Monday 2 June 2014

CPF and retirement

Ways to improve CPF
Once meant to provide a pension, it now helps fund housing, education and health care. Amid rising costs of living and other pressures, Insight looks at what could be done to ensure CPF still provides peace of mind about retirement.
By Alvin Foo, Andrea Ong And Nur Asyiqin Mohamad Salleh, The Straits Times, 31 May 2014

OVER mahjong or a casual chat, when Madam Susan Tan meets up with her fellow MacPherson seniors, one topic often crops up - their future. Specifically, how to afford it.

At 65, Madam Tan still works to boost her Central Provident Fund (CPF) payouts. But the part-time bus attendant is happier spending time with her grandchildren.

Admin clerk Celestine Chong, 53, has been working since she was 16 but worries she will not have enough to meet her CPF Minimum Sum requirement in two years' time.

Madam Margaret Chng, 66, is not on the CPF Life scheme and withdrew her CPF savings at 55. Now the money has run out and she relies on her family.

These MacPherson residents are some of the many faces of the CPF system now under the spotlight.

From its colonial roots in the 1950s as a fund purely to meet retirement needs, the CPF is now a multi-headed beast that helps pay for housing and health care, and has a life annuity scheme.

The pressures on it will only grow amid a rapidly ageing population that is living longer.

Acknowledging the challenges ahead, Prime Minister Lee Hsien Loong promised in Parliament this week that CPF Life would be enhanced so payouts would keep pace with the cost of living.

Lower-income groups who have little in their CPF will also get greater assurance, said PM Lee, who will disclose more during the National Day Rally.

But these two aspects of the CPF system are just the tip of the iceberg when it comes to tackling the complex issues surrounding an institution that is older than the nation itself.

Add to that the emotive nature of the subject - Singaporeans' hard-earned retirement money - and it is clear that the issue, if not managed well, could well become a political minefield.

Just this week alone, at least eight MPs of all political stripes rose during the debate on the President's Address with critiques of the CPF.

A defamation suit filed by PM Lee against blogger Roy Ngerng has also drawn attention to the latter's posts about the CPF system.

How can CPF be improved? Insight looks at some of the issues.

 Rebalancing CPF and housing

THE current CPF system takes on too many functions, say some observers. However, solutions they propose to ensure cash flow in the golden years strike at the very heart of Singaporeans' aspirations - property ownership.

Ang Mo Kio GRC MP Inderjit Singh and CIMB regional economist Song Seng Wun want the CPF to return to its 1955 founding goal of ensuring workers can support themselves with dignity in retirement.

Mr Song wants to simplify the system, with 80 per cent of funds set aside for pension purposes. "All the other goals such as housing, education and health care should be dealt with through separate agencies or schemes."

But tell that to Singaporeans who have poured their funds into the hot property market over the past decade and seen their assets appreciate each year.

On the other hand, this over-commitment of CPF savings to property purchases is a key reason many are unable to meet the Minimum Sum, points out finance professor Benedict Koh from the Singapore Management University (SMU). The Minimum Sum is intended to be enough for the basic retirement needs of those in the lower-middle income group.

A 2007 study that he led found that almost 44 per cent of cumulative CPF savings have been in invested in properties, based on CPF data from 2005. And longer home loan tenures have meant that more Singaporeans are likely to be still servicing their mortgages when they turn 55.

Prof Koh is among those who favour capping the amount of CPF one can spend on property.

However, UOB senior economist Alvin Liew cautions: "If the amount is significant, it will have a direct impact on the public and private housing market." A sharp drop in home values could impact retirement drastically, especially for those who have already bought property, he warns.

Mr Christopher Tan, chief executive of financial advisory firm Providend, favours using other levers such as raising CPF contributions and salary ceilings.

However, moderating property prices is the key, says Associate Professor Hui Weng Tat from the Lee Kuan Yew School of Public Policy, who notes that the Government is moving in this direction by delinking the prices of new Housing Board flats from market prices. "As long as HDB prices remain affordable, people's CPF withdrawal will also likewise be reduced," he says.

