be withdrawn.

The Minimum Sum will be $155,000 from July 1. This is up from $80,000 in 2003.

The rapid increase in the last decade is one reason for the unhappiness over the scheme, fuelling a sense of betrayal of trust.

In fact, the Government could have tackled this discontent better if it had dealt with it more directly.

The nub of the issue here is how to ensure CPF members have enough for their old-age needs.

The simplest way is to raise the withdrawal age directly. It was set at 55 at a time when people retired around that age.

Today, the retirement age is 62, and companies are encouraged to rehire workers till 65. There is also talk of raising the re-employment age to 67.

But memories still linger of the widespread public anger 30 years ago when the 1984 Howe Yoon Chong report on the aged suggested raising the CPF withdrawal age to 60.

Shying away from that anger, the Government allowed people to withdraw their CPF funds at age 55, but required them to set aside a Minimum Sum.

It then proceeded to ramp up the sum. This has inevitably caused many people to construe the compulsory retention of CPF savings beyond the official withdrawal age as unfair.

But there is a middle path to resolve this issue. Officials could have confronted the issue directly by raising the official withdrawal age for future cohorts, say, those who started work in a certain year.

This would have allowed the government to "keep faith" with older CPF members, while giving younger ones ample time to adjust to a later withdrawal age.

After all, life expectancy has been increasing at a rate of three to four years per decade. In 1980, for example, life expectancy at birth was 72 years. This had increased to 82 years by 2013.

A progressive increase in the official withdrawal age - say, by two years every five years starting from 1990 - would have led to a present-day withdrawal age of 65 for workers who are entering the labour force for the first time.

Also, with people living longer and working until a later age, many may not need their CPF monies at age 55.

It would then make sense to keep the bulk of CPF savings intact to a later official withdrawal age.

Unfortunately, the CPF's own marketing has created expectations of a happy retirement at age 55.

The CPF's own website and brochures have blissful images of a happily retired couple under the banner "Reaching 55... Planning Your Golden Years".

It is not too late to start a discussion on raising the withdrawal age for younger workers. But once the withdrawal age is set for a cohort and expectations are formed, it should not be changed.

However, keeping to an agreed withdrawal age to maintain trust is only one aspect of the overall problem.

Ensuring that there is enough in the CPF balance to live on when one retires is the greater challenge, explored in the next article. 

How to raise CPF returns

Whether or not the amount in a Singaporean's Central Provident Fund (CPF) account is adequate for retirement does not just depend on the amount saved. The rate of return on the savings is also important.

At the very least, the rate of return on CPF savings must be enough to offset increases in the cost of living.

To find out how CPF interest rates have fared relative to inflation in Singapore, I computed the annualised rate of return on CPF savings over five-year periods.

This was done using the respective CPF interest rates applicable for the Ordinary, Special and Medisave accounts starting from 1960 onwards.

This computed rate of return, which takes into account the apportionment of the savings over these three accounts, was then compared with the corresponding rate of inflation over the same five-year periods.

The analysis shows that except for the high inflation arising from the oil-price hikes of the mid-1970s, the CPF system has managed to enhance the real value of CPF savings. But the average rate of increase in the real value of CPF savings has been falling.

From 2.16 per cent for the past four decades before 2008, it has fallen to an average of just 0.7 per cent in the last five years.

The calculation takes into account the additional 1 per cent interest on the first $60,000 of a member's combined CPF savings since 2008. For CPF contributors with more than $60,000 in combined CPF savings in 2008, the real value of savings in excess of this amount has in fact remained stagnant.

There is an urgent need to raise the CPF nominal rate of return to make sure it stays above inflation as much as possible. What will it take to beef up the returns on CPF savings? I have two suggestions:

Implement a 1 percentage point across-the-board increase in the interest rate on CPF savings. This will bring the real rate of return closer to the long-term real return of 2.16 per cent.

Based on the $259 billion of total CPF members' balance in March, this could mean additional returns of $2.6 billion per year for the benefit of 3.53 million CPF members. This sum may seem large but it is less than a third of the Net Investment Returns Contribution (NIRC) from the Government's investments.

Alternatively, raise the extra interest on the first $60,000 to 2 per cent. This would involve a payout of less than half of the previous amount. The additional interest return should be ring-fenced in the Retirement or Special accounts to ensure it contributes to building up the Minimum Sum for long-term retirement adequacy.

To shore up confidence in the CPF system, it is not enough for the Government to give an assurance that it can meet its national social security obligations.

This article was first published on June 6, 2014.
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