But while the CPF and housing systems find a new equilibrium, there is a generation who may find themselves asset-rich and cash-poor and feel "worse off", he says. The Government has indicated it is looking at more ways to help them monetise their homes.

Schemes already exist to do this, such as the Silver Housing Bonus and enhanced lease buyback. But MPs and social workers cite obstacles such as seniors' emotional attachment to their homes, the disruption of relocating and the Asian culture of parents wanting to leave something for their children.

Beefing up retirement adequacy

TWO particular sources of angst involve CPF's key aspects of providing a sustained source of retirement cash: the Minimum Sum and the CPF Life annuity.

Many like Madam Celestine Chong from MacPherson worry that yearly increases in the Minimum Sum are a harbinger of future trends, though CPF has stressed that there are no plans to revise it further in real terms in the near future.

Another elderly CPF member who declined to be named tells Insight: "Every time they raise the Minimum Sum, I suspect that it's because Temasek or GIC lost money overseas."

Given such comments, it is no wonder that in a blog post last Sunday, Manpower Minister Tan Chuan-Jin was at pains to say that increases in the Minimum Sum are necessary because of longer life expectancy, higher cost of living and quality of life.

He also explained that the recent announcement that it will rise to $155,000 in July is part of a series of adjustments already announced in 2003.

At the same time, the increases in drawdown age - it will rise to 64 next year and 65 in 2018 - have upset some. The Workers' Party, for one, has criticised the move regularly over the years.

There may be some lessons for policymakers, in better managing communication with the public.

Or the unhappiness over CPF may, as Professor Euston Quah from Nanyang Technological University puts it, arise "simply from the lack of complete control over one's mandatorily state-imposed savings to do whatever the saver wants". Madam Susan Tan shares a commonly voiced sentiment that she should be able to get payouts earlier if she wants to, as "CPF is our money".

MPs and economists have floated several ideas to reduce the sting from the Minimum Sum and drawdown age requirements. Dr Intan Azura Mokhtar suggests a tiered Minimum Sum for the lower-income, while Prof Quah suggests greater flexibility in withdrawal for those who want to retire earlier, to take into account "some people's expectation of what constitutes retirement age and at the same time protect the greater needs of society".

Another issue is whether Singaporeans can meet the Minimum Sum requirement when they turn 55. Last year, 49 per cent of active CPF members who turned 55 reached the Minimum Sum then of $148,000. While the proportion has gone up by 12 percentage points since 2009, it also means that just over half are still unable to hit the target.

Prof Hui Weng Tat cautions that the 49 per cent includes those who pledged their property to make up half of the Minimum Sum - which translates to lower payouts in the future. Only 20 to 30 per cent can meet the Minimum Sum fully without pledging property, "which means retirement adequacy is much worse than what we anticipate".

A 2012 study commissioned by the Manpower Ministry and done by National University of Singapore dons Chia Ngee Choon and Albert Tsui estimates that 70 to 80 per cent of new entrants to the workforce will be able to meet the Minimum Sum for their cohort.

But Prof Hui says the study underestimates inflation, housing aspirations and wage patterns.

Another piece of the puzzle in boosting retirement adequacy is CPF Life. One improvement unanimously raised by the observers Insight spoke to is for payouts to be adjusted for inflation. PM Lee indicated on Wednesday that the Government is looking into this.

Some also question if the CPF Life payouts are enough to support retirees in the future.

Those turning 55 from next month with the full Minimum Sum of $155,000 can expect a monthly payout of $1,200 for life, the CPF board tells Insight.

But for Mr Palaniappan Muthukumar, 54, who works in the training industry, $1,200 is a "pittance". He hopes for higher payouts but acknowledges this will mean raising the Minimum Sum.

Providend's Mr Tan is in favour of higher CPF Life payouts that are inflation-indexed, but notes that raising the Minimum Sum "may be political suicide for the ruling party".

One urgent priority, however, is to provide for the vulnerable in society who cannot pay for CPF Life, through a basic pension. Prof Chia highlights groups such as the lower-income and homemakers.

The gender imbalance is seen in CPF's latest annual report. There were 11,753 more women than men aged above 60 as at end-2012, but their total CPF balances were about 32 per cent less - $5.7 billion - than the men's.

Prof Chia suggests setting up a Basic Pension Endowment Fund - similar to the fund for the Pioneer Generation - to ensure that such a scheme, which can be means-tested and will not require contributions, is sustainable without leading to future tax increases.

Making other such provisions may become even more pressing as it is likely that Singapore will see higher and longer periods of unemployment in the future, says economics professor Hoon Hian Teck from SMU.

Making money work harder

CRITICS say the Government is being too conservative and can get higher rates of return on CPF funds, given the performance of GIC and Temasek Holdings.

The CPF Ordinary Account (OA) yields a market-related rate pegged to the 12-month fixed deposit and month-end savings rates of the major local banks, with a minimum rate of 2.5 per cent. This means the OA rate can be higher if these rates rise beyond 2.5 per cent.


Providend's Mr Tan notes, though: "It is not fair for CPF members to ask for the rates of returns similar to that of GIC and Temasek. If you want to have that kind of return, you must be prepared to take the risk. Currently, our CPF monies are not invested in GIC or Temasek."

Some experts suggest the investment mandate of CPF be widened so that the Government can afford to pay higher returns. Now, funds are invested solely in risk-free Special Singapore Government Securities.

Singapore could take a leaf out of the book of Norwegian and Canadian pension funds, which invest in a wider range of assets including stocks, bonds and real estate, says CIMB's Mr Song.

Economist Chua Hak Bin from Bank of America Merrill Lynch notes that CPF returns are "barely keeping pace with inflation". In comparison, Malaysia's Employees Provident Fund, which is comparable in size to the CPF but uses a more active approach, delivered a dividend rate of 6.35 per cent last year and 6.15 per cent the year before, he says.

He suggests offering CPF members - with savings above a certain threshold and with a greater risk appetite - the option of investing directly in a GIC or Temasek-managed fund. "Returns may be more volatile than the guaranteed rates, but will likely outperform over the longer term."

In Parliament this week, Chua Chu Kang GRC MP Zaqy Mohamad mooted a government-backed investment plan offering higher interest rates and taking into account inflation. Nominated MP Tan Su Shan, a senior bank executive, suggested having regular savings plans tied to bonds or fixed-income unit trusts.

Rebuilding public trust

THE CPF debate poses questions about the trust and changing expectations Singaporeans have of the Government and how it should manage their retirement money.

In a Facebook post this week, presidential candidate Tan Cheng Bock said the changes to the CPF and "the constant reminder that they may not have enough disposable income when they grow old" have created a sense of insecurity.

Some Singaporeans may also want clearer answers on how CPF monies are invested, he said.

SMU's Prof Hoon Hian Teck sees two big issues going forward. One, how the Government should redistribute its revenues and carry out its social spending. It can channel the returns from investing Singapore's reserves either to the Budget or to paying higher returns on CPF savings. There is a trade-off.

Paying a higher rate of return on CPF is a "general distribution to every working person" - including the higher income - but there is a greater element of risk.

In contrast, the Government's current approach is to tap the investment returns of the reserves for Budget programmes that give more targeted help to the needy.

Two, whether Singaporeans are comfortable with the CPF as a social security system applying to all, or whether they take the view that "I am my own master, I can manage my own funds and beyond the minimum, I can provide for myself".

Sociologist Tan Ern Ser of the National University of Singapore says if Singaporeans are allowed to opt out of the system, the next question is: "Who should shoulder the risks of losing CPF savings drawn out in full - the Government or the individual?"

The challenge is finding the right balance between giving greater autonomy to CPF members who are savvy enough to plan their own retirement finances, and ensuring CPF provides a sustainable stream of retirement income for everyone else.





A combination of luck and planning
By Nur Asyiqin Mohamad Salleh, The Straits Times, 31 May 2014

RETIREMENT is looking rosy for Mr Koh Chek Koh, thanks to a combination of good luck and planning.

The 62-year-old met the target Central Provident Fund (CPF) Minimum Sum when he turned 55 in 2007. Back then, it was $99,600 - an amount he hit easily without needing to pledge his property, unlike some.

Mr Koh says: "I was lucky. My house was cheap and my pay was good. But not all senior citizens can say that. A lot of them don't even think about their CPF because they know there's almost nothing inside."

He lives with his wife, 56, and two sons, who are in their 20s, in a five-room flat in Hougang, snapped up more than 30 years ago at just $88,000 using his CPF and which is now fully paid off.

The civil service veteran, who has been in the field for the last three decades, has seen his pay rise from less than $1,000 a month when he started out to $6,000 at its peak.

He is still working in the sector even now, earning about $4,000 a month. He and his wife, neither of whom have chronic illnesses, make enough to cover their daily expenses.

After Mr Koh retires, he is keen on finding part-time work to keep himself occupied.

And in two years, he will also receive a steady stream of income in the form of monthly CPF Life payouts of some $800 for the rest of his life.

"The ultimate purpose of CPF is to protect senior citizens. And the good thing is, CPF Life really is for life," he says.

But sprightly Mr Koh, who says he is careful to always plan ahead, has some investments to help him retire in style.

"For me, it was a good thing I couldn't touch the money in my CPF till I reached a certain age," he says. "Sometimes, if you have money in hand, you feel like spending. It's just human tendency."

When Mr Koh turned 55, he withdrew all the money in his CPF account, leaving behind just the Minimum Sum.

He spent $120,000 of this money on his older son's university education in Australia.

The rest, which amounted to over $250,000, was used to buy endowment plans and insurance policies to grow his money.

This has reached about $400,000 now, says Mr Koh - an amount he is in no rush to tap yet.

While CPF Life payouts will come in handy for his daily expenses, these investments act as funds for both enjoyment and emergency.

He will dip into them if he has a health problem, or if he and his wife plan to travel or buy new furniture in their old age.

"You have to enjoy your life after retirement. You work hard before that so you don't suffer," he says.

He adds: "CPF was a good thing for me but I know that for people who don't earn so much in their young years, knowing they have some money there but cannot touch is very tough on them."





CPF Life not enough to get by on
By Andrea Ong, The Straits Times, 31 May 2014

WHEN Madam Pauline Seah contemplates the future, a big question mark hangs over it.

"As long as I can work, I would like to work," says the 59-year-old admin clerk.

Madam Seah knows she has to continue working to support herself in her golden years, as she has few other sources of income.

While the CPF Life annuity is compulsory for those of her age, she has calculated that she will receive less than $500 a month when she starts receiving payouts in the future - definitely not enough to survive on alone.

"The cost of living keeps increasing. Those of us with little savings have to work until we die," she declares.

Madam Seah falls into a group of Singaporeans who may need extra attention from the Government even as it looks at how it can improve the CPF savings and CPF Life schemes.

 These are the people who, for various reasons, did not manage to accrue enough money in their CPF accounts over their working lives.

Before becoming an admin clerk last year, Madam Seah worked part-time and full-time as an insurance agent for over 20 years. Her CPF savings are thus not as high as those of other workers', as this earlier work was counted as being self-employed and so she did not receive any employers' CPF contributions.

The single mother also took out about $20,000 from her Ordinary Account to pay for her daughter's university education.

Last year, Madam Seah sold her four-room flat near Sin Ming and downsized to a three-room flat in MacPherson, using the sale proceeds to pay off debts.

Her house has been pledged to make up half of the CPF Minimum Sum, as she did not have enough in her CPF savings to meet the $117,000 needed when she turned 55 in 2009.

While some observers suggest that CPF be used strictly for retirement purposes, Madam Seah says the alternative might be tough for cash-strapped Singaporeans.

For instance, she used to pay her HDB mortgages in cash when she was self-employed, which took a toll on her savings and money for daily needs.

She also has friends who had to dip into their cash savings when their children attended private universities, which do not qualify for the CPF education scheme.

Madam Seah worries the minimum sum will increase further in the future, and whether her children - her daughter, 26, and her son, 34 - will ever have enough to retire.

That is why she is determined to support herself for as long as she can, she says, adding: "I have to work for my own livelihood."

















FAQs on CPF

 Increases in the CPF Minimum Sum have been a source of concern for many. The CPF Board answers some frequently asked questions about the issue.
The Straits Times, 31 May 2014


Why does the minimum sum keep rising? Isn't that like shifting goalposts, making it harder for Singaporeans to meet the amount set?

Singaporeans will need more money in their retirement because they are living longer, daily needs have increased and prices will rise over time.

For members to achieve a steady stream of income that can cover their living expenses in retirement, the amount they need to set aside in the CPF - the minimum sum - has to increase correspondingly.

In 2003, the minimum sum was increased from $80,000 then, to $120,000 in 2003 dollars.

This was intended to enable CPF monthly payouts in retirement to be increased to improve retirement adequacy. The target of $120,000 (in 2003 dollars) was to be reached over a period of 10 years so as to give each successive cohort time to adjust.

 Adjustments to the minimum sum were based on two components - the scheduled $4,000 stepped increase in real terms, and the headline Consumer Price Index that is used to account for inflation.

In 2012, the target was pushed back another two years to 2015 to make the increases more gradual because of the higher inflation in recent years.

The annual increases are specific to each group of members who turn 55 yearly. The minimum sum for those who have already turned 55 remains unchanged.

For those members who are unable to meet the minimum sum, there are schemes available.

For older Singaporeans, the Pioneer Generation Package will help ease the burden of health-care costs.

For home owners, there are schemes to help those who wish to unlock their housing equity: the Silver Housing Bonus and the Enhanced Lease Buyback Scheme.

To help more members meet the minimum sum, several policies are in place:

For low-income workers, there is the Workfare Income Supplement scheme, which pays into the CPF accounts of lower-wage workers.

In addition, extra interest of 1 per cent is paid on the first $60,000 of CPF savings so those with lower balances can grow their savings faster. About 60 per cent of members would be effectively earning 5 per cent on their retirement monies because of the extra interest.

The amount that employers must contribute to the CPF was raised as well, including sums for older workers and low-wage workers.
Will the minimum sum continue to increase?

We have no plans to revise the minimum sum further in real terms in the near future (after the minimum sum target has been reached next year).

However, in nominal terms, the minimum sum will still have to be adjusted to account for inflation and to ensure that its real value is preserved.
Does CPF have a target in mind for attainment of the minimum sum?

Even with the increase in the minimum sum, more Singaporeans have been able to attain it.

About half of active CPF members are able to now, compared with one-third just five years earlier.

If CPF members are unable to set aside the full minimum sum in cash, their property, bought with their CPF savings, will be automatically pledged for up to half the minimum sum.

 We expect even more members to meet the minimum sum over time.
If I don't reach the minimum sum by the time I hit the drawdown age, I won't be able to use my CPF or get CPF Life payouts.

 Even if a CPF member is not able to achieve his minimum sum by his drawdown age, he will still receive his payouts from that age.

 It is not necessary for such a member to top up in cash to make up the minimum sum, although his monthly payout would be lower than if he had accumulated the full amount.

If you have a smaller balance in your retirement account, you will receive smaller payouts.

Further, whether or they have met the minimum sum, all CPF members are allowed to withdraw the first $5,000 from their accounts at 55.
How much are people getting from their CPF Life payouts?

The median payout for members turning 55 from last year and who were automatically enrolled into CPF Life is about $890.

Members turning 55 from July 1, 2014, with the full minimum sum of $155,000 can expect to receive payouts of about $1,200 per month for life (based on the CPF Life Standard Plan).

Actual payouts for individual members might be higher if they make subsequent top-ups, which they can choose to, up to the prevailing minimum sum for that year.





Which to go for - CPF Life Basic or Standard plan?
It depends on whether you prefer to collect payouts from age 65 or you want to wait until you are 90
By Goh Eng Yeow, The Sunday Times, 1 Jun 2014

Many of my friends in their 50s are facing a major concern - whether they have saved enough to last them through retirement.

For my parents' generation, the norm for a married couple was to raise a large family which would, in turn, look after them when they grow old. But times have changed, and many of us either have small families or stay single so we have to be financially secure to ensure our money does not run out.

But getting to our objective of financial wellness needs a careful strategy.

The cornerstone of any retirement planning should start with the savings we are accumulating in our Central Provident Fund (CPF) accounts. That at least ensures that we can still pay our monthly grocery and electricity bills when we are old and not working, if we have already paid for the roof over our heads.

Then how comfortable we want to make our retirement will depend on the other aspects of our financial planning such as squirrelling money away into a Supplementary Retirement Scheme (SRS) account or even buying a house for investment in the hope that property prices will keep going up.

Take a Singaporean who reaches 55. As a CPF member, he must set aside a Minimum Sum in his Retirement account from money in his CPF Ordinary and Special accounts. From next month, the Minimum Sum will be $155,000. Currently, about half of them meet this requirement.

Once he reaches 65, he will get a fixed monthly payout for about 20 years from the savings set aside in his CPF Retirement account. Between 55 and 65, the money in his Retirement account will enjoy an interest rate of up to 5 per cent per annum - which is far higher than what the banks are offering for fixed deposits.

But what happens if our Singaporean lives past 85 and the money runs out? It is not a hypothetical question as people are living longer. My parents are in their 80s and I have a 104-year-old aunt in Hong Kong.

Since last year, it has been compulsory for Singaporeans and permanent residents who turn 55 to be part of the CPF Lifelong Income for the Elderly (Life). Yet most of them are ignorant about its details. CPF Life offers two plans - Standard and Basic.

The Standard plan is essentially a traditional annuity scheme. People taking up this option will use the entire sum in their Retirement accounts to buy the annuity. They will get a monthly payout for the rest of their lives once they reach 65.

Wage-earners may like to opt for this plan since they are used to getting their salaries credited into their bank accounts every month. This ensures that when they retire and hit 65, the salaries they are used to getting will be partly replaced by the monthly CPF Life payout.

Calculations from the CPF Life Payout estimator show that a male Singaporean who turns 55 from next month and has the CPF Minimum Sum of $155,000 will get a monthly payout ranging between $1,200 and $1,350 if he opts for the Standard plan. For a woman, the monthly payout will roughly vary from $1,100 to $1,250 as she is expected to live longer.

Indeed, the norm for most of the 400,000 people who retire in Britain every year is to buy an annuity similar to CPF Life Standard.

One merit about CPF Life is that it is run by the Government. That removes the big worry of retirees as to whether their insurer is financially strong enough to withstand the next global financial crisis in order to keep making the monthly payouts.

 But buying an annuity is a relatively new concept here and there are people who gripe about why they should have to buy one when it takes Herculean efforts to live past the age of 85.

One issue raised by a friend is the possibility of "mortality cross subsidy", whereby those unfortunate enough to die early effectively subsidise those who live longer than the average.

My reply is that the purpose of buying an annuity is to achieve some income certainty when we are old. Trusting our investments entirely to achieve that goal is too much like relying on the roll of the dice, given the regularity with which financial crises have been occurring.

Still, I am glad that CPF Life has another choice - the Basic plan - which gives a lower monthly payout and a higher bequest. Essentially, it works like a deferred annuity - an insurance product that is very popular in the United States.

Under this plan, a CPF member will have premiums deducted from his Retirement account to pay for the deferred annuity whose payouts will only start when he reaches 90. After he turns 65, what he gets is a monthly payout from his CPF Retirement account.

In essence, the CPF Life Basic works like an insurance plan for those with longevity concerns but who may have other sources of income. If he lives past 90, he will get a payout - and he does not have to worry about subsidising people who live longer than the average.

I believe that the Basic plan will appeal to the financially literate and to the self-employed who may not have much CPF savings.

That, in a nutshell, sums up CPF Life: The Standard plan offers an annuity scheme similar to what retirees in Britain opt for. The Basic plan is commonly adopted by US retirees. Choose wisely.








